Subprime mortgage problem is now at its crudest practice with various reputed mortgage lenders' associations and mortgage lending institutions suffering huge losses. The last week has witnessed three major industry players of the mortgage and financial market going down with a large amount of losses resulting as the subprime crisis.
Merrill Lynch comprehended a considerable amount of third-quarter loss, which has been valued at $5 billion. They blamed the collateralized debt obligations or CDOs and the falling subprime mortgage portfolio for this loss. Washington Mutual is the other house announcing a huge loss by 75% drop of the third-quarter income. The total loan loss stipulation of WaMU is estimated to be $975 million for this third-quarter. The third incorporation suffering from this same problem is the Citigroup Inc. They have declared a 60% drop of their income on this third quarter comparing to the revenue amount of same time of the previous year.
These three groups are suffering from an evident and natural consequence of the events that set this subprime mess of the mortgage industry. The first major attack was on 19th July 2007 as the main US benchmarks hit their pick point. The crisis continued at the same pace till 22nd August 2007 when these major benchmarks plunged by approximately 6.4%. The CBOE Volatility Index of this period apprehended the impending danger by scaling a price rise of a $15 contract to a $23 contract.
The subprime problem is not only the result of poor alertness of the mortgage lenders in granting a mortgage loan, but also it has been a consequence of wrong structuring of the loan products by investment banks. The investment banks in this case had failed to judge the amount of risk a subprime loan carries as a collateral. Along with these joined a number of factors like a sharp bump up of mortgage interest rates. This rise is estimated as 200 base points in 2 years. The real estate industry also suffered a breakage by falling sales and dropping price rates. The process of economic deceleration was also showing its effects. And finally the flexibility allowed in the sub prime mortgage lending qualifications and process completed the preparation ground for the forthcoming blizzard.
Defaults in terms of total credit granted for subprime loans have been estimated falling from a 14.86% at the beginning of 2002 to 10.58% at the end of 2004. But from then on a sharp rise to 13.93%, as estimated at the beginning of 2007, in a very short period demonstrates the easy availability of the subprime loan, preparing the factors of the current subprime mess. Along with the growing availability of the subprime loan also increased the cost of risk ratio from 14% at the beginning of 2006 to 32% at the middle of the 2007. However, the cost of risk percentage is currently sobering down.
The US mortgage market is valued at $10,000 billion. In this figure, the subprime market comprises a 13% share. The gross domestic product or the GDP of the United States is incorporated with a 9% subprime market share. This amplifies the gravity of the subprime mortgage mess. It is not only the mortgage market, the banking and lending industry, but the whole national economy is suffering from this subprime tantrum. The consequence is worldwide.
Martin Lukac represents RateTake Refinance marketplace. RateTake matches consumers with multiple lenders offering low rates. Got too much credit debt? Get Debt Relief and you'd be surprised what we can do together.
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