Sub-Prime Capers

The sub-prime mortgage losses claimed by banks don’t make sense, since the underlying real estate remains intact, although maybe temporarily devalued. A cover-up seems likely.

Here are the numbers.

Sub-prime mortgages in the US total $890 billion.

– Sub-prime mortgages allegedly went to poor people, so we can assume a modest $100,000 per mortgage.

– That means 9 million sub-prime mortgages – about 5% of the total US private housing stock assuming the US has 1 apartment, condo, or house per 2 people.

– Last November, about 16% of sub-prime mortage holders had defaulted, handing about 1 million homes back to the lenders. This number will increase, but it’s very unlikely all 9 million will default.

Worst case, what if they do all default? The lenders will just be sitting on $890 billion of real estate assets, rather than collecting mortgage payments on them. That’s actually better than waiting for the mortgage repayments to come in over 20 years or so, since lenders have all their capital back very quickly.

Then the worst that will then happen is the value of these assets will fall, as less buyers lead to price cuts. But that’s temporary, since:

… home prices, once they begin to correct, tend to decline 17 percent on average before markets heal themselves. “And the average duration of these adjustments is 3.5 years,”…

So not only do the mortgage holders still have those assets, if they wait an average of 3.5 years they can resell them at book value!

Still, the losses being reported are enormous:

Citigroup swung to a loss of nearly $10 billion in the fourth quarter as it took a write-down of $18.1 billion for bad bets (sic) related to the mortgage industry, the bank said on Tuesday.

Citi is the nation’s largest bank, but sub-prime losses are spread over the worlds’ banking sector, so the total loss is maybe 20 times Citi’s – say $360 billion.

That says about 40% of the $890 billion sub-prime properties got nuked and the land they’re built on is so contaminated it’s worthless.

But that hasn’t happened.

So although there’s something rotten in the worlds’ banking sector, it’s unlikely to be caused by poor Americans.


3 Responses to Sub-Prime Capers

  1. dearieme says:

    Is the explanation perhaps that they not only made duff loans, but then geared up on them?

  2. gandalf says:


    The FT piece is just top cover – they say that even if the sub-prime numbers don’t add up, there are plenty of other problems, which they then decline to quantify.

    There’s a large dead rat here – maybe a massive failure of one of the fancy derivative devices.

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