Pitt’s losses in subprime crisis unclear

Dan Jozwiak knows very little about the current subprime mortgage crisis in the United… Dan Jozwiak knows very little about the current subprime mortgage crisis in the United States. The Pitt freshman has a very vague idea of what the issue is and has very little reason to know more.

“I don’t know much about subprime mortgages because they don’t affect me,” he said. “I don’t think most college students would know about it because it doesn’t affect them.”

Perhaps college students should worry about the subprime crisis, considering Harvard University lost about $350 million through investments based on subprime mortgages, according to The Wall Street Journal.

A subprime mortgage is a mortgage loan made to borrowers who do not qualify for the best market interest rates, typically because of problems evident in their credit history, according to David Dejong, the chair of Pitt’s economics department.

The current subprime mortgage crisis began in the summer of 2006, when increasing interest rates broke a five-year long pattern of low interest rates following the dot-com bubble and the terrorist attacks of 2001.

These high interest rates caused a large number of people with subprime mortgages to default on their payments, which in turn forced several lenders into bankruptcy.

However, the economic shockwaves of subprime mortgages could hit closer to home for students.

Pitt has also played the subprime game, but according to Pitt spokeswoman Sharon Blake, “The University has managed to weather the recent storm in equity and capital markets without suffering serious setbacks from subprime mortgages.”

Many universities, in search of higher returns on their investments, have sought to invest in more exotic, nontraditional investments. In August, The Wall Street Journal reported that Harvard University lost approximately $350 million through an investment in Sowood Capital Management, a firm with investments in mortgage-backed securities.

Mortgage-backed securities are packages of home loans, either subprime or not, that are sold to investors. The fall in the subprime mortgage market would have devastating effects on the price of mortgage-backed securities.

When asked about whether the University has limited or eliminated its exposure to subprime mortgage-backed securities, Blake had no comment. She also refused to comment on whether the University has made a decision to stay away from such investments in the future or whether the losses from these investments will affect the University’s operating budget.

The money used by the University of Pittsburgh’s Trustee’s Investment Committee, according to Blake, comes from private philanthropic donations.

The current climate of the market has also caused housing prices to fall, which has hurt the ability of homeowners to maximize the effect of their home equity loans.

“A meltdown in the housing market means that housing prices will fall, therefore hurting home equity,” said Dejong. “With less home equity, homeowners have less money to draw from their homes, and that hurts their spending power.”

Consumer spending accounts for more than 68 percent of the United States’ total Gross Domestic Product, according to the Bureau of Labor Statistics. A decrease in consumer spending, therefore, would have an adverse effect on the national economy.

The economic downturn of the entire nation would have consequences for the Pittsburgh area, according to Pitt economics professor Jack Ochs.

“If there is a national recession, Pittsburgh’s economy will mirror that of the nation’s as a whole,” he said.