Http:// Josh Nassar Overview of Subprime Mortgage Market.

http://www.responsiblelending.org

Josh Nassar

Overview of Subprime Mortgage Market


Introduction

http://www.responsiblelending.org 3

About CRL

Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.

Affiliated with Self-Help, one of the nation’s largest community development financial institutions.


Self-Help

Self-Help is a non-profit lender founded in 1980 to increase and protect wealth and ownership opportunities for minorities, women, rural residents, and low-wealth families

Over $5 billion in home, small business and non-profit financing for more than 55,000 loans in 47 states and the District of Columbia

Serves borrowers who do not meet traditional underwriting criteria

7 branches in NC plus a Washington, DC and Oakland, CA branch


Home Equity and Wealth

Wide gaps remain in wealth and homeownership In 2004, the median net worth of households of

color was only 17.6% of the median net worth of white households. (Federal Reserve Bulletin, Feb. 2006)

Approximately 75% of white Americans own their homes. The figures are much lower for African-Americans (48.2%) and Latinos (49.5%). (US Census Housing Vacancy Survey, 2005)

Promoting homeownership for remains the most important tool for closing the wealth gap.


Home Equity and Wealth

Median value of home equity as share of the net worth of homeowner households (2002)

Source: Rakesh Kochkar, The Wealth of Hispanic Households: 1996 to 2002 at 5, tbl. 1 (Pew Hispanic Center, 2004).

61.6%

88.4% 88.1%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Non-Hispanic White Hispanic Non-Hispanic Black

Ethnicity

Hom

e E

qui

ty a

s %

of

Wea

lth


Prime v. Subprime

“Prime” Borrowers Excellent credit history; stable employment history;

meet traditional debt-to-income, payment-to-income, and loan-to-value ratio underwriting criteria

“Subprime” Borrowers Credit blemishes (usually, less than “A” rating);

insufficient or non-traditional credit history; less stable employment history; high debt-to-income, payment-to-income, or loan-to-value ratios


More Costly Credit

Subprime loans are priced higher, in theory to cover higher risk

However, many subprime borrowers could qualify for prime loans but are courted only by subprime lenders

Other subprime borrowers are charged more than is justified by risk. Origination fees are typically higher and prepayment penalties are more common


Growth of Subprime Market: 1998-2006

$0

$100

$200

$300

$400

$500

$600

$700

1998 1999 2000 2001 2002 2003 2004 2005 2006

(in

Bil

lion

s)

0%

5%

10%

15%

20%

25%

Subprime Volume Subprime Market Share


Subprime Market Is Not Fair or Price Competitive

More than 70% of subprime home loans contain prepayment penalties – can cost families thousands of dollars when they refinance or pay off their loans early

Prepayment penalties do not result in lower interest rates – simply another method of stripping home equity

Yield spread premiums encourage brokers to make loans at interest rates higher than the rates for which borrowers qualify.


A Critical Issue

“ . . . [B]ecause of the concentration of subprime lending in low-income and black neighborhoods, there has been a growing concern that borrowers in these neighborhoods are vulnerable to a subset of subprime lenders, who engage in abusive lending practices, strip borrowers’ home equity, and place them at increased risk for foreclosure.”

Randall M. Scheessele, Black and White Disparities in Subprime Mortgage Refinance Lending (U.S. Dept. of Housing and Urban Development, April 2002), at 1.


Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners

In one of the worst foreclosure crises in American history, subprime mortgages originated from 1998 through third quarter of 2006 will wipe out $164 billion in homeownership wealth for 2.2 million American families. Research from the Center for Responsible Lending—the first

comprehensive, nationwide look at how subprime mortgages perform—shows:


Alarming Rate of Home Losses: For subprime loans made during the past two years: one out of five (19%) will fail.

Worse than Oil Patch: These rates are far worse than the notoriously high rate of foreclosures during the Oil Patch disaster (14 percent) of the 1980s.

Increasing in Most Areas: As the housing market cools, subprime foreclosure rates will rise sharply in most major markets.


Driven by Lending Practices: Subprime lenders are breeding foreclosures through bad underwriting combined with risky loans featuring adjustable rates, balloons, prepayment penalties, low-doc/no-doc. Pervasive 2/28s (“exploding” ARMs) dominate the current market and are very likely to make the loan unaffordable.


