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Gramlich on Subprime Loans
In his address to the Financial Services Roundtable Annual Housing Policy Meeting, FRB Governor Gramlich discussed issues related to subprime lending. Subprime loans have some typical features. These include high loan-to-value ratios, generally smaller in amount, and borrowers with weak credit histories.
Understanding subprime lending is important for several reasons. One is that the subprime lending market has increased dramatically in the last decade. This increase in subprime lending is accompanied by a general increase in homeownership from 64 percent to 68 percent. Most of this increase, Gramlich believes, is attributable to subprime lending which has increased the ability of less qualified borrowers to purchase a home for the first time.
It also appears that CRA and fair lending programs have played a significant role in these mortgage market developments. More than half of the new home owning households are minorities. Nearly half of all black and Hispanic households now own their own home.
The analysis of HMDA information shows that HUD has identified five commercial banks as leading subprime lenders, but these five institutions do almost 27 percent of the subprime lending. Eleven of the subprime lenders are thrifts, 19 are bank subsidiaries and 35 are affiliates of a financial holding company. Together , these lenders comprise close to 90% of the subprime business. The financial institutions and their direct subsidiaries comprise slightly less than half of the subprime lending industry. Independent mortgage companies number 113 but perform only 11.8% of the lending.
These numbers are interesting in the context of Governor Gramlich's analysis. Subprime borrowers are presumably those most vulnerable to predatory lenders. Gramlich stated that the best defense against predatory lending is careful compliance examination. In the face of this success in reaching new markets and increasing homeownership, one challenge facing the industry is how much farther to go. The delinquency rate for subprime loans is significantly higher than for prime loans. More than 7% of subprime loans are in serious delinquency compared with just over 1% for prime loans. Less than half of one percent of prime loans go into foreclosure while 3.38% of subprime loans do. Adding predatory lending prohibitions to CRA is one definitive step that regulators can take.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 11, 10/04
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