Has sub-prime lending hurt homeownership?

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.