Ebook Banking on Bad Credit: New Research on the Subprime Home Mortgage Market
Since the early 1990s, the rapid growth of the subprime home mortgage market has arguably been the most important development in alternative financial services and undoubtedly the most controversial. Thus, it comes as no surprise that three of the papers presented on the alternative financial services panel of Promises and Pitfalls report new research on the subprime home loan market and related issues.
The subprime home loan market, designed for borrowers with weak credit, continues to evolve at a breakneck pace. The past five years has witnessed the institutionalization of subprime lending, with the locus of subprime loans shifting from small, independent lenders to large mortgage subsidiaries of banks (particularly national banks). Roughly two-thirds of subprime home loans are securitized on Wall Street, and investment banks and their affiliates increasingly are not only underwriting subprime securitizations but originating loans in subprime loan pools as well.
Another development, an unfortunate one, has been a sharp spike in home foreclosures in many cities across the country, often driven by unaffordable subprime loans. As foreclosures have climbed, the subprime industry has attracted criticism from consumers and the press for allegedly abusive lending practices and loan terms.
Because of such concerns, the legal landscape of subprime home mortgages is rapidly changing and remains in flux. At least 37 states, the District of Columbia, and some counties and municipalities have enacted anti-predatory lending laws of varying degrees of strength. In response, the U.S. Comptroller of the Currency has issued a regulation preempting state and local anti-predatory lending laws as those laws apply to national banks and their mortgage lending subsidiaries. The Federal Deposit Insurance Corporation is considering pre-empting those state and local laws for state-chartered banks as well. And Congress may consider a new federal anti-predatory law this term.
Just as subprime lending and its legal environment have evolved, so has empirical research on the topic. Thanks to the efforts of researchers, both on this panel and others, we now have a store of empirical data on the workings of the subprime market that continues to grow.
The seven-city study by Jonathan Hershaff, Susan Wachter, and Karl Russo is a splendid example of recent advances in subprime research. Their study is important in several ways, not the least of which lies in documenting changes in how subprime refinance loans affected neighborhoods from 1997 through 2002. From 1996 through 2003, subprime home loans more than tripled in volume nationwide. But that growth was not evenly distributed across cities and neighborhoods, as Hershaff, Wachter, and Russo demonstrate. First, from 1997 through 2002, subprime lending migrated geographically. Two of the seven cities studied – Philadelphia and Baltimore – experienced absolute declines in the number of subprime loans over that period, while other cities, especially Dallas, experienced rapid growth. Second, from 1997 through 2002, subprime lending migrated from lower-income areas to higher-income areas and to areas with less educational attainment and more minority households. According to the authors, from 1997 through 2002, “low income areas, all else equal, [became] less attractive to subprime lending.”
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