Claim That Subprime Loans Expanded Homeownership A “Fraud” As They Were Designed to “Fail”

24 11 2008

“…Carr, of the National Community Reinvestment Coalition, said that in hindsight the claim that subprime loans expanded homeownership was “a fraud.” Subprime loans, with their low teaser rates and expensive prepayment penalties, were “designed to fail.”

“…(in) Orange County, where subprime lending giants New Century, Fremont, Option One and Argent all were based. Subprime accounted for less than 10 percent of all home loans made in the county between 2004 and 2007. But in central Santa Ana – today the county’s foreclosure hotspot – the subprime share topped 40 percent…”

http://www.ocregister.com/articles/subprime-percent-home-2233845-lending-loans

For a few delirious years, subprime mortgages brought fat profits to Orange County lenders – plus Mercedes, Beemers and the occasional Lamborghini for their salespeople.

Subprime loans left a more lasting impact elsewhere, in places like Fresno and Moreno Valley, Florida and Michigan – areas now suffering from massive foreclosures.

A Register analysis shows that subprime loans were concentrated in the less prosperous, less stable corners of the nation. The Register studied 43 million prime and 12 million subprime loans made between 2004 and 2007.

The analysis shows how subprime loans evolved from a niche product, largely confined to Texas and the Deep South, into a nationwide phenomenon. But even as subprime went national, it played a much bigger role in some housing markets than in others. (Click here to see maps of both California and U.S. from 2004-2007).

Consider two cities: During the height of the bull market, residents of New York City got just 3 percent of their home loan money from subprime mortgages. In hard-pressed Detroit the figure was 31 percent.

Now look home, to Orange County, where subprime lending giants New Century, Fremont, Option One and Argent all were based. Subprime accounted for less than 10 percent of all home loans made in the county between 2004 and 2007. But in central Santa Ana – today the county’s foreclosure hotspot – the subprime share topped 40 percent.

A series of maps shows subprime lending spreading year by year from the South to California to the Midwest and Northeast.

The maps are “like you’re looking at X-rays of a cancer patient,” said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, a nonprofit that promotes lending to low-income areas. “(2004) and ’05 is when it went viral.”

Subprime lending mushroomed from less than 10 percent of national home loan volume in 2004 to 20 percent in 2005 and 24 percent in 2006. In 2007 as major lenders failed, subprime fell to 15 percent of national home loan volume.

Subprime’s sudden collapse gave counties that depended on subprime loans a bitter foretaste of the credit crunch. While total home loan volume dropped 21 percent nationwide in 2007, it slumped by 43 percent in Riverside and San Bernardino counties. The crunch was even sharper in parts of the San Joaquin Valley: Home lending dropped 50 percent in San Joaquin and 55 percent in Merced.

Easy credit helped the valley prosper in the first half of the decade. Its urban centers grew twice as fast as the state did. Cotton fields and vineyards gave way to new homes from Bakersfield north to Stockton.

“The subprime lending practices definitely lent fuel to the economy,” said John Mahoney, director of the Real Estate & Land Use Institute at Cal State Fresno. “That single element alone is what expanded this market to unsustainable levels.”

Mahoney has studied the new home market in Fresno for years. Between 2004 and 2006, he said, the number of new housing units produced each year doubled. The median price also doubled.

Easy money was “the primary component that fueled the overbuilding, the overpricing,” Mahoney said. It was “a marketing cycle that fed on itself.”

It couldn’t last. In 2007 home lending volume in Fresno County slumped 37 percent, builders stopped building and the first foreclosure signs appeared.

Mark Boud, an Irvine real estate economist, has studied the valley market. Between February and August, he said, there were 4,133 foreclosures in Fresno and neighboring Madera County – four times more than in the same period in 2007 and 30 times the 2006 number.

Subprime is a big factor in foreclosures, Boud said. He blamed “loose lending standards,” particularly in the new-home market, for the surge in foreclosures.

Carr, of the National Community Reinvestment Coalition, said that in hindsight the claim that subprime loans expanded homeownership was “a fraud.” Subprime loans, with their low teaser rates and expensive prepayment penalties, were “designed to fail.”

Carr looks at the maps showing the spread of subprime year by year and sees a lost chance for regulators.

“As late as 2004 we could have prevented this foreclosure crisis,” Carr said. “They had an oportunity to tighten down on financial institutions whose lending behavior was clear as early as 2002-2003. It was a missed opportunity to get this problem under control.”

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