The subprime mortgage situation

By: Armand Glans
The subprime mortgage situation is hitting the credit market in the US and the house mortgage loans are once again in focus where the credit squeeze might go towards a credit crunch. If we going towards a credit crunch there will be signs that mortgages rated as Alt A loans is starting to get hit.At this stage there are no signs that the credit squeeze is going towards a credit crunch and hit the private consumption and global growth.
Interesting though is that problems in the subprime mortgage loan market in the US expect to be hitting the loaning market world wide and for now stock markets in “old Europe” is taking a hit and been coming off more than 10% in the last month though Asia, where the real growth is today not been taking much on the downside.
Though the depending on the US market is declining the fear is spreading all over the world but the impact of US insecurity is day by day decreasing when country by country is less depending on the US consumers. Japan as an example have the last 5-6 years decreased there total depending on the US market by 25 %.
To understand the impact on what is going on at this stage there might be a good idea to try to find out the worse case scenario on the US mortgage situation. When it comes to high risk loans in the US market there is four types of high risk loans, subprime, Alt – A, Jumbo IO and option ARM which together stands for around ј of the total house mortgage stock in the US. What shakes the market at this point is the insecurity how far this can go, what is going on now is revaluation of risk and this might in the end hit the spreads between company bonds and government bonds.
At this stage the spreads in the private sector is getting wider and if that also hit company loans that will hit the cost for company investments world wide. Besides the fear of increasing spreads on loans the stock market speculating that the growth coming from US consumers will be taking a hit when the house mortgage sector having problems.The FED is though very aware of the risks and will be watching very close what will occur regarding the mortgage situation.
FED has to provide the market with liquidity and act powerful to avoid the US going into a recession. At this stage FED is waiting for the growth of employments to ease off to take the step to cut interests. This might though be a view that FED will change if the mortgage situation is getting really bad.In the longer run the level of interest in a number of countries seems to peak on historically low levels will be something that might help the global growth in near future.
The US and Great Britain is as an example where the probability of pushing the interest any further is out of the question regarding the risks of growth and inflation. The impact on the overall expectations on low interest levels in the global economy might at this stage as well be underestimated by the market and help both easing off the mortgage problems we have at this stage and keep the growth on a descent level as it did in the mid ninety when the stock market holding up nicely though the interest was peaking.
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