My perception of the effect of Subprime and Alt-A meltdowns was changed by this article at Housing Wire last week. Basically it points out that the Prime sector, due to its size and expected stability, is the key driver.
Small increases in the prime default rate can translate into much more money lost than large increases in the Alt-A default rate.
Also, because very few subprime and Alt-A loans are being made now, problems in the prime sector will more dramatically affect the future of lending.
The banks know Subprime/Alt-A is going bad, and they have cut those out. Prime is still there. If prime goes bad, it hurts the vast majority of past loans, discourages future loans and may cause rates to really rise.
After reading this article, I’m much less interested in Alt-A, except as an indicator that the prime meltdown is approaching. When prime hits the fan, or even grazes the fan, that is what makes the big mess.
Prime problems, not Alt-A problems will drive the desireable areas like CV into the dirt.
Interestingly enough, when looking for the link above, I found this article on Housing Wire about the FT article posted by the original poster:
