If stiffer mortgage laws restrict access to certain loans to push back the growing number of homeowners on foreclosure rolls, hundreds of thousand of Americans could be unintentionally deprived of access to home financing.

When considering 2005-2006 lending levels, a recent study found that reducing available subprime credit by 10 percent would result in about 580,000 borrowers unable to access an estimated $94 billion in mortgages. A 20 percent reduction would affect 1.1 million borrowers and amount to $188 billion in unavailable mortgage money.

That's among the findings in "U.S. Mortgage Borrowing: Providing Americans with Opportunity, or Imposing Excessive Risk?" a study by the four-year old Center for Statistical Research (CSR) funded by the American Financial Services Association (AFSA).

The AFSA membership includes industrial banks, auto finance institutions, mortgage lenders, finance companies, credit card issuers and others providing credit to consumers and small businesses.

The study, which used mortgage origination data from "several major financial institutions" is at odds with the five-year-old Center for Responsible Lending's report on the matter, "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners". The center's study used a "proprietary loan-level dataset of more than six million securitized subprime loans."

Responsible Lending's report forecasts 2.2 million homeowners have either already lost the farm or will by 2008, due to subprime loans. The center has long called for stiffer rules governing the risky loans.

Beyond what AFSA or anyone forecasts, there's no way to be certain how stiffer rules will impact the market, but without them, strong anecdotal evidence reveals many borrowers are already getting locked out or thrown out of the market.

It's already tougher to get a mortgage these days but the demand remains.

The Federal Reserve's "April 2007 Senior Loan Officer Survey" found that while the vast majority of senior loan officers, 85 percent, said credit standards on prime mortgages remained unchanged in the last three months, more than 56 percent said credit standards on subprime mortgages "tightened somewhat" or "tightened considerably" and 45.5 percent likewise said credit standards on nontraditional mortgages tightened considerably or somewhat in the past three months.

On the demand side, among prime loans, 68 percent of the officers surveyed said demand remained the same or was moderately stronger; for nontraditional mortgages, 78 percent of the officers said demand remained the same or was moderately stronger; and for subprime loans, nearly 69 percent of loan officers said demand remained the same or was moderately stronger during the past three months.

Other studies reveal the mortgage demand-supply imbalance is hurting lower-income households most and in several ways.

Already at their financial wits end, one-in-four low-end households pays more than 40 percent of their income on debt payments, most of it housing, according to a recent Brookings Institution Metropolitan Policy Program study "Borrowing to Get Ahead and Behind: The Credit Boom and Bust in Lower-Income Markets".

It only takes one ARM adjustment to send some subprime household budgets into a tailspin. If a credit card payment gets sucked into the vortex, not only does the household face foreclosure, but the credit card company reacts with a skyrocketing interest-rate-increase penalty, further exacerbating the household's financial woes.

With stiffer laws, would the market have spared those homeowners to better prepare themselves for homeownership later?

The AFSA study says that more restrictive mortgage regulation would deny credit not only to those who would actually experience a foreclosure, but also to the whole class of borrowers in a particular risk category -- the vast majority of whom would otherwise use the credit successfully.

It also says foreclosure trends in prime, FHA/VA and subprime loans using data on mortgage foreclosures through the end of the fourth quarter of 2006, fall within the range of historical fluctuations recorded since 1998.

Foreclosure rates were at historical highs during 2001- 2003, and current foreclosure rates are again beginning to reach those levels, after a significant drop in 2004-2005, indicating foreclosure rates are not unusually high, the AFSA study says.

Furthermore, the study finds that rising foreclosure start rates in subprime fixed and adjustable rate loans are mirrored by a rise in prime and FHA fixed and adjustable-rate loans, strongly suggesting that economic conditions are driving the current upturn, rather than bad lending habits. The study also notes the majority of foreclosure difficulties are centered on geographical regions with serious economic problems and high unemployment.

That doesn't fully jibe with what analysts discovered last year.

In the 12 months through August of 2006, the default rate of subprime mortgages rose to 7.74 percent from 5.53 percent in the previous 12 month period, according to Friedman Billings Ramsey Inc., analysts who follow the securitized portion of the market.

Prime loan foreclosures, on the other hand, rose only 0.24 percent, a steady average since 2000, and up only from 0.16 percent from a year earlier.

Foreclosures on subprime mortgages climbed to 3.18 percent in the month of August 2006, up from 2.16 percent in August 2005, FRB also says. For prime loans, the foreclosure rate rose only marginally from 0.06 percent to 0.09 percent during the same month.

Another analyst, UBS Securities, said subprime loans originated last year were, by August, going bad at a 50 percent higher frequency than those issued in 2005, and attributed the problem to looser underwriting standards.

The problem, at the time, caused Standard & Poor's downgraded credit ratings on a record 132 residential mortgage bond issues in a single quarter, mostly due to poor performance of subprime loans.

This year, April's foreclosure rate for the nation was 62 percent higher than a year ago, according to RealtyTrac, an online foreclosure marketplace.

Last year, there were 1.2 million foreclosure filings. This year, at the current rate, the number could reach 1.6 million said RealtyTrac spokesman Daren Blomquist.

Blomquist also estimated at least 50 percent of the foreclosure numbers are coming from the subprime market.

Published: June 7, 2007

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.