18 February 2008

Do Subprime Mortgages Help The Poor?

Law professor Alan M. White makes a case for banning subprime mortgages. The abstract touts his most surprising empirical finding:

Subprime mortgages were said to have increased homeownership. The subprime effect was supposed to have been especially strong for low-income and minority families previously unable to buy homes. The democratization of credit was also attributed to subprime mortgages.

The empirical data do not support these welfare claims. The U.S. homeownership rate increased somewhat between 1994 and 2007. Subprime mortgages, however, were mostly made to existing homeowners to refinance debt; very few were made to first-time home buyers. The number of homes lost due to subprime foreclosures significantly exceeded the new homeowners added by subprime mortgages. Subprime mortgages also displaced the safer and lower-cost FHA loans that would otherwise have been made. Conventional prime mortgages for purchases fully accounted for the observed increase in homeownership.

Important underlying data comes from this report.

Whether or not you buy the conclusion, the empirical claim made in the paper is a powerful one.

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