HOUSINGNEWS REPORT
THE RETURN OF RISK: SUBPRIME SNEAKING BACK
holding on to them stopped making financial sense, and with no personal and emotional connection to them, they began walking away in huge numbers.” “Most economic analysis of the recent American housing market bust and the subsequent default and foreclosure crises focuses on the role of the subprime mortgage sector,” write Fernando Ferreira and Joseph Gyourko with the Wharton School in a 2015 report. “Roughly three-quarters of the papers on the crisis reviewed in the next section use data only from the subprime sector and typically include outcomes from no later than 2008.” Instead, to find the real cause of the mortgage meltdown, the Wharton researchers looked at the financing and refinancing of “33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units in 96 metropolitan areas from 1997 to 2012, resulting in almost 800 million quarterly observations.” The real problem, say Ferreira and Gyourko, was negative equity. The key to foreclosures is not the credit
status of the borrower but their equity in the property.
marketing and sale of inappropriate financial products which led to the loss of homes, investor red ink, and mammoth liability settlements. For borrowers the conclusion is obvious: they have to shop around. “Mortgage interest rates and loan terms can vary considerably across lenders,” said the CFPB in May. “Despite this fact, many homebuyers do not comparison shop for their mortgages. In recent studies, more than 30 percent of borrowers reported not comparison shopping for their mortgage, and more than 75 percent of borrowers reported applying for a mortgage with only one lender. Previous Bureau research suggests that failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.” Alt-A Mortgages “More recently,” explained the Urban Institute (UI) in April, “researchers have found that the largest contributors to poor credit performance was not first time home buyers; rather it was borrowers who chose to obtain cash-out refinances and second liens; many of these borrowers had stronger credit profiles.” According to UI, “these borrowers often used non-traditional instruments such as interest-only loans and negative amortization loans to stretch their buying power.” Translation: Remember Alt-A mortgages? These were such things as option ARMs and interest-only mortgages which required little or no
“The crisis was largely one of sound borrowers falling into negative equity because of very large declines in house prices.” The catch — and it’s a big one — is that many and perhaps most subprime borrowers before the mortgage crisis actually qualified for better financing. In 2007 The Wall Street Journal published the results of a study involving subprime loans worth $2.5 trillion. It found that 55 percent of all 2005 subprime borrowers “went to people with credit scores high enough to often qualify for conventional loans with far better terms.” The situation in 2006 was even worse. The paper found that 61 percent of the subprime mortgages issued that year went to borrowers who likely would have qualified for conventional financing. The evidence is that some number of improperly underwritten borrowers lost their homes to foreclosure because they faced needlessly steep monthly costs. In such cases it was the
GROWING SHARE OF CO-BUYERS CO-BUYER PCT
17.4%
Q1 2018
16.3%
Q1 2017
14.9%
Q1 2016
13.7%
Q1 2015
10
JULY 2018 | ATTOM DATA SOLUTIONS
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