The Truth About Sub-Prime

With all of the bad news about the housing market and the impact of sub-prime loans, its worth putting this in a historical context.  The U.S. mortgage market totals $12 trillion. Of that, $2.4 trillion is sub-prime loans.  Of this 20% of the debt will go bad — about $400 billion.  That equates to 3% of our GDP which is a striking number but less than half of the impact that the S&L crisis of the 1980s.  What’s more significant is the indirect cost of subprime. For those of us in commercial real estate, sub-prime is important because of the commingling of commercial and residential mortgages by the CMBS market (60% of CMBS loans were interest only) which caused that market to decline by 50%. Even though, subprime was contained to residential, Wall Street’s appetite for real estate in general was dulled by these movements (even AAA rated mortgage bonds were hit). So, the impact of subprime has been to affect the risk profile and pricing — for one increasing equity requirements for commercial loans from 10% to 35%.