You have to hunt through the rubble, but might there actually be something positive to say about the subprime mortgage debacle? The facts are certainly grisly. Last year’s subprime mortgages are becoming delinquent at twice historic rates, according to UBS. The culprits are fairly predictable: loans with weak documentation and high loan-to-value percentages, taken out by borrowers with weak credit scores. In some cases, borrowers actually have no equity at stake.

No wonder, then, that a feature of the subprime implosion has been an increase in the percentage of subprime loans on which borrowers fail to make even their first payment. Mortgage originators sell these loans on but usually have to repurchase them when there is such flagrant non-performance.

This is obviously bad news for mortgage originators. But it should also mean that the risks of contagion for other corners of the mortgage market may be overblown. Indeed, Barclays Capital research suggests that soaring defaults are due to weak underwriting rather than weaker housing or a sudden rise in monthly payments due to the structure of certain mortgages. The fall-out from this bad underwriting, spurred on by intense competition to keep volumes flowing, should be more easily containable. Of course, it still has the capacity to hurt the housing market as foreclosures add to the overhang of housing supply. But relatively low unemployment should still support prime borrowers.

But for the financial sector, the main question is how much more pain the originators will feel. Here, the shake-out looks as if it may have further to go. Subprime lending of the 2006 vintage of roughly $600bn was produced by far too many originators. The “right” size of the market is not obvious, but the pool of originators is set to shrink further.

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