U.S. Housing And The Gamble Of Subprime Loans

Bill Emerson, CEO of Quicken Loans
Bill Emerson, CEO of Quicken Loans

Prices for existing home sales nationwide rose just barely over 1% last year. That's not much compared with the double digit appreication in the previous years. And regionally--neighborhood to neighborhood--prices dropped and continue to fall. So what is the state of the U.S. housing market? Bill Emerson is CEO of Quicken Loans . He appeared on "Squawk Box to discuss the issue.

Emerson says that for he thinks the home buying market will pick up by mid 2007. He expects home mortgage rates to be around 6 1/4 and 7%--and he says that's good for homeowners. Emerson also says inventories are a key part of the equation. He says that we need to watch if inventories of homes are going down because they're sold--or because people are getting discouraged and taking them off the market. He also says a strong economy is important for home sales--and tied to jobs as an indicator that the economy is doing well. He said the next couple of months will be key.

Emerson talked about sub-prime loans in response to a report by CNBC's Diana Olick. (A subprime loan is a loan that is given to people who have trouble getting a regular loan. The interest rate on a subprime loan is likely to be a lot higher than an interest rate you would expect on a loan from a bank.) Olick reported that there's trouble in the $1.3 trillion dollar subprime mortgage market. Subprime loans now make up nearly 20% of the mortgage market. But Olick reports that home sales and prices have turned them into a gamble--but can bring high returns for some. Her report details the issue. The problem is the number of foreclosures.

Emerson says that his clients are mostly prime loan customers and that he's not putting any extra financial reserves away to deal with the situation.

FYI: From a San Diego Union Tribune report:About one in five subprime mortgages made in the past two years is likely to go into foreclosure, according to a report released in December of 2006, with San Diego among the regions expected to be hard hit. About 1.1 million homeowners who took out subprime loans in the past two years will lose their homes in the next few years, the report said. The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity. The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody's Economy.com. Researchers examined more than 6 million mortgages made from 1998 until the third quarter of 2006 in the first nationwide study on the performance of subprime mortgages. The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.

Also of note: So-called subprime loans have helped boost U.S. homeownership to a record 69 percent of households. But the industry's growth has brought problems. Subprime lenders foreclose on properties much more frequently than do conventional lenders. About 3.5 percent of subprime mortgages and refinancing loans go into foreclosure (as of 2005), but a study by the University of North Carolina Kenan-Flagler Business School found that 20 percent of refinancings in 1998 through 2000 that were examined wound up in foreclosure. For conventional loans, the rate is 1.1 percent of mortgages and refinancings.