Example of 2-28, $200,000 ARM, No Change in Rates

Source: CRL Calculations

$-

$500

$1,000

$1,500

$2,000

$2,500

Mo

nth

ly P

ay

me

nt

(Pri

nc

ipa

l &

In

tere

st)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Po

st-

Ta

x D

eb

t-to

-In

co

me

Monthly Payment $1,311 $1,948

Post-Tax DTI 61% 90%

Teaser Rate Fully Indexed Rate


Underwriting without regard for ability to repay:

- e.g. exploding ARMs, no docs, piggybacks

- No escrow for taxes or insurance

Presumption of continued housing appreciation

How Did We Get Here?


Most Vulnerable Bear the Brunt: African American and Latino families get a disproportionate share of subprime loans. Low-wealth families have the most to gain from homeownership, and the most to lose from foreclosure. It typically takes 10 years to recover and buy another house – many never recover.


Subprime Spillover: Key Findings

We project that, nationally, foreclosures on subprime home loans originated in 2005 and 2006 will have the following impact on neighborhoods and communities in which they occur: 40.6 million neighboring homes will experience

devaluation because of subprime foreclosures that take place nearby.

The total decline in house values and tax base from nearby foreclosures will be $202 billion

Homeowners living near foreclosed properties will see their property values decrease $5,000 on average.


Impact of the Subprime Collapse

Foreclosures:- 2.2 million subprime loans will have ended in foreclosure- 1 in 5 recent originations will end in foreclose- Disproportionate impact on minority borrowers and communities- Homeowners, not investors

Cost:- $164 billion direct equity loss to borrowers- Billions in equity loss to surrounding homeowners- Costs to lenders, local governments- Impact on national and global economies



Projected Foreclosures: Loans Originated 1998-2001



Projected Foreclosures: Loans Originated 2006


Loan Features Carry Risk

Among subprime loans originated in 2000, after controlling for credit score: ARMs had 72% greater risk of foreclosure than FRM. Balloons had 36% greater risk than FRM. Prepayment penalties associated with 52% greater risk. Low/no doc loans with 29% greater risk. Purchase money with 29% greater risk than refinance.


Higher-Cost Home Loan Purpose

Purchase41.4%

Home Improvement4.4%

Refinance54.2%

Source: 2006 HMDA: First Lien, Owner-Occupied Conventional Mortgages


Higher cost 1st lien total loans2006 HMDA

# Higher cost% of total

African American 411,040 52.5% Latino 467,373 40.8% White 1,205,720 22.5%



Higher cost 1st lien refi loans 2006 HMDA


African American 216,151 52.5% Latino 200,405 37.2% White 684,624 26.0%



Higher cost 1st lien purchase loans2006 HMDA


African American 176,930 52.8% Latino 250,941 45.0% White 458,098 18.4%



Subprime Homeownership: a Net Loss

-800

-600

-400

-200

0

200

400

98 99 00 01 02 03 04 05 06

# ho

meo

wne

rs (0

00s)

Newhomeowners

Projectedforeclosures

NetHomeownershipLoss


Baltimore Foreclosure Filings and Race



Aftermath of Subprime Foreclosures


Subprime production in the fourth quarter of 2007 was less than half that of the previous quarter, which in turn produced half of the volume of the quarter before it.

According to Inside B&C Lending, an estimated 192.5 billion is subprime mortgages were originated in 2007. That was down a stunning 67.9 percent from the previous year. And lenders originated a paltry $13.5 billion in subprime mortgages in the fourth quarter of 2007, the lowest quarterly production on a record.


FHA endorsement volume outpaced subprime originations in the fourth quarter of 2007 for the first time since 2001.

Seven of the top 20 subprime lenders in 2007 had zero subprime originations in the fourth quarter, either because they abandoned the products voluntarily or because they were out of business

The subprime share of total MBS issuance fell to a dismal 3.5 percent in the fourth quarter of 2007, according to the Inside Mortgage Finance MBS Database. That’s well below the sector’s 21.6 percent share for 2005.


Response to Foreclosure Crisis


Refinancing

Very few homeowners who cannot pay their mortgages will be able to sell or refinance.

Loan servicers who could modify loans to make them more affordable aren’t doing so in sufficient numbers: A recent report by Moody’s found that loan servicers had only modified 3.5 percent of mortgages that increased to higher rates.


