Putting things in perspective

Lets take a look at the real impact of the subprime meltdown. I am even hesitant to call it a meltdown. Media buzzwords always seem to have a “hype” to it that both captures attention and yet doesn’t quite tell the story right. I digress.

This is a purely numerical analysis designed to determine the impact it will have on purchase transactions. I heard this in a Mortgage Market Guide telephone conversation late last week and here it goes:

• Last year almost 20% of mortgages were subprime (lets assume this is still the case)
• In today’s market 40% of transactions are purchases
• This means 8% of all purchase money is subprime
• If 20-30% of applicants can not obtain a subprime loan due to tighter guidelines then it follows that there will be a 2% reduction in the number of purchase transactions

To put this in perspective when mortgage rates increase by 0.5% there is a corresponding 2% decrease in the number of mortgages written.

Hence from this we see that the current subprime “meltdown” is equivalent to a 0.5% increase in rates. That is why Mr. Bernanke said yesterday the fallout is contained and why the Fed didn’t lower the Federal Funds rate in response to the subprime crisis.

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