Forecast Darkens for U.S. Subprime Mortgage Market

[Jul 2, 2007.]

Subprime mortgages are often considered the wild cards of the U.S. mortgage industry. Extended to individuals who may have less-than-stellar credit, these mortgages are accompanied by a great amount of risk for lenders.

However, with the increased risk comes the possibility of greater rewards. As a result, subprime mortgages can be considered a mixed blessing for the housing market.

Against this backdrop comes news that the subprime market may face additional challenges in the months ahead. Over the past year, subprime mortgages have meant serious losses for lenders across-the-board. There's also credible evidence of a mounting default rate for subprime loans.

According to a report issued by the Reuters news service, a leading analyst says that he believes the U.S. subprime mortgage industry will get worse before it becomes better.

Goldman Sachs Group Inc. Chief Financial Officer David Viniar made that prediction in a recent conference call with reporters.

Viniar stated, "The subprime business continues to be weak." That's obviously bleak news for those who have made subprime a large share of their business. Viniar also ominously noted, "We have not seen the bottom in the market."

That means there could be a serious financial crunch ahead for both lenders and borrowers. As Viniar said, "There will be more pain felt by people as it works its way through (the) system."

What's to blame for the weakness in the subprime sector? Obviously, a number of factors may come into play. One significant element may be the fact that those who apply for subprime mortgage may be naturally more likely to default, given their difficult credit histories. While they may have every intention of paying back their loans, they may find that they simply don't have the means to do it—especially in a climate in which interest rates are likely to rise.

The subprime crisis has had implications beyond the mortgage market. For instance, Viniar said subprime problems have led to a decrease in fixed-income trading. Still, difficulties with subprime mortgages have apparently not affected other debt markets at this time. Viniar told reporters, "So far we still have not seen any contagion."

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