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When Will it End?

Are you tired of hearing about U.S. subprime mortgage problems?

Well, get used to it suggests TD’s Deputy Chief Economist Craig Alexander.  “I think the [subprime] weakness is going to drag on longer than people think,” Alexander said in the Globe & Mail Saturday.

Peak delinquencies often don’t appear for up to 25 months after subprime mortgages are issued. Therefore, “it will be well into 2008, if not the end of 2008, before all of the worst news about the subprime market has been announced,” he feels.

Famed distressed-company investor Wilbur Ross, who recently invested $50 million into bankrupt American Home Mortgage, agrees

American Home Mortgage Daily Stock Chart


“We don’t think [subprime] problems are over with at all,” Ross says. “In the second half of 2007, $170 billion of adjustable rate mortgages will go from teaser rates to normal market rates. Next year $400 billion will go.”

“No one is making teaser loans [now],” he says. “The rate shock is going to become quite severe, and people aren’t going to be able to afford the payments. Typically, payments were more than 40% of borrower’s income and generally will be going from 45% to 55% or 60% of their income, (so) it’s just not going to be possible for people to pay that.”

Longer-term, however, Ross feels that subprime market will thrive once again.  “It’s a business that has validity but at a much smaller size,” he says.  BusinessWeek article

In Canada, the subprime market is thriving now.  In fact, it’s growing 50% a year thanks to prudent underwriting and big demand.  Fortunately, Canadian homeowners aren’t as overextended as our American neighbours (yet anyway).