sunday subprime saviour meltdown, page-5

"I completely disagree with you, but only due to the amount of bad loans out there and the flow on affect it will have."

Fair enough. Let's try to to quantify things.

Subprime loans in the US constitute approx 5% of the total mortgage market: $500 mil of a $10 trillion market.

What percentage of those loans are in distress and will eventually default? Pick a number -- no-one really knows, and that in itself is actuall the biggest problem.

If you want to be pessimistic, say 50% (which is actually very unlikely).

So you are talking about 2.5% of the total mortgage market going bad. Do the lenders lose 100% of the amount loaned? No... they get the house. They may have to sell it at a loss in a depressed market, but they recoup most of the money. Say they lose 25% on average for every defaulted loan.

We are now down to well under a 1% total loss of value for the market overall, even with highly pessimistic assumptions.

What is the overall size of the US mortgage market in relation to the overall US economy? Not so large that a 1% loss in value overall is going to cause any long-term systemic disruptions. Depression? I don't think so. A recession? Possible, if the flow-on effects aren't managed properly and commercial interests rates get unreasonably high. But I don't think that's even particularly likely at this stage.

That's my back of the envelope. Feel free to share yours.

-Mark