September/October 2002 Going Subprime
Will low-income homebuyers gain or lose when Fannie Mae and Freddie Mac move into the subprime lending market?
By Allen J. Fishbein
The recent foray into the subprime mortgage market by Fannie Mae and Freddie Mac has renewed the debate over their role in the affordable housing arena. The subprime market targets borrowers with credit problems or limited credit histories who do not qualify for cheaper, prime loans. Fannie and Freddie traditionally have purchased a small share of these loans, but this figure is expected to grow significantly in the next few years. Proponents say that the two huge intermediaries can bring better pricing for some subprime borrowers and help to curb predatory lending. Competitors and some analysts say they will only cream the least risky borrowers, making other subprime loans even more costly to borrowers who need them. Still others forecast that a bigger role in the subprime market may pave the way for making traditional prime loans more expensive for some borrowers. http://www.nhi.org/online/issues/125/goingsubprime.html
Timeline shows Bush, McCain warning Dems of financial and housing crisis; meltdown
http://www.youtube.com/watch?v=cMnSp4qEXNM
Remarks by Governor Edward M. Gramlich
At the Financial Services Roundtable Annual Housing Policy Meeting, Chicago, Illinois
May 21, 2004 Subprime Mortgage Lending: Benefits, Costs, and Challenges
One of the key financial developments of the 1990s was the emergence and rapid growth of subprime mortgage lending. Because of regulatory changes, the desire for increased profits, significant technological innovations, and liberalization in some government mortgage support programs, lending institutions began extending credit to millions of borrowers who previously would have been denied credit, both for mortgages and for other consumer loans. The increased availability of subprime mortgage credit has created new opportunities for homeownership and has allowed previously credit-constrained homeowners to borrow against the equity in their homes to meet a variety of needs. At the same time, increased subprime lending has been associated with higher levels of delinquency, foreclosure, and, in some cases, abusive lending practices. On a social level, one question is whether the gains afforded by these new market developments outweigh the losses. Another question is whether anything can be done to limit foreclosures. These are my topics today.
Basic Facts of Subprime Mortgage Lending
Subprime lending can be defined simply as lending that involves elevated credit risk. Whereas prime loans are typically made to borrowers who have a strong credit history and can demonstrate a capacity to repay their loans, subprime loans are typically made to borrowers who are perceived as deficient on either or both of these grounds. Obviously, lenders take a borrower's credit history into account when determining whether a loan is subprime; however, they also take into account the mortgage characteristics, such as loan-to-value ratio, or attributes of the property that cause the loan to carry elevated credit risk.
A borrower's credit history is usually summarized by a Fair Isaac and Company (FICO) credit score. Everything else being the same, borrowers with FICO scores below 620 are viewed as higher risk and generally ineligible for prime loans unless they make significant downpayments. But it is noteworthy that about half of subprime mortgage borrowers have FICO scores above this threshold, indicating that a good credit history alone does not guarantee prime status.
Compared with prime loans, subprime loans typically have higher loan-to-value ratios, reflecting the greater difficulty that subprime borrowers have in making downpayments and the propensity of these borrowers to extract equity during refinancing. They are also somewhat smaller in size. Whereas only about 1 percent of prime mortgages are in serious delinquency, the rate for serious delinquency on subprime is more than 7 percent. Not surprisingly, subprime mortgages also carry higher interest rates than those for prime loans. Evidence from surveys of mortgage lenders suggests that a weak credit history alone can add about 350 basis points to the loan rate.
http://www.federalreserve.gov/boarddocs/speeches/2004/20040521/default.htm |
