Has sub-prime lending hurt homeownership?MortgagePress.comSub-prime lending troubles
The Center for Responsible Lending (CRL) said that high
foreclosure rates on sub-prime loans have resulted in a net loss of
homeownership since 1998, directly contradicting claims by the
mortgage industry about the benefits of sub-prime lending.
Considering that only nine percent of sub-prime loans go to
first-time homebuyers and projected foreclosure rates, "we see a
net loss of homeownership every year since 1998 totaling almost one
million families," CRL President Michael Calhoun told a House
panel.
Last year, an estimated 354,172 first-time homebuyers used
sub-prime loans, but the consumer group projects 624,631 sub-prime
loans originated in 2006 will eventually end up in
foreclosure—resulting in a net loss of homeownership to
270,459 families.
However, the Mortgage Bankers Association asserts that the CRL
study is misleading.
John M. Robbins, CMB, chairman of the Mortgage Bankers
Association, issued a statement standing by MBA's analysis of the
sub-prime mortgage market and its contribution to homeownership
rates and challenging the integrity of the data and methodology of
the CRL's recent study.
"Today, homeownership stands at 69 percent because many people
not able to get credit in the past have gotten the opportunity to
borrow money. And, our data demonstrates that 87 percent of
borrowers with sub-prime loans are paying their mortgages on time
and enjoying the benefits of homeownership. Because our members use
MBA data and forecasts in their business planning, we put forth a
truthful and occasionally painful analysis based on what the data
tells us."
According to the MBA:
• The percentage of foreclosures in the sub-prime market
is far below the rates cited by CRL, and not all of these
foreclosures result in the borrower losing the house.
Percent of foreclosure started in each year on sub-prime
loans
Year Percent
1999 6.97
2000 8.20
2001 9.34
2002 8.54
2003 6.57
2004 5.86
2005 5.63
2006 7.28
These numbers are well below those presented by CRL, which
assume a worst-case scenario of economic conditions, interest rates
and home prices to inflate its facts.
• CRL's latest analysis combines performance data on
refinance loans with data on purchase loans. This approach may be
the only way they could generate a net loss in terms of
homeownership. A different analysis, even using their numbers,
would show that 85-90 percent of sub-prime borrowers are ultimately
successful on their loan.
• Sub-prime loans accounted for about 20 percent of all
mortgage originations in the first half of 2006, according to MBA's
Mortgage Origination Survey. Contrary to many perceptions that
sub-prime loans are just a way for people to refinance their way
out of other debt problems, many consumers use sub-prime credit to
purchase a home. In the first half of 2006, 45 percent of sub-prime
originations were for the purchase of a home. Twenty-five percent
of these purchase loans were by a first-time homebuyer.
• Sub-prime loan performance is fundamentally a result of
local economic conditions, not the loan terms or the product. For
example, the fact that the seriously delinquent rate (loans in
foreclosure and 90 days or more past due) for sub-prime
adjustable-rate loans in Ohio is six times that of the rate Arizona
is due to the local economic conditions in the Ohio, not problems
with the loans. Similarly, the seriously delinquent rate for prime
fixed-rate loans in Ohio is nine times that of the rate in
Arizona.
• California accounts for approximately 40 percent of
sub-prime lending in this country. Homeownership rates in
California increased from 2004 to 2006 by more than one percentage
point, while they have fallen in states like Ohio. Again, this
points to the importance of local economic conditions when
assessing foreclosures and delinquencies.
• The sub-prime market exists to provide credit to people
who would not be able to qualify for loans in the prime market. It
provides an opportunity for them to buy a house earlier than they
might otherwise be able to, or to stave off problems that occur
after they own the house. It provides them an opportunity to either
build or repair their credit records and whether they take
advantage of that opportunity is up to them. The simple fact is
that the majority of sub-prime borrowers perform well and do not go
into foreclosure.
For more information, visit www.mbaa.org.
