Did Subprime Loans Increase Homeownership?

Posted by: Peter Coy on March 28, 2007

Here’s an email that Alan White of Community Legal Services in Philadelphia sent to a bunch of reporters this morning. Agree or disagree?philadelphia.jpg


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.

Reader Comments

Scott Patterson

March 29, 2007 11:33 PM

Seems to me that if he wanted to clear up this issue, then he would provide data supporting his claim, instead he uses vitriolic language to force his perspective and doesn't give any evidence for his claims. So I will chalk it up to a rant until I see the data.

Patrick Gaydon

March 30, 2007 5:35 PM

Your definition of subprime is false. Subprime lending is not mostly home equity loans. They are loans that most of your traditional lenders would not make. Many people out here are self employed or may have other income that is not reported to the IRS. These individuals may have a great credit but may not show and income (exotic dancers, beauticians, barbers, business owners). Your FHA, VA, and Fannie Mae Financing would not be for these individuals since they require reported verifiable income. Now a lot of subprime loans have better rates and cost than these prime loans that you speak of. The reason why so many foreclosures are happening now is not because of the subprime market it is because of the state of the economy. Fuel cost have gone up which eats into a person's discretionary income. Fuel cost effects all aspects of a person's lively hood. Whether it is from food to gas for the car. Since the cost of living has gone up most people's income have not adjusted to the rise in that cost. Many people are 2 weeks away from getting into some deep financial trouble. Many companies have laid off thousands of workers. These workers who may have had no problem making mortgage payments are now in the situation where they are losing their home. Most loans made in America today are either FHA VA or Conventional. Let us not spread incorrect information about the subprime market. I go back and state the subprime market has allowed more people to buy a home in America.

apella

April 4, 2007 1:30 AM

I think that alot of the market for loan products depends on the area of the country.

Alan White

April 4, 2007 10:08 AM

The comment on supporting data is a fair one. From 1998 to 2006 about 15.2 million subprime mortgages were made. About 9% of them went to first-time homebuyers, i.e. about 1.4 million. Meanwhile, 2.2 million subprime mortgages have ended or will end in foreclosure. The source for these numbers is the Center for Responsible Lending's recent testimony:

http://www.responsiblelending.org/pdfs/House-Calhoun-Mar27-final.pdf

During the same time period, 10s of millions of FHA, VA and conventional prime mortgages were also made. Many more of those loans put first-time buyers into houses. Also, at least some of the first-time buyers who did get subprime mortgages could have gotten prime or FHA mortgages. There really is no research or data to sort all these factors out, to see whether subprime mortgages have contributed at all to homeownership for otherwise excluded groups. For the most part they have put a lot of cash into the hands of existing homeowners.

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About

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.

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