In this day of sensationalism that has pervaded our marketplace, entertainment, churches, etcetera, it is acceptable to have a numbness toward sensationalism in the news media.  One such area of sensationalism is the issue of Sub prime mortgages and the proclaimed downfall of the mortgage world as it has ever existed.

I've made several commentaries on this issue, but have held my tongue regarding much of my opinion because personal experience has told me that the masses prefer hysteria to logic.  So I just plot along doing my job thoroughly and integriously while I hear rumors of Rome burning.

However, I read a syndicated column this morning in our money section of the newspaper that has given me hope that there are others out there who are willing to reveal the truth of the current situation.  This is a correction, not a downfall and if we over-react, we will most certainly create a monster that is larger than the problem itself.  Allow me to re-present the article I read this morning.

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Author: Eric Tyson, King Features Syndicate
Title:  SUBPRIME MORTGAGE CONCERNS OVERBLOWN
Date:  December 18, 2007

Q: I am terrified to invest in stocks because of all the concern about subprime mortgages and the fallout from those risky loans that are now going bad. Homeowners seem to be in trouble; the banking, housing and mortgage company stocks have plunged because of all the losses; and now there's concern about all of this spilling over into the rest of the economy. What do you say?

A: My analysis suggests that the concerns about subprime mortgages (those mortgages made to borrowers with relatively low credit scores) are overblown.

I will say, though, that it's sad when a homeowner who wants to keep his or her home is overextended and loses the home because he or she can't make mortgage payments.

When a bank makes a loan — whether it's to a small business, on a credit card, or via a mortgage — there is some small risk that the borrower will default on the loan.

Consider that credit-card loans are far riskier, since there's no collateral behind those loans, and there are higher rates of loan charge-offs (losses) to financial institutions than with mortgages.

For sure, more homeowners are falling behind in their mortgage payments and seeing their homes go into foreclosure. However, if you look at the percentage of mortgage and other loans being written off by banks, according to the Federal Deposit Insurance Corp., banks have been charging off 0.5 percent of all loans outstanding this year — just under half of what it was five years prior.

The charge-off rate was more than 1.6 percent in the early 1990s — triple what it is today.

I — and most economists with a pulse — expect the current charge-off percentage to increase, but the sky is far from falling.

Another way to look at subprime mortgages is to consider that there is slightly more than $600 billion of subprime mortgages outstanding, according to Morgan Stanley.

The figure of $600 billion sounds like a lot until you realize that this represents less than 6 percent of the more than $10 trillion in mortgages outstanding.

So even if all of these sub-prime mortgages went completely bad — which could never happen — it's a small portion of all outstanding mortgages.

Let's say that 20 percent of the subprime mortgage borrowers end up defaulting; that would be just 1.2 percent of all mortgages. But remember that, unlike with an unsecured credit-card debt, banks have collateral in the form of a house, which they take over when they foreclose on a home. Suppose home prices drop 25 percent nationally — a decline we've not seen since the Great Depression — banks would still get back a hefty chunk of their mortgage debt from the sale of the real estate.

Please don't get me wrong. I'm not in any way minimizing what a horrible experience it is when people lose a home they want.

But my analysis is to show that, from an overall economic standpoint, subprime mortgages aren't as big a concern as you might think.

Eric Tyson, author of Let's Get Real About Money! and Investing for Dummies, receives e-mail at eric@erictyson.com. King Features Syndicate
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Let's all work with the mortgage industry, the National Association of Mortgage Brokers and our legislators to bring a balance of thinking amidst a very challenging time in the world of finance, home-ownership and the mortgage industry.


Til next time

Brandon Thienes   www.TheEquityExperts.com