The Journal did endeavor to get to the bottom of an important question: what sort of people wound up with subprimes? The authors found that subprimes aren't a primarily urban or lower income phenomenon, but are more widely distributed than commonly believed across income levels, ethnic groups, and regions. That adds a new wrinkle to the problem.
However, one paragraph I object to characterizes subprime lending as the linear progression of a trend towards making credit available to lower income borrowers that began with the Community Reinvestment Act and continued with FHA loans. Huh? Those were government, not private sector, initiatives. FHA lending featured almost everything that subprimes lacked: sensible loan to value ratios, income verification and other assessment of the borrower, and realistic rates. In large measure, it was the favorable FHA record that led private sector lenders to take interest in lower to middle income borrowers.
It's much more accurate to depict subprime lending as yet another instance of recent lax lending practices, which included cov-lite LBO loans, CDOs, historically low risk spreads for junk bonds, and overheated commercial real estate lending, that to depict it as the result of programs to promote affordable housing.
From the Journal:
The analysis of loan data by The Wall Street Journal indicates that from 2004 to 2006, when home prices peaked in many parts of the country, more than 2,500 banks, thrifts, credit unions and mortgage companies made a combined $1.5 trillion in high-interest-rate loans. Most subprime loans, which are extended to borrowers with sketchy credit or stretched finances, fall into this basket.
High-rate mortgages accounted for 29% of the total number of home loans originated last year, up from 16% in 2004. About 10.3 million high-rate loans were made in the past three years, out of a total of 43.6 million mortgages. High-rate lending jumped by an even larger percentage in 68 metropolitan areas, from Lewiston, Maine, to Ocala, Fla., to Tacoma, Wash.
It's much more accurate to depict subprime lending as yet another instance of recent lax lending practices, which included cov-lite LBO loans, CDOs, historically low risk spreads for junk bonds, and overheated commercial real estate lending, that to depict it as the result of programs to promote affordable housing.
