Whether we agree or not with Rosengren’s views we have to give him merit for his proactive attitude in understanding the problems and potential solutions of the US sub prime market. The Federal Reserve Bank of Boston has started gathering data on this market for the New England area in order to understand it better. The lack of data on sub prime mortgages has been just one of the many problems surrounding this market. This lack of data seems to be a problem that has been present in all products involved in the recent credit squeezes. Central Banks have no data on the amounts of CDOs or similar securitized instruments. Yes, it is odd! Policy makers have been dealing with a beast they did not know were was hidden or how big it was.
Turning back to the data gathering effort of the Federal Reserve Bank of Boston, this new pile of information has provided a bit of light on the sub prime market developments. Some of the conclusions of their research outlined in a recent speech by Rosegren were already known:
a) Parties involved in the origination process assumed that house prices would continue rising nationally. This assumption allowed easy refinancing but this process stopped when the trend was reversed.
b) Sub prime mortgages were a relatively new phenomenon with short experience to assess the likelihood of defaults if underlying economic conditions changed.
c) There was reckless behaviour due to the increased reliance on mortgage brokers that were compensated based on volumes of loans made (sometimes on the rates and fees as well).
But possibly the most optimistic conclusions provided by the data are related to the solutions to solve the current situation. According to Rosegren, data shows that many of the sub prime holders have improved their credit conditions enough to modify their mortgage into a prime mortgage with lower rates that would also ameliorate the holder’s creditworthiness. Moreover he sees good opportunities for banks in the sub prime market. Though these conclusions are limited to a local market –New England-, they are possibly over optimistic. Even if we believe what Rosengren has read in the data the difficulties of loan rearrangements are messy as detailed in this week Buttonwood’s column in The Economist. If only all the US were like New England may be there might be more hopes.