User Name: Password:      Register - Lost password?

Forex News Blog
Back to The Headlines
Friday March 16, 2007 - 16:26:37 GMT
Lloyds TSB Financial Markets -

Share This Story:
| | Email

Credit Market Analysis: Why the negative impact of the US subprime mortgage market may be exaggerated

Credit Market Analysis 16 March 2007

Why the negative impact of the US subprime mortgage market may be exaggerated

US mortgage delinquency rates at 4yr highs...
The media has become transfixed with the US subprime mortgage market recently, where mortgages are extended to borrowers with higher credit risk, i.e. with low credit scores. This market has grown rapidly in recent years, as unemployment has fallen and credit lending standards have eased.

However, according to data from the Mortgage Bankers Association, the subprime mortgage delinquency rate, where loans are past due, has increased to a 4-year high of 13.33% in the final quarter of 2006, compared with 12.56% in Q3 and 11.63% a year earlier. The rise was particularly marked in subprime adjustable-rate mortgages (ARMs), which are more sensitive to interest rate rises. Remember too that interest rates have been raised seventeen times from a low of 1% in mid-2004 to 5.25% presently.

However, there are several reasons why the rise in subprime delinquency rates will not necessarily spread directly to a broader slowdown in consumer spending and therefore US economic growth (see below). The greater risk, in our view, is the possibility of contagion effects, resulting in tighter bank lending standards, even to consumers with good credit histories, and in the spillover effect to other asset classes.

...but the direct impact on the US economy should
be limited

So why should the rise in subprime delinquency rates not necessarily spread directly to a broader slowdown in consumer spending?

Firstly, the subprime mortgage market represents only a small proportion of the total market, about
10%. Moreover, delinquency rates for prime mortgages remained low at 2.57% in Q4 and have risen much less than subprime mortgages in recent years. Chart a on the next page illustrates the total mortgage delinquency rates since 1972 and chart b shows the split between prime and subprime delinquency rates since 1998.

Secondly, given historically low interest rates and continued jobs growth, particularly in the buoyant service sector, households should continue to service their debts comfortably. Chart c shows that employment has risen by an average of 156,000 in the past three months, in line with trend growth, boosted by a buoyant service sector.

Thirdly, the massive rise in housing wealth in recent years should provide ample cushion against modest declines in house prices. According to S&P/ Case&Shiller data, house prices have fallen in nine of the twenty metropolitan areas they cover (see chart d). However, there is no firm evidence to suggest that subprime delinquency rates in these areas are particularly high.

Chart e on the next page plots metropolitan areas with above-average subprime delinquency rates (data taken from First American Loan Performance, as reported by Reuters on 14 March 2007) versus their respective latest annual house price inflation, according to official OFHEO data. Despite former Fed Chairman Greenspan's comments yesterday linking house prices and subprime mortgage problems, there seems to be little evidence of a strong negative correlation between house prices and subprime delinquency rates. Indeed, the relationship appears to be positive to neutral. At the aggregate level, we expect house prices to stabilize this year and begin to recover in 2008.

Overall, while previous episodes of higher mortgage delinquencies (prime and subprime) have tended to coincide with a downside in economic activity, we believe that consumers will be more resiliant this time, because employment growth in the service sector is expected to remain strong.

Main risk: spillover effects via tighter credit conditions and a general rise in risk aversion
A key risk for the household sector is if the problems in subprime mortgage loans, mostly originated outside the banking sector, spill over into a tightening of mortgage lending standards by banks in the prime market. The concern, specifically, is that risk aversion leads to an over tightening of general credit supply to the household sector (and one can extend this to the supply of credit to the business sector).

Indeed, the latest Fed Q4 senior loans survey revealed that a net 16% of banks reported tightening credit standards on residential mortgage loans, which was the highest level since the early 1990s, see chart f. However, total mortgage delinquency rates have remained below the previous peak in 2001.

Aside from the impact on liquidity from bank lending standards, the other key risk is a reduction of liquidity in the financial markets resulting from a general rise in risk aversion, essentially a contagion effect. This means that, as risk aversion rises, the use of the abundant levels of liquidity in the financial markets seen in recent years will fall back, resulting in lower equity prices, wider corporate spreads versus treasuries and possibly higher corporate default rates. We have already seen some evidence of this recently, see chart g.

However, we believe that the tightening of credit standards are precautionary, in case the quality of loans deteriorate significantly. With economic fundamentals remaining broadly strong for the household sector, we do not expect a broader 'credit crunch' to develop. Further, we could see delinquency rates stabilise towards the end of the year. Moreover, despite the risk of contagion, the financial markets have also responded effectively in recent months by reducing treasury yields and therefore mortgage rates, thus ensuring a sufficient supply of liquidity in the system and providing support to the housing market.

