The meltdown in the U.S. subprime market could dim the U.S. economic outlook, warns National Bank Financial in a news research note.

“In the past, the subprime segment has not been perceived as having the potential to derail overall conditions in the market for residential housing,” it notes. And, while some market participants continue to share this view, NBF says it certainly does not.

It points out that subprime loans as a share of total mortgage loans outstanding have surged from 2% to over 13% in the past seven years. “As a result of this exponential growth, it no longer takes large variations in foreclosure rates for the subprime segment to significantly alter the supply of homes on the market,” NBF maintains, adding that as of the fourth quarter, the inventory of subprime loans that were in foreclosure stood at 4.53% vs. 0.5% for the prime loans.

“Even though the rate of foreclosure for subprime loans remains well below the 9% level that prevailed in 2001, this segment already accounts for the vast majority of the total inventory of homes that are in foreclosure in the United States,” it concludes. “In our opinion, developments in the subprime market for residential loans continue to pose significant downside risks to the U.S. economic outlook.”