Saturday, May 26th, 2012

Shattering a Subprime Myth: No, High-Rate Loans Didn’t Create Homeownership

By Mary Kane
Friday, January 02, 2009 at 9:25 am

One of the long-held beliefs about subprime mortgages is that they had a positive side, extending credit to non-traditional buyers and increasing minority homeownership rates. But in a new research paper (pdf), the Boston Federal Reserve takes a closer look at foreclosures in Massachusetts. In a remarkable finding, researchers say that widely-held assumption simply isn’t true. In fact, subprime lending led instead to a churning of properties that only left minority homeowners and neighborhoods worse off.

From the Boston Fed:

We show that much of the subprime lending in the state was concentrated in urban neighborhoods and that minority homeownerships created with subprime mortgages have proven exceptionally unstable in the face of rapid price declines. The evidence from Massachusetts suggests that subprime lending did not, as is commonly believed, lead to a substantial increase in homeownership by minorities, but instead generated turnover in properties owned by minority residents.

Researchers matched federal mortgage data on race and income with state deeds and property records, making their conclusions based on statistics rather than anecdotes — the latter of which are too often at the heart of the conventional wisdom about subprime lending.

Here’s more:

Altogether, the data seem to paint a somewhat bleak picture of the role of subprime lending in Massachusetts urban neighborhoods. Rather than increasing the share of homes owned by members of the community, it appears that subprime lending allowed one set of minority homeowners to replace another…these new homeowners, with greater debt burdens and less equity (and likely poorer credit to begin with), were poorly suited to handle the collapse in house prices that followed.

In another surprising conclusion, researchers found it may do little good for lenders to reduce the loan principal on multi-family properties in particular to avoid foreclosures. Those properties are especially vulnerable to foreclosure, but reducing the loan amount only leaves a marginal homeowner still in place – and one who still may not be able to handle the mortgage. Instead, researchers say, lenders should work to find a buyer who can take ownership of the property under the reduced loan terms, such as a local community housing group.

This is a sobering paper well worth your time. The notion that the subprime crisis had some positive side effects by increasing homeownership rates is often accepted as an article of faith, as is the belief that government policies should aid homeownership efforts. This research shatters the myth of the “good” side of subprime – and raises some hard questions about policies that support homeownership at all costs.

Comments

27 Comments

Danilo
Comment posted January 2, 2009 @ 7:45 am

The thing is this was predictable as we argued in 2005 (http://www.nlihc.org/doc/housingmyths.pdf) based on solid research like this, Reid, C., 2004. “Achieving the American Dream? A Longitudinal Analysis of the Homeownership Experience of Low-Income Families,” Department of Geography, University of Washington. See also Huarin, D.R & Rosenthal, S.S., 2004. The Sustainability of Homeownership: Factors Affecting the Duration of Homeownership and Rental Spells. Washington, D.C.: US Department of Housing and Urban Development.

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