Subprime mortgages to less creditworthy borrowers comprised only 13.7 percent of outstanding U.S. mortgage debt in the fourth quarter of 2006, and their delinquency rate was 13.3 percent, according to the Mortgage Bankers Association.
The subprime mortgage market is "little more than an asterisk in the overall U.S. credit economy," said Roth Capital Partners economist Donald Straszheim.
The concern that rising defaults among subprime borrowers would spill over to lower consumer spending in the broader economy is unwarranted, said Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness.
"It's the latest episode of housing hysteria," Snaith said. "It's a small segment of the overall mortgage market and its problems are not akin to a currency crisis where there is some contagion that just ripples through an economy."
By contrast, some argue that a systemic problem is in the making and government action is needed. A week after a coalition of civil rights groups called for a six-month halt to foreclosures on subprime borrowers, several Democrats in Washington called on Wednesday for the federal government to bail out troubled subprime mortgage holders.
"The federal government can send in an infusion of (money) to prevent foreclosure," said U.S. Sen. Charles Schumer, citing the possibility of "hundreds of millions of dollars."
THE CASE FOR OPTIMISM
Such intervention may not be necessary though.
"It's easy to build a domino theory for this," said Milton Ezrati, economist with fund manager Lord Abbett. "There is a risk but I don't see it as likely."
With demand for homes sluggish and so much property already for sale, it is doubtful lenders are in hurry to foreclose though.
"It's in everybody's interest, both the borrower and the lender, to find a way to avoid foreclosure," said Dana Johnson, economist with Comerica Bank.
With about 40 percent of new mortgages in the past year being made to subprime borrowers, as interest rates have been rising and house prices stagnating, many subprime mortgages may be headed toward foreclosure, but they represent only a small proportion of the $9 trillion worth of U.S. home mortgages outstanding, and about $5 trillion of mortgages outstanding have been securitized.
"If we're talking about the subprime industry I think there is a compelling and distressing story to be told," said Richard DeKaser, an economist with financial holding company National City Bank. "But if we're talking about the housing market or the U.S. economy as a whole, I think its role has been over-amplified."
In the context of a $13 trillion U.S. economy, this is just "indigestion", said Ken Fisher, chief executive of Fisher Investments in Woodside, California.
"At most it slows the growth rate. It doesn't stop the growth rate or create a recession," he said.
Moreover, troubles for subprime mortgage borrowers will be mitigated by a strong jobs market, said economist Ryan Ratcliff of the UCLA Anderson Forecast. "It's hard to predict a major surge in foreclosures without major job losses," he said.
With the U.S. economy creating more than 150,000 jobs per month in four of the past five months and the unemployment rate falling to a five month low in March, a new appreciation of the strength of the economy is being reflected in higher U.S. bond yields this week, analysts said.
"A very sensitive indicator of sentiment is the stock market and it seems to have regained its composure," said Comerica Bank's Johnson.
The U.S. stock market's rebound in the past three weeks from the four-month lows seen in early March was helped by the confidence expressed by Federal Reserve Chairman Ben Bernanke that the subprime mortgage market's troubles will be contained.
"I don't think Bernanke would glibly deny this problem," said Fritz Meyer, senior investment officer at AIM Investments.