Economist's Commentary: April 1, 2008

Subprime Exposure Decreases Nationwide

By George Ratiu, Research Economist

Subprime exposure decreased nationwide in the fourth quarter of 2007, based on data from the Mortgage Bankers Association.

The percentage of subprime mortgages in the fourth quarter dropped 50 basis points compared with the third quarter, to 12.7 percent of all mortgages. Year-over-year, subprime mortgages declined by 100 basis points, from 13.7 percent to 12.7 percent.

Regionally, subprime mortgage origination was driven by areas with rapid price appreciation and speculative investing. Looking at the latest data, the states with the lowest subprime exposure are also the states with low speculative investments and good fundamentals. The list of top five states in this category is virtually unchanged from last quarter or a year ago. North Dakota presents the lowest subprime exposure, with only 4.6 percent of all loans originated being subprime. Other states with low subprime-to-total ratios are South Dakota (5.6%), Montana (6.1%), Vermont (7.1%) and Iowa (8.1%).

Source: MBA

Subprime exposure is higher in states where a combination of factors, including accelerated price increases, speculative investing and a deterioration of economic fundamentals, led to the proliferation of riskier loans. The five states with the highest percentage of subprime loans are Nevada (17.7%), Florida (16.0%), Arizona (15.1%), Mississippi (15.0%), and Ohio (14.3%).

Based on yearly activity, the move away from subprime loans is evident virtually in every state. Compared to the fourth quarter of 2006, every state except Alabama, Arkansas and Alaska registered drops in the percentage of subprime loans. The drops range from ten basis points for Connecticut to 150 basis points for Utah. The states with the highest declines in subprime exposure are Utah (150 bps), Wyoming (140 bps), Virginia (130 bps), Wisconsin (130 bps), Vermont (120 bps) and Oklahoma (100 bps).

Considering these trends and also weighing the fact that this past week MBA reported a surge in mortgage applications, it is obvious that more people are refinancing and moving away from the risky subprime loans. After the continuing anticipated increase in foreclosures through the summer from the surge in scheduled subprime ARM resets in upcoming months, a decrease in subprime exposure will lead to a steady slowdown of foreclosure activity.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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