Here’s an email that Alan White of Community Legal Services in Philadelphia sent to a bunch of reporters this morning. Agree or disagree?
There is a useful fiction that is continually repeated in all stories about subprime mortgages. The fiction is that subprime mortgage lending has helped low-income and minority families become homeowners, and increased the overall homeownership rate. This received wisdom is demonstrably false. The empirical evidence is that subprime mortgages have resulted in more foreclosures than first-time purchases of homes.
Just Monday, a Fed official made the following statement to Congress:
The expanded access to subprime mortgage credit has helped fuel growth in homeownership. The national rate of homeownership increased from 1995 through 2006, from 65 percent to nearly 69 percent of all households. This means that nearly 67 million households now own homes, compared to roughly 64 million 10 years ago.
The fallacy in this statement is painfully obvious. The 3 million net new homeowners mostly got conventional, FHA and VA mortgages, not subprime mortgages. If we didn’t have ANY subprime lending in those ten years, there would be MORE homeowners, not fewer.
Subprime mortgages are mostly home equity loans: people who already own a home are borrowing cash to pay off credit card balances, in order to sustain consumption beyond their income level. The subprime mortgage market is in reality a huge consumer credit binge, allowing US consumers to borrow and spend, thanks to the world capital glut produced by the gnomes of Shanghai.
I would urge all of you to stop repeating this nostrum that subprime mortgages have been good for U.S. consumer welfare. It is based on blind faith and industry propaganda more than any actual facts.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.