The sub-prime lending meltdown

Here is a good article discussing how many of the sub-prime mortgage lenders are now taking their medicine by Caroline Baum at Bloomberg.

Subprime loans carry rates 2 or 3 percentage points higher than those extended to prime borrowers. They accounted for about 20 percent of new mortgages last year and 13.5 percent of the total home loans outstanding, according to the Mortgage Bankers Association.

The issue isn’t whether loans defined as risky carry risk; they do. The real question is whether the risk was priced correctly; whether rising delinquency rates on subprime loans, sometimes made without proper documentation, will spill over into the rest of the home-loan market; whether borrowers will default when teaser rates on adjustable-rate mortgages reset higher at a time when home prices are falling; and — the big kahuna, the one that matters to the Federal Reserve — whether any of the bad- loan problems will affect financial institutions’ ability to lend.

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