Hurry, Hurry! Step Right Up!

Some of the changes in the mortgage market have made a difference in who gets loans.

The growth of the subprime mortgage market often tops the list when mortgage industry experts discuss the ways their business has changed in recent years.

The advent of subprime lending coincided with lenders' increased reliance on credit scores to determine applicants' creditworthiness. (Prime loans—with the most favorable lending terms—tend to be given to borrowers with credit scores above 620.) According to the Mortgage Bankers Association, the share of subprime mortgages outstanding climbed from 2.4 percent in 1998 to 12.8 percent in the first quarter of 2005.

At a speech before the 2004 Financial Services Roundtable Annual Housing Policy Meeting, Edward Gramlich, a member of the Federal Reserve Board of Governors, partially credited the growth in homeownership during the past decade to sub-prime lending. “Nearly 9 million more households own their home now than just nine years ago. A major portion of this expansion in homeownership seems clearly attributable to the increased access to credit afforded by expansions in prime and sub-prime mortgage lending,” he said.

From most perspectives, increased homeownership is a welcome trend. But the subprime trend has its attendant worries. Studies have reported bias against minorities in the subprime market (see “Rate Imbalance,” page 44). Several states have passed anti-predatory lending legislation; the U.S. Congress is considering similar action. What's more, Ameriquest Capital Corp., the nation's top subprime lender, earlier this year set aside $325 million to settle cases alleging loan abuses in 30 states.

And subprime loans tend to be riskier. They are much more likely to be ARMs: Two-thirds of sub-prime mortgages in 2004 were ARMs, compared with 26.6 percent of prime loans, according to LoanPerformance. Plus, they have higher delinquency rates—and many of them are about to reset at a time of rising interest rates. “The challenge in housing will be 2006,” says John Silvia, chief economist of Wachovia. “Of the $950 billion in subprime loans, $550 billion will reset by the end of 2006. The question is: Are those people going to be able to refinance or carry the mortgage on that property?”

SOURCE: FREDDIE MAC PRIMARY MORTGAGE MARKET SURVEY

SOURCES: LOANPERFORMANCE; OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT