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Subprime foreclosure problems have been blown out of proportion, according to a new investment house report.“Problems in subprime mortgage will likely extend the housing recession,” a team of economists said in the report from Lehman Brothers.
“Supply rises because many bad loans will go through the foreclosure process, returning homes to the market,” Lehman said. “This worsening supply-demand puts downward pressure on construction activity and home prices. “Those extra foreclosures represent an 800,000, or 20%, increase in the inventory of homes on the market. If that were to arrive in one fell swoop it would quite depressing, but there is a long and winding road from delinquencies to liquidations.” Problems in the “lower-quality parts of the mortgage market” are sending a shock through the economy that will linger for another two years, Lehman said. “Credit standards are already tightening and will likely continue to do so this year,” the company said. “The foreclosure problem is likely to be felt mainly in 2008 and 2009.” Lehman acknowledged that “precise estimation of the subprime shock is difficult … but some simple rules of thumb illustrate the scale of the problem.” Last year, subprime lending represented about 23% of new loans, Lehman said. “So even if there is a dramatic scaling back of a third, the overall supply of credit will only decrease by about 8%.” Debt problems could dampen consumer spending and confidence, according to the report. “If the impact on the economy is severe enough, there could be second-round effects, with bad loans weakening the economy and the weak economy worsening the bad loan problem,” Lehman said. But Lehman said the problems, while severe, are not as bad as the press and others have portrayed. “For some time we have argued that the main problem with the ‘doom and gloom’ view of the housing market is that it does not recognize the lagged nature of the economic shock,” the Lehman economists said. “The economy faces a series of body blows, not one knock-out blow.” Lehman also argues that press coverage of the situation has “spawned a number of ‘urban legends'” that it seeks to debunk. For instance, Lehman said the notion is that in a tougher lending environment borrowers working on a mortgage reset will be shunned. “Not true,” the company said. “The current lender has a strong incentive to try to keep the owner in the house. Everyone loses with a foreclosure.” There is also an “implicit assumption” lags in the housing market do not exist. Lehman says that is also “not true.” “At each stage of the process lags are long and variable,” the economists said. “Prices adjust slowly, consumers respond slowly to wealth changes and it takes time to go from loan delinquency to liquidation of a property.“ |
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Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer. |