Subprime Effect on U.S. Unemployment

University Degree Business and Administrative studies

Introduction

In recent decade, mortgage brokers in the United States (U.S.) engaged heavily in securitization of subprime mortgage loans into high yield mortgage–backed securities being sold to investors, pension funds and financial institutions. With this profitable model, it generated additional funding to create more loans, resulting to loose lending practice, poor credit rating, and overleveraging (BBC, 2007). Sudden increases in foreclosures from second quarter 2007 led to job cuts in constructions and financial activities. With the U.S. subprime market unfolded, how did the current unemployment rate reach 5% from 4.4% in December 2006 (Appendix A)? This essay attempts to explain the magnitude of the U.S subprime crisis and analyze the impact on its unemployment.

Causes of the Subprime Crisis

“Subprime” refers to borrowers with less than good credit ratings, and unable to qualify for prime conventional loans (Wikipedia, 2007). The Mortgage Asset Research Institute published a survey that borrowers stated income with little documentation and most overstating income of more than 50% (Sharick, M. et. al. 2006, p.12). Increased foreclosures resonated from borrowers’ inability to meet their increased loan installments through Adjustable Rate Mortgages (ARMs). Example, ARMs offer low fixed interest rate for two years with periodically adjustments based on selected indexes (BBC, 2007). Appendix B shows an expected subprime ARMs reset of $282 billions in 2007 and $210 billions 2008.

The upward trend in foreclosures had steepened from June 2007 because of the increasing ARMs reset before June 2007 (Appendix C). Subsequently, increased vacancy rates; downward trend in building permits; housing starts and new home sales, indicated lower demands for labor in construction (Appendix D & E). Slow financial activities have triggered job losses through losses in investments, tighter credit environment, and lesser mortgage business (Appendix F).

Job Losses on U.S. Non-farm Payroll

The non-farm payroll (NFP) establishment measures the number of jobs added or lost in the economy during a month. Appendix G shows the total change since January 2007 with recent negative payrolls for four months consecutive.

Given the large housing inventories, construction industry had consecutive job cuts for the last 10 months, total of -422k since January 2007 (Appendix H). November 2007 marked the largest loss of -13.9k in real estate and -9k in finance and insurance (Appendix I). To date, job losses totaled -126k in financial activities since January 2007 (Appendix G).

With lesser consumer spending, manufacturing employment had job losses totaled of -437k from January 2007 to current. Trade employment had been stable for 2007 until recent job losses totaled -169k for 2008 (Appendix G). Consumer sentiments in May 2008 plunged to 28 years low, expecting to create further decline on consumer spending (Willis, B. & Chandra, S., 2008).

The Effects on U.S. Unemployment Rate

In compiling unemployment statistics in the U.S., the term unemployment is one description of the state in which a person above 16 years; is without work; available to work; and have actively looked for work in the prior four weeks (Parkins, 2008, p.504). According to the U.S. Bureau of Labor Statistics (2008) in April, over 7.6 million people are unemployed at the rate of 5% based on the labor force of 153.9 million.

Since January 2007 to April 2008, job losers have increased from 48.6% to 52.6% (Appendix ...