Division of Research

Commentary
from Nov '08 Indicators

It is now quite evident that the U.S. economy has entered a recessionary period. The ongoing problems in the global credit markets and banking system were unraveled more than one year ago with the start of the “subprime mortgage crisis” in the summer of 2007.

For years, financial institutions relaxed their standards for providing home loans to borrowers with high risk of default (“subprime lenders”) and increased their exposure to these mortgages. This worked relatively well until interest rates began to rise and housing prices stopped increasing. What followed was a dramatic increase in the number of defaults and foreclosures. The latest data shows that as of August 2008, 10.7 percent of the almost three million (2,919,604) lenders of subprime loans were on foreclosure. But how does South Carolina compare with the rest of the nation? As of August 2008, there were 32,106 subprime loans in South Carolina, about 1.1 percent of all subprime loans in the U.S. Figure 1 shows the number of subprime loans per 1000 housing units in the United States. With a value of 16.4, South Carolina has less than half the incidence of the top states Nevada, Florida and California. A similar picture emerges when the percentage of subprime loans that are in foreclosure is considered. The foreclosure rate of 8.3 percent for South Carolina is slightly lower than the national average of 10.7 percent (see Figure 2). However, with a souring economy and without outside intervention, there is reason to believe that the number of foreclosures will keep increasing in the coming months. Subprime lenders are under pressure, as evidenced by the rate of lenders that had at least one late payment in the last 12 months. That rate was 56.9 percent for South Carolina, slightly below the national average of 57.6 percent (see Figure 3). Whether South Carolina will handle this problem better than other states is unknown. For one hand, South Carolina is one of the states with the highest percentage of loans originated before 2005, when housing prices were not as inflated as now (see Figure 4). On the other hand, South Carolina subprime borrowers have one of the smallest average credit scores in the nation, suggesting that they are more likely to default in their loans (see Figure 5). o

                     Paulo Guimarães, 11/18/08