In summary
Overall, we believe that talk of higher subprime mortgage delinquency rates leading directly to weaker household consumption growth and overall economic growth in the US are exaggerated. The subprime market is a very small part of the total mortgage markets, consumers' balance sheets remain solid and households should be able to weather temporary falls in house prices, given the build-up of housing wealth in recent years. Further, metropolitan areas which have seen lower house prices recently do not appear to be the same areas which have high subprime delinquency rates. Instead, the greater risk is the contagion effects of higher subprime delinquency rates into other asset classes not directly related. Such a general repricing of risk could lead to higher corporate spreads and default rates, which we have already factored in to our macroeconomic forecasts. Further, banks have already reported tighter credit lending standards for traditional (mainly prime) mortgages and the risk is that they over tighten lending standards, leading to a credit crunch.

However, we expect the prime market to remain strong and delinquency rates may peak later this year. This potentially could lead to some interesting trading opportunities, as these trends become clearer over the course of the year ahead.

Hann-Ju Ho, Senior Economist

. Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.

* All data and charts are sourced to Lloyds TSB Corporate Markets Economic Research, Merrill Lynch, iTraxx, Reuters, Mortgage Bankers Association and Bloomberg.


Forex Trading News

Forex Research

Daily Forex Market News
Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

Forex News
Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."

Actionable trading levels delivered to YOUR charts in real-time.

Register To Test Your Amazing Trader

GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Mon 23 July 2018
A 14:00 US- Existing Homes Sales
Tue 24 July 2018
AFlash PMIs
Wed 25 July 2018
A 08:00 DE- IFO Survey
A 14:00 US- New Homes Sales
A 14:30 US- EIA Crude
Thu 26 July 2018
AA 11:45 EZ- European Central Bank Decision
A 12:30 US- Weekly Jobless
A 12:30 US- Durable Goods
Fri 27 July 2018
AA 12:30 US- GDP
A 14:00 US- Final University of Michigan

John M. Bland, MBA
co-founding Partner,

Global-View Affiliate Program

We are starting an affiliate program to market some of our products.

Send me an email if you would be interested or if you know someone who would like to be an affiliate. Generous commissions payout for those accepted.

Put the word "affiliate" in the email subject line.

Contact us

Start trading with forex broker Markets Cube

Max McKegg's Daily Forex Trading Forecasts

Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.

Request a TRIAL of Max's Forex Service.


Retail Forex Brokerage Changing!

Are you looking for your first broker or do you need of a new one? There are more critical things to consider than you might have thought.

We were trading long before there were online brokers. Global-View has been directly involved with the industry since its infancy. We've seen everything and are up-to-data with recent regulatory changes.

Our Best Brokers listing section includes:Forex Broker Reviews, Forex Broker Directory, Forex Broker Comparisons and advice on How to Choose a Forex Broker

If would like guidance, advice, or have any concerns at all ASK US. We are here to help you.

SEE Our Best Brokers List

Currency Trading Tools

  • Live rates, currency news, fx charts. 

  • Research reports and currency forecasts.

  • Foreign Exchange database and history.

  • Weekly economic calendar.

Directory of  Forex trading tools

Terms of Use    Disclaimer    Privacy Policy    Contact    Site Map

Forex Forum
Forex Trading Forum
Forex Forum + forex rates
Forex Forum Archives
Forex Forum RSS
Free Registration

Trading Forums
Currency Forum Guide
Forum Directory
Open Forum
Futures Forum
Political Forum
Forex Brokers
Compare Forex Brokers
Forex Broker News
Forex Broker Hotline

Online Forex Trading
Forex Trading Tools
Currency Trading Tools
Forex Database
FX Chart Points
Risk/Carry Trade Chart Points
Economic Calendar
Quicklinks to Economic Data
Currency Futures Swaps
Fibonacci Calculator
Currency Futures Calculator

Forex Education
Forex Learning Center
FX Trading Basics Course
Forex Trading Course
Forex Trading Handbook

Forex Analysis
Forex Forecasts
Interest Rate Forecasts
Central Bank Forecasts

FX Charts and Quotes
Live FX Rates
Live Global Market Quotes
Live Forex Charts
US Dollar Index Chart
Global Chart Gallery
Daily Market Tracker
Forex News
Forex Blog
Forex News
Forex Blog Archives
Forex News RSS
Forex Services
Forex Products
GVI Forex
Free Trials
FX Bookstore
FX Jobs and Careers
Jobs USA
Jobs UK
Jobs Canada

Forex Forum

The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.

Forex News

The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.

Currency Trading

Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by

Forex Brokers

The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.

Forex Trading

Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.

FX Trading

Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.

Forex Blog also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.



By using this website, you are agreeing to our Privacy Policy and Terms of Use, and Cookie Policy

Copyright ©1996-2014 Global-View. All Rights Reserved.
Hosting and Development by Blue 105