Egypt News

The value of U.S. Subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien Subprime mortgages outstanding. Approximately 16% of Subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21%and by May 2008 it was 25%.
The U.S. mortgage market is estimated at $12 trillion with approximately 9.2% of loans either delinquent or in foreclosure through August 2008. Subprime ARMs only represent 6.8% of the loans outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007.
During 2007, nearly 1.3 million properties were subject to foreclosure filings, up 79% versus 2006.
Understanding the risks of default
Traditionally, banks lent money to homeowners for their mortgage and retained the risk of default, called credit risk. However, due to financial innovations, banks can now sell rights to the mortgage payments and related credit risk to investors, through a process called securitization. The securities the investors purchase are called mortgage backed securities (MBS) and collateralized debt obligations (CDO). This new "originate to distribute" banking model means credit risk has been distributed broadly to investors, with a series of consequential impacts. There are four primary categories of risk involved: credit risk, asset price risk, liquidity risk, and counterparty risk. Each of these risk types is described separately in the background information.
Understanding the market mechanisms affecting corporations and investors
There is a greater interdependence now than in the past between the U.S. housing market and global financial markets due to MBS. When homeowners default, the amount of cash flowing into MBS declines and becomes uncertain. Investors and businesses holding MBS have been significantly affected.
The effect is magnified by the high debt levels maintained by individuals and corporations, sometimes called financial leverage. The mechanisms through which a decline in housing prices affects market participants is described separately in the background information.

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