Brief #7 in the Opportunity and Ownership Project series.
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Abstract
The prime mortgage market largely fueled America's first housing burst after World War II. Low- and moderate-income households, largely excluded from this earlier movement, are getting swept into the second housing boom. This brief details how homeownership has again expanded, this time fueled by the development of the subprime market. Rising interest-payment burdens for many subprime borrowers, however, might mean delinquencies and foreclosures.
Introduction
The American landscape changed dramatically
after World War II, as homeownership
rates rose from 45 percent to
65 percent in little more than a decade.
This burst was fueled by the opening of
mortgage credit and ownership to the middle
class, symbolized by the now-classic
30-year fixed-rate mortgage. Millions of
American households were able to purchase
their split-level homes in the suburbs
and send their children to the public
schools there.
Low- and moderate-income households
were generally excluded from this
earlier movement. Either they could not get
mortgage credit at all, or could not afford
the down payment or monthly payments.
Minority families often faced discrimination
on top of these other factors. As a consequence,
the national homeownership rate
stabilized at about 65 percent for 35 years.
But recently, homeownership again
expanded. The share of Americans who
owned homes rose from 64 percent in 1994
to 69 percent by 2005. This time
the new homeowners were largely lowand
moderate-income groups, and minorities.
Over the decade, the homeownership
rate in the lowest tenth of the income
scale rose 4 percentage points to 43 percent,
the second lowest rose 4 percentage
points to 49 percent, and the rates for
blacks and Hispanics rose 7 and 8 percentage
points, respectively, to 49 percent.
About 12 million new homeowners have
emerged, roughly half of them blacks,
Hispanics, and others of mixed race. The
overall rate of 69 percent moves the United
States into the top rung in world homeownership
rates.
The Subprime Mortgage Market
While the first surge in ownership involved
the prime mortgage market, the second
surge has been largely fueled by the development
of the subprime mortgage market.
This subprime market can render down
payments as low as zero. Subprime borrowers
have lower incomes and inconsistent
credit histories, forcing them to pay
high interest rates, sometimes double-digit
interest rates, to get their loans. Points and
fees are higher for subprime mortgages and
prepayment penalties are almost universal,
making it much more costly for borrowers
to get out of subprime mortgage loans.
This subprime mortgage market is a
reasonably new financing option. Subprime
mortgage originations were a mere $35 billion
in 1994, less than 5 percent of total
mortgage originations. By 2005, subprime
originations had risen to $625 billion, now up to 20 percent of total
originations and 7 percent of the total outstanding
mortgage stock. Over the decade,
subprime originations increased 17-fold,
a whopping 26 percent annual rate of
increase.
Just as the middle classes did at the
close of World War II, these new low- and
moderate-income homeowners now have a
chance to build wealth, invest in their
neighborhoods, have their children attend
better schools, and reap other advantages
of homeownership. Both presidents Bill
Clinton and George W. Bush have engaged
in significant cheerleading for the growth
in homeownership. At this point most of
the cheerleading has been from the bully
pulpit, since there has been very little
new federal money behind the growth in
homeownership.
But any social change this large is
likely to have some mixed blessings.
Overall delinquency rates for subprime
mortgages are on the order of 7 percent,
10 times as high as the normal rate in the
prime market (Joint Center 2006). Various
indicators suggest that another 10 percent
of subprime borrowers could be flirting
with credit problems, even if not in
actual delinquency or foreclosure status (Schloemer et al. 2006). And foreclosures
have likely been held down by the recent
period of very low short-term interest rates
and the proliferation of financing instruments
that take advantage of these rates.
Now that short-term rates establish more
normal levels, interest payment burdens
for many subprime borrowers are rising
sharply, and further increases in delinquencies
and foreclosures are almost sure
to follow.
Indeed, early reports show exactly that
happening in late 2006. Three subprime
lenders have recently declared bankruptcy,
and an intensive study of six million recently
made subprime mortgages forecasts
sharply higher foreclosure rates
(Schloemer et al. 2006). The numbers are
not large enough to threaten the macro-economy,
but even a small rise in foreclosures
could damage the prospects of
millions of low- and moderate-income
households.
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