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The role of subprime lending

Responsible lending and borrowing: whereto low‐cost home ownership?

They also can help policymakers cope with the growing ranks of the homeless. Los Angeles, New York and other cities in America are struggling to cope with the problem of homelessness and the lack of affordable housing. On a single night in January , more than , people nationwide were homeless — meaning they slept outside, in an emergency shelter or in a transitional housing program. Almost a quarter were children. Meanwhile, homeownership is hovering at year lows , while about half of renters struggle to pay their landlords.

But because the city typically pays market rents or more , many landlords responded by pushing out regular and low-income tenants in favor of this steady stream from the government. Such programs reduce the overall supply of affordable units, crowding out other groups in need. Fortunately, Mayor Bill de Blasio aims to phase out the costly program over the next three years.

While there are many other approaches to tackling homelessness, they rely on addressing an important underlying problem: the housing affordability crisis. It may seem improbable, but subprime lending could help ease the housing affordability crisis. The relationship between homelessness and the strains in the housing rental market is well-known : when there are more rental vacancies available, homelessness decreases I survey the academic findings on the topic here.

This suggests that if we reduce home affordability problems, we can effectively reduce homelessness. A powerful tool to help ease the housing affordability crisis is subprime mortgage lending — defined as loans made to borrowers with credit scores below More supply on the market helps reduce average rents, which in turns helps more of those pushed to the streets afford a roof over their heads with less government aid. Thus this makes the policies still based on rental subsidies more effective.

Borrowers could simply state their incomes rather than providing documentation for review. Another common type of stated income loans was a no income verified assets loans, in which underwriters verified assets but did not look into whether the potential borrower was employed or had other sources of income.

Government policies and the subprime mortgage crisis - Wikipedia

Low underwriting standards fostered an environment where people who posed a real credit risk were able to obtain home loans. Often, subprime borrowers were targeted for predatory loans with complex and harsh provisions. In fact, special mortgage loans were created just for borrowers who were unable to come up with the cash for a down payment. Improper mortgage lending practices played a large role in the financial collapse. However, this is still not the whole story.

In fact, activities in real estate and secondary financial services markets contributed a great deal to the larger economic problems the country experienced during the recession. To start with, homes were being appraised at excessively high values, inflating real estate prices across the country. During the booming housing market of the s and early s, appraisers routinely overvalued homes or employed incomplete valuation methods.

This caused inflated housing values to circulate in real estate markets. Securitization is a necessary and common practice in the financial markets. The financial sector began securitizing mortgages in the late s. This process was immensely profitable, and lenders believed they would profit regardless of whether any one borrower went into default.

Of course, the concept of spreading the risk only works when most of the loans are paid back. At that point, the investment banks that are left holding these enormous securities are forced to take huge portfolio losses. These losses caused the failure of large investment banks like Bear Sterns and Lehman Brothers [25] and the failure of Indymac, one of the largest mortgage originators in the United States.

The Subprime Specter Returns: High Finance and the Growth of High-Risk Consumer Debt

Congress Responds to the Economic Crisis. Congress enacted the Dodd-Frank Act in response to these conditions with the intent of preventing a similar catastrophe in the future. The legislation was extensive, creating a new federal agency —the Consumer Financial Protection Bureau — and reforming practices in both the real estate industry and financial sector. Dodd-Frank overhauled mortgage lending practices, heightened oversight of banks and credit rating agencies, and included a whistle-blower provision that provides financial reward for the reporting of securities violations.

Government support of the mortgage market helped increase rates of homeownership significantly. It stands at 64 percent today. When the economy crashed, banks were not willing to lend at all. For generations, homeownership has represented the greatest source of wealth for most U. Homeownership also allows households greater financial predictability and stability and has been linked with social benefits, including higher rates of life satisfaction, political participation, and voluntarism.

While these federal investments in homeownership have helped white families build wealth, families of color have often been excluded. The FHA, the VA, and GSEs facilitated policies such as redlining and discriminatory lending that increased segregation and prevented people of color from attaining homeownership in desirable areas. This harmful set of policies began to be reversed in the s and s with the passage of civil rights legislation, including the establishment of the U.

However, the process of correcting these errors has been slow, with significant backsliding, and much of the damage of these shameful policies persists to this day. In the early s, the government and GSE share of the mortgage market began to decline as the purely private securitization market, called the private label securities market, or PLS, expanded.

Sub Prime lending is back... as Non Prime loans

During this period, there was a dramatic expansion of mortgage lending, a large portion of which was in subprime loans with predatory features. Instead, they often were exposed to complex and risky products that quickly became unaffordable when economic conditions changed. When the housing market stalled and interest rates began to rise in the mids, the wheels came off, leading to the financial crisis. There is near consensus among experts that the housing crisis was caused primarily by the rise of predatory lending and products with exotic features marketed to consumers without adequate information or preparation and sometimes using fraudulent information, as well as the failure of the PLS market.

These claims directed at federal housing policy are at odds with the evidence.

Consumer Compliance Outlook

Since its creation in , the FHA has provided insurance on 34 million mortgages, helping to lower down payments and establish better terms for qualified borrowers looking to purchase homes or refinance. While this role does expand access to mortgage credit, and played a key role in kick-starting the growth of American homeownership following the Great Depression, FHA-insured mortgages have never dominated the American housing market. Critics have attacked the FHA for providing unsustainable and excessively cheap mortgage loans that fed into the housing bubble. In fact, far from contributing to the housing bubble, the FHA saw a significant reduction in its market share of originations in the lead-up to the housing crisis. The reduction in FHA market share was significant: In , the FHA insured approximately 14 percent of home-purchase loans; by the height of the bubble in , it insured only 3 percent.

Analysts have observed that if the FHA had not been available to fill this liquidity gap, the housing crisis would have been far worse, potentially leading to a double-dip recession. The FHA has largely recovered from this period by modifying its loan conditions and requirements, and it is once again on strong financial footing. The mortgage market changed significantly during the early s with the growth of subprime mortgage credit, a significant amount of which found its way into excessively risky and predatory products.

While predatory loans fed the bubble, the primary driver of this lending was demand from Wall Street investors for mortgages, regardless of their quality, which created a dangerous excess of unregulated mortgage lending. In many of these cases, brokers offered loans with terms not suitable or appropriate for borrowers. Brokers maximized their transaction fees through the aggressive marketing of predatory loans that they often knew would fail.

Many of these mortgages were structured to require borrowers to refinance or take out another loan in the future in order to service their debt, thus trapping them.