Subprime Lending, Foreclosures, and Possible Solutions
Tom Feltner, Policy and Communications DirectorWoodstock Institute
Government Housing Policy and Local CommunitiesNorth Park University
February 11, 2007
Informing communities about
the financial services policy
issues that impact them most
Documenting patterns in the financial services
industry and helping local organizations and
media understand problems
Giving communities the tools to make better,
safer financial decisions
Woodstock InstituteOur mission and how we accomplish it
Individual Impacts Community Impacts
About Woodstock InstituteDetermining individual and community impacts
Changes in Mortgage Market Make-Up:RMBS Issuance by Mortgage Type, 1995 to 2007-2Q
Source: Inside MBS & ABS from “The Deflating Mortgage and Housing Bubble, Part II” by Thomas Zimmerman. October 2007
84.1%
78.4%
51.2%
0.2% 0.4% 1.4%
8.4%
15.4%17.7% 18.3%
5.6%8.2% 6.7% 6.4% 6.6% 7.2%
21.6% 21.7%
15.1%13.0%
10.6% 11.2%
0.9%
5.8% 5.3% 5.3% 4.2%
84.6%
75.5%78.1%
82.2%
77.9%
80.3%
77.7%
54.1%
44.7%44.7%
2.7%2.9%0.8%2.7%1.3% 2.3%
19.3%
8.5%7.0%
11.7% 12.4%8.7%9.2%10.5%8.7%9.0%10.5%
7.1%10.3%
8.1%
3.0%3.6%2.0%2.2%
0.7%1.4%1.5%1.2%0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-2Q
Agency Alt-A Subprime Jumbo Other
Source: LoanPerformance, UBS from “The Deflating Mortgage and Housing Bubble, Part II” by Thomas Zimmerman. October 2007
Concerns about Subprime LendingDecreasing Equity
6.7%
43.7%
46.7%
43.2%
5.4% 5.0%
2.3% 1.1%1.7%2.5%2.1%
4.6%
12.9%10.5%
11.9%
36.6% 36.5%
7.7%
2.9%
1.8%0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2002 2003 2004 2005 2006
Prime ARM Alt-A ARM Subprime ARM Option ARM
Percent of ARM Loans with LTVs Below 80% by Type of Mortgage, 2002 to 2006
Source: LoanPerformance, UBS from “The Deflating Mortgage and Housing Bubble, Part II” by Thomas Zimmerman. October 2007
Concerns about Subprime LendingIncreasing Popularity of Low Docs
Percent of ARM Loans with Low Income Documentation by Type of Mortgage, 2002 to 2006
49.9%
66.1%
44.9%42.5%37.8%
41.4%
62.7%
53.6%59.0%58.8%
76.3%
31.8%36.2%
39.9%
47.2%
88.1%
80.5%
67.7%69.8%
74.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2002 2003 2004 2005 2006
Prime ARM Alt-A ARM Subprime ARM Option ARM
4.5%14.1%
18.9%
32.9% 9.5%
17.8%
67.1%
35.2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1999 2000 2001 2002 2003 2004 2005 2006
Others Fixed 3/27 2/28
Concerns about Subprime LendingGrowing Popularity of Hybrid ARMs
Subprime Loans By Mortgage Adjustment Period, 1999 to 2006
Source: LoanPerformance, UBS from “The U.S. Subprime Industry in Turmoil” by Thomas Zimmerman. March 2007
• Brokers more common in subprime market– Subprime: 71%
– All Loans: 50%
• Loans through mortgage companies, not depositories– Not covered by CRA
– Less rigorous safety and soundness regulations
• Increasing popularity of risky products and loan terms in subprime market– Interest Only
– Option ARM
– Hybrid ARM
– Piggyback 80/20
• Poor underwriting
• Fraud
Concerns about Subprime LendingProduct features and characteristics
Concerns about Subprime LendingImplications of inappropriate pricing
Source: Woodstock Institute calculations
Pricing implications of interest rate changes on $100,00030-year fixed rate mortgage
$537
$665
$878
$93,256
$139,509
$215,92610%
7%
5%
Rate Monthly Payment Interest paid over life of the loan
What type of mortgage do you currently have?
Source: Elizabeth Razzi, “Mortgage Ignorance Rampant.” Bankrate.com [March 26, 2007]
Interest Only(3%)
Fixed-Rate(57%)
Don’t Know(34%)
Adjustable RateMortgage (6%)
Refinance to afixed rate loan
(36%)
Don’t Know(34%)
Won’t have theloan anymore
(24%)
Move (4%)
Get Another ARM (2%)
What do you plan to do when your ARM loan readjusts?
Concerns about Subprime LendingBorrowers are unaware of loan terms
Source: GAO-06-1021 Alternative Mortgage Products (2006).