Current Law

Current Law excludes homeowners from relief available to yacht owners and subprime lenders Today homeowners are denied equal access to

bankruptcy protections. Court-supervised modification of loans is available for

owners of commercial real estate and yachts, as well as subprime lenders like New Century, but is denied to families whose most important asset is the home they live in. In fact, current law makes a mortgage on a primary residence the only debt that bankruptcy courts are not permitted to modify in chapter 13 payment plans.


Legislation

Legislation is urgently needed that would allow lenders and loan servicers to modify mortgages to allow families to continue paying on their loans and keep their home.

Judges need to be provided the authority to modify harmful mortgages marketed by subprime lenders in recent years, and would help more than 600,000 families stuck in bad loans keep their homes.


Relief available only when family lacks sufficient income to pay their mortgage

It ensures that loan modifications are available only where the homeowner’s income is insufficient, after deducting for modes IRS-approved living expenses, to cover the mortgage payments.

In addition, there is a good faith requirement that allows courts to exclude anyone who wrongly makes it through existing hurdles

The result of these requirements is that judicial modification will only be available for those loans that would otherwise end in foreclosure In foreclosure, the lender cannot recover any more than the market

value of the home, and typically recovers far less after a one- to two-year process.


Lender has ability to voluntarily modify and avoid court-supervised modification

The recent American Securitization Forum fast-track modification process enables lenders to modify loans in borrowers’ favor without

borrower consent. If servicers choose to modify loans sufficiently,

the borrower would be able to pay the mortgage, would therefore fail the IRS “means test,” and would thus be ineligible for court-supervised modification.


Relief available for existing loans only

Applying these changes prospectively would have no negative impact on interest rates- this is because bankruptcy modification would be available only where the home would otherwise be lost to foreclosure, and the risk of foreclosure is already factored into interest rates.

However, the compromise goes further, and limits the bill’s application to existing loans only. New loans would not be subject to bankruptcy

modification. This removes any concerns that could reasonably be raised about the bill’s impact on the cost or availability of credit.


Share in appreciation

Where the modification entails marking the loan’s principal amount that is secured down to the fair market value of the property, allow the lender/investor to recapture appreciation up to that amount


Judicial discretion limited; favorable loan terms guaranteed

The compromise bill would require courts to set interest rates at a commercially reasonable, market rate- the current 30-year conventional fixed rate plus a reasonable “risk premium.”

The bill provides that the principal balance cannot be reduced below the value of the property, and that the term of 30 year loans will be unchanged. It also makes relief available only to those families who have sufficient income to afford their loans as modified.


Bill applies only to loan products federal regulators deem potentially dangerous

Even as to existing loans that will otherwise end in foreclosure, the compromise bill applies only to those that fall within one of the two categories of loans that the federal regulators have determined to be potentially dangerous given recent poor underwriting by many lenders: subprime, and “non-traditional” loans (that is, interest-only loans and payment option ARM’s).

Conventional fixed-rate or adjustable-rate loans are not eligible.


Policy Challenges



Predatory Mortgage Lending: The Legislative Challenge

Prohibit known predatory practices not covered by existing law

Preserve ability to address emerging abuses efficiently and effectively

Preserve access to credit for subprime borrowers


Principles of Responsible Lending

Eliminate incentives for lenders to originate predatory loans

Create a fair, competitive market that responsibly provides credit to consumers

Guarantee access to justice for families caught in abusive loans

Preserve essential federal and state consumer safeguards


Policy Recommendations

Require lenders and brokers to serve the interests of homeowners

Strengthen underwriting requirements Make enforcement of existing laws count Support laws and policies that reduce abusive

lending while supporting a strong market


What do we do now?

Help Current Homeowners- Loss Mitigation

- Bankruptcy Reform- Foreclosure assistance

Protect Future Borrowers- Ability to repay - Regulation of broker fees - Broker duties- Assignee liability


CRL Can Help

Research on borrowers and industry

Up-to-date information on industry trends

Links to other resources and organizations

Technical assistance in understanding the issues

Collaboration on meetings with industry


Any Other Questions?

Call CRL (919) 313-8500(202) 349-1850

Josh [email protected]

(202) 349-1865

Visit www.responsiblelending.org

Date post:	19-Jan-2016
Category:	Documents
Upload:	chester-miles
View:	213 times
Download:	0 times

Http:// Josh Nassar Overview of Subprime Mortgage Market.

Documents