Once considered virtually a panacea for those who otherwise couldn't buy a home, subprime loans have become such a scourge they are now being blamed for reducing the nation's level of home ownership.
The Center For Responsible Lending in testimony last week before the U.S. House Committee on Financial Services (Subcommittee on Financial Institutions and Consumer Credit), said despite popular belief, subprime loans haven't created any net gains in home ownership.
To the contrary, according to testimony by Mike Calhoun, president of CRL, the questionable loans are contributing to a net loss of home ownership.
What's more, the condition is exacerbated by the failure of a growing number of similarly risky non-traditional mortgages.
Subprime loans are generally more expensive than prime loans, but they are granted to some borrowers who pose a greater risk to lenders, typically because of their lack of credit or previous credit problems.
The loans were sold as an opportunity to achieve the American Dream for those who otherwise may have been locked out. Unfortunately, many home owners with subprime loans ended up kicked out of the dream anyway.
"Homeownership has been thwarted rather than supported," said Mike Calhoun, CRL president. "There's a difference between increasing access to home loans and expanding home ownership."
Responsible Lending says the since 1998, only an estimated 9 percent of subprime loans actually went to the target-market of first-time home buyers, a market segment where home ownership growth was necessary to boost the overall rate of home ownership.
However, compared to the 9 percent of subprime loans that went to first timers, a much greater share of subprime loans, some 15.6 percent, have already failed or will end in foreclosure, according to the center's research.
The center's "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners" released in late 2006, forecast nearly 20 percent of all subprime mortgages originated in the last two years will ultimately end in foreclosure. That will cause some 2.2 million households to lose the farm, including any equity gained.
That's putting the brakes on the once rising rate of home ownership.
The rate of home ownership rose about two percentage points every five years since 1993 to a peak of 69.2 percent in the fourth quarter of 2004, according to the "U. S. Census Bureau Report On Residential Vacancies and Homeownership" released in January.
Since then, the rate has been flat, dropping as low as 68.5 percent in the first quarter of 2006. It recovered, ending up at 68.9 percent by the fourth quarter of 2006.
A flattening rate of home ownership coincides with the end of the housing boom, rising foreclosure levels and the resultant fallout that's blanketing the housing market.
With a view of lower rates of home ownership from the back end, foreclosure tracker RealtyTrac says foreclosures are up 12 percent nationwide from a year ago and at least half of those foreclosures are subprime loans. In some areas the increase is much higher. California, for instance, is suffering a 78 percent increase in foreclosures.
Last year, there were 1.2 million foreclosure filings, this year, at the current rate, the number could reach 1.6 million said spokesman Daren Blomquist.
On the front end, lenders are failing and surviving lenders are curtailing subprime lending while also stiffening underwriting standards on nontraditional or "Alt-A" loans. That effectively closes the door to home ownership for many buyers who have better credit than subprime borrowers.
Among other strategies, surviving lenders are dropping some 100 percent financing loans, requiring higher credit scores, cutting maximum loan amounts and otherwise making the riskier loans tougher to get.
"There is a big problem in the subprime market, but I think the problem extends outside that market as well. I have noticed that many people who could qualify for quality loan products were persuaded to obtain risky loans as a way to purchase more home," said Ann M. Davis a Keller Williams real estate agent in Portland, OR.
"Now that the values of homes have flattened or gone down across the country, there are many people who are making payments on a home they can't afford to sell as they owe more than the home is currently worth. Many of these loans are adjustable rate loans as well, which may compound the problem in the not too distant future," Davis added.
Freddie Mac recently announced it will no longer purchase subprime adjustable rate mortgages (ARMs) when lenders qualify borrowers at the introductory interest rate instead of considering affordability after the scheduled interest rate increases.
If subprime makers are limited where they can sell their loans they'll write fewer of them.
When City Influence, a market research firm specializing in urban real estate market conditions, recently surveyed Washington, D.C. urban area real estate agents, it found 73 percent of them saying they were having problems getting purchases into escrow because of tighter standards on both subprime and Alt-A loans.
Further negatively impacting the rate of home ownership, Responsible Lending says the vast majority of subprime loans have been for refinancing or moving up, rather than buying for the first time.
"Even in 2006, subprime refinance loans accounted for more than half (56 percent) of all subprime loans made. These loans, obviously, do not contribute to new homeownership. We estimate that overall since 1998, only nine percent of subprime loans have gone to first-time homebuyers," Calhoun reported.
What's more, the subprime drain on the rate of home ownership isn't a new phenomenon, according to the center.
"Comparing the home ownership gain from subprime lending to first-time homebuyers to the loss of homes caused by subprime foreclosures, we see a net loss of home ownership every year since 1998, totaling almost one million families," Calhoun said.
