19 December 2007

Subprime Mortgage History

Janet at Xark! links to a BBC Q&A on the mortgage "crisis."

What we're seeing in the mortgage market is just a piece of the larger credit "crisis" resulting from bad decisions by private lenders and borrowers after deregulation.

The evolution of the subprime mortgage market (pdf, 2006)

Many factors have contributed to the growth of subprime lending. Most fundamentally, it became legal. The ability to charge high rates and fees to borrowers was not possible until the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in 1980. It preempted state interest rate caps. The Alternative Mortgage Transaction Parity Act (AMTPA) in 1982 permitted the use of variable interest rates and balloon payments.

These laws opened the door for the development of a subprime market, but subprime lending would not become a viable large-scale lending alternative until the Tax Reform Act of 1986 (TRA). The TRA increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home....

Although the subprime mortgage market emerged in the early 1980s with the adoption of DIDMCA, AMTPA, and TRA, subprime lending rapidly grew only after 1995, when MBS with subprime-loan collateral become more attractive to investors....

During the 1990s, average credit scores tended to decline each year, particularly for ARM borrowers; but since 2000, credit scores have tended to improve each year. Hence, it appears that subprime lenders expanded during the 1990s by extending credit to less-credit-worthy borrowers. Subsequently, the lower credit quality unexpectedly instigated higher delinquency and default rates (see also Temkin, Johnson, and Levy, 2002).
TREASURY DEPUTY ASSISTANT SECRETARY MICHAEL S. BARR
REMARKS TO THE NATIONAL ASSOCIATION OF ATTORNEYS GENERAL PREDATORY LENDING SUMMIT
PORTLAND, MAINE (2000)
When lower-income families went looking for home equity debt in the past, many may not have been able to find it due to their limited or poor credit history. With the rise of the subprime lending market, however, it has become relatively easier for these borrowers to access credit. As the Treasury-HUD report noted, the volume of subprime mortgage originations has increased nearly five times over in the last five years. As a means for expanding the availability of credit, the development of this market has represented a signal achievement for our economy.
UPDATE:

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.


This American Life, The Giant Pool of Money

Related:
"An Enterprise Failure"