I feel like the Subprime Definition is Getting Muddled and confused with the mortgage products problem. Aren’t there really two separate issues out going on? #1 is the subprime borrowers (those with marginal credit scores). #2 is the mortgage products offered (interest only, neg-am, no-docs, etc.).
The media is all over the subprime implosion. I have to say I know of a few non-subprime borrowers who are also in trouble because of the mortgage product they chose. I guess that is to say I know of some A borrowers (with great credit) who put themselves so far out on the tree branch that they may default and become future subprime borrowers.
I think this is an important distinction because all the talking head economists in the media are saying the subprime market makes up a small percentage. They do not take the next step in the analysis to explore how non-subprime borrowers are also in trouble now that the subprime borrowers are effectively being eliminated from the market as purchasers.
Are they not taking that additional step in the market analysis or are they muddling the definition of subprime to include the mortgage product (even when the product is taking by A credit buyers)?
Exotic mortgages owned by people with good credit fall into the “Alt-A” category. This category is also at risk. It’s just that the risk is relatively lower. Right now, the sub-prime implosion is so spectacular, it attracts all of the attention.
IMO, defaults in the “Alt-A” category will be the “next wave” after the current wave of sub-prime defaults. Stay tuned, there will be more bad news for this category in the months ahead. Here is one article:
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