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Subprime Loans Led To Decreased Homeownership

Study Finds No Net Increase in Home Ownership Despite Lending Bonanza

By Mark Huffman
ConsumerAffairs.com

April 5, 2007

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Subprime loans, currently at the center of a crises in the mortgage industry, were supposed to be a good thing. Designed for consumers with little or no credit, subprime loans were supposed to allow millions of Americans shut out of the housing market to have a shot at the American Dream.

Nine years and $2 trillion in subprime loans later, critics charge there has not been a net increase in homeownership. In fact, the Center For Responsible Lending says homeownership numbers are moving in the opposite direction.

According to a CRL report, about 1.4 million first-time home buyers purchased their homes using subprime loans from 1998 through 2006. The group estimates that over 2.2 million borrowers who obtained subprime loans will lose or have already lost their home to foreclosure.

Updating the analysis to include subprime originations for fourth quarter 2006 increases the total number of projected subprime foreclosures to 2.4 million.

CRL estimates that subprime loans made during 1998-2006 have led, or will lead to a net loss of homeownership for almost one million families. In fact, the group argues, a net homeownership loss occurs in subprime loans made in every one of the last nine years.

How can that be? Because, says CRL, most subprime loans are not made for the purchase of a home. They are made to refinance an existing mortgage.

The report argues that until the recent boom in housing prices, the overwhelming majority of subprime loans were refinances. Even in 2006, subprime refinance loans accounted for a majority (56%) of all subprime loans originated.

These loans were made to people who already owned homes, but who were tapping into their homes' increasing equity, while being saddled with high interest rates and risky features.

CRL estimates that since 1998, only nine percent of subprime loans have actually gone to first time home buyers. The rest went to people responding to all those TV commercials about how easy and inexpensive it is to tap into your home's equity.

"History has shown that borrowers with lower incomes or blemished credit can be successful homeowners when given suitable mortgages with reasonable terms and fees," the authors wrote. "But lax underwriting practices, dangerous loan products, and a disregard for affordability have set up vulnerable homeowners to fail.

"As a result, millions of families with the most to gain from ownership have lost their homes and billions of dollars in equity."

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