Wednesday, October 1, 2008


It looks like a bailout of the subprime securities market is going to happen although it is very unpopular with the U.S. people.  The question now is how the U.S. government will value the subprime mortgage backed securities.  For example according to census estimates in 2007 the average price of a home was $183,917.  The U.S. Census Bureau and Federal Reserve Bank of New York estimates that there are 2,919,604 subprime home loans.  This means that the total amount paid at the average subprime interest rate of 8.46% is $504,255 per loan and a total paid to interest is $321,414.  The total of all loans is $1,472,227,309,095 and the interest paid will be $58,767,833,432. Lehman reduced its subprime Alt-A mortgage valuations to 39% of face value compared with 63% of face value in the previous quarter.  Similarly, Lehman reduced values on subprime securities and second loan securities from 55% of face value at the end of the second quarter to 34% of face value at present. If all values on subprime securities were valued at 36.5 % of face value which is $1,472,227,309,095 it would reduce the face value to  $  441,728,098,320.  The number includes considerations that 10.7% are in foreclosure and 9.7% are 90+ days past due.  The question is what will the reduction to the face value be?  If is anything above 36.4% they will make profits for the holders of the subprime securities.

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