How serious is the sub-prime mortgage problem?

Almost every think tank in the US is confident that the ‘sub-prime lending’ issue will not have any negative repercussions on the financial sector and the economy as a whole. Former Fed chairman Alan Greenspan is the only person who thinks there is something more than meets the eye. And this time I would tend to agree with Mr. Greenspan.

The first signs of the problem were sighted when HSBC declared in February that it was holding bad debts amounting to 10.6 Billion $ and that it was expecting further losses in the current year. This news was taken very lightly. Then other sub-prime lenders like New Century came forward with their version of the bad news. Suddenly the sub-prime story caught everyone’s eye. But as time has passed the fears about sub-prime lending have been subdued.

Sub-prime lending amounts to 20% of the mortgage market in the US. The sub-prime lenders are only intermediaries i.e. they borrow from banks and other financial institutions and lend to sub-prime borrowers at high interest rates. Majority of these lending’s have been securitized and sold to investors. To protect the investors the lenders have opted for credit default insurance as well as got their feet into the credit derivatives market.

Majority of the analysts are looking at the lender in isolation, when in reality he has his hands tied. So this fiasco is not restricted to the sub-prime lender but to whole host of other individuals and corporates. And the ripple effects of this issue will be seen in future consumer confidence numbers.