$2,931
$1,718
$1,598
$1,487
$1,383
$1,287
$33,446
$27,278
$19,735
$10,714
$3,299
N/A
Minimum Monthly Payment Total increase in outstanding balanceYear
1
2
3
4
5
6 and beyond
Increase in Minimum Monthly Payments and Outstanding Loan Balance with an April 2004 $400,000 Payment-Option ARM, Assuming Rising Interest Rates
Alternative Products Produce Borrower Payment Shock
Concerns about Subprime LendingResets will likely lead to repayment problems
Source: IMF and Credit Suisse
Concerns about Subprime LendingReset patterns suggest problems will persist
Source: Two Steps Back: The Dual Mortgage Market, Predatory Lending, and the Undoing of Community Development. 1999 Woodstock Institute
21%
74%
White Tracts Black Tracts
Prime Lenders Subprime LendersPrime Lender
Subprime or “High Cost” Lender
Percent of 1998 refinance application by type of lender –heavily concentrated in minority communities
Concerns about Subprime LendingConcentrated in minority areas
Source: Risky Business: An Economic Analysis of the Relationship Between Subprime Lending and Neighborhood Foreclosures. 2004 Woodstock Institute
0.311.76
8.91 9.55
7.82
-0.54
Prime Loan
Subprime or “High Cost” Loan
Expected Foreclosures per 100 loans by loan type
Home Purchase Home Improvement Refinance
Concerns about Subprime LendingConcentrated subprime lending drives foreclosures
Quarterly Changes in Chicago Area Foreclosure Starts, January 2003 to June 2007
Source: Woodstock Institute analysis of data from Foreclosure Report of Chicago
Foreclosure Trends in the Chicago Region
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1Q-032Q-033Q-034Q-041Q-042Q-043Q-044Q-041Q-052Q-053Q-054Q-051Q-062Q-063Q-064Q-061Q-072Q-07
2006 Foreclosures in the Chicago Region
Foreclosures per 1,000Mortgageable Properties, 2006
25 or greater
24.9 to 13
12.9 to 8
7.9 to 4
< than 4
< 10 total properties
• Regionally there was a 36% increase in foreclosures 2005 to 2006– North Cook – 52.1%– NW Cook – 48.7%– DuPage – 46.4%– Will – 44.8%– Kane – 37.5%– Chicago – 36.9%– Lake – 36.1%– Southwest Cook – 29.3%– West Cook – 29%– South Cook – 26.9– McHenry – 25.3%
Source: Woodstock Institute analysis of data from Foreclosure Report of Chicago
33.6
18.417.5
14.012.1 12.0 11.7
9.07.8 7.2
4.5
13.8
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
SouthCook
Chicago Will County KaneCounty
McHenryCounty
West Cook LakeCounty
SouthwestCook
NorthwestCook
DuPageCounty
North Cook 6-CountyRegion
Source: Woodstock Institute analysis of data from Foreclosure Report of Chicago
2006 Foreclosures in the Chicago Region
Foreclosures per 1,000 Properties
• Many of the Largest Subprime Lenders Are Out of Business– New Century– Fremont– Ameriquest– Option One– Aegis– Accredited– BNC
• Implications– Lenders clearly making problem loans– More aggressive pursuing foreclosure– Difficult to work out troubled loans
• Investment Properties– Made up growing share of mortgage market– More vulnerable to foreclosure
Concerns about Subprime LendingMany lenders out of business
Possible Trouble Spots for Foreclosures:Problem Lenders and Investment Properties
Source: Home Mortgage Disclosure Act data (2006).
Source: There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values. 2005 Woodstock Institute
3,750 foreclosures in 1997 and 1998 are estimated to reduce nearby property values by more than $598 million
average cumulative single-family property value effect of $159,000 per foreclosure
1.44 percent decline in property values for each foreclosure within one-eighth of a mile of a house in a low- or moderate-income census tract.
Given the $111,002 for properties in low- and moderate-income tracts, this amounts to a loss of nearly $1,600 per foreclosurefor the average property
Concentrated subprime lending increases risk of foreclosureand reduces neighborhood property values
Concerns about Subprime LendingForeclosures reduce property values
• Individuals– Credit Card Issues– Credit History
• Housing Market– Difficult to obtain favorable mortgage terms– Increased inventory
• Local Property Values– Foreclosures affect values of surrounding properties
• Crime– Foreclosures lead to increased crime– Neighborhood instability and vacant properties
• Municipal Costs– Lost property tax revenue– Increased burden on city services (police, fire, public health) to secure and
monitor vacant properties
Implications of Subprime LendingIndividual and community impacts
– Government subsidies focused on driving demand for home ownership– Poor regulatory oversight– Strong demand for mortgage backed securities– Perception that home prices would continue to rise– Government, homeowner, investor, lender and servicer must all absorb
portion of loss– Freeze interest rates for adjustable rate mortgages at starter rate– Change bankruptcy law to allow for modification of primary mortgage– Develop government-backed acquisition mechanism to purchase loan pools
at a discount and modify loans to ensure all parties share in loss– Ensure counseling and loan review for loans with potentially predatory
features
Why is this Happening?And what can be done?
