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Subprime’s sucking sound

Via Mark Thoma, Federal Reserve Bank of Cleveland economist Yuliya Demyanyk gives us “Ten Myths About the Subprime Crisis.”

Myth 2: Subprime mortgages promoted homeownership

The availability of subprime mortgages in the United States did not facilitate increased homeownership. Between 2000 and 2006, approximately one million borrowers took subprime mortgages to finance the purchase of their first home. These subprime loans did contribute to an increased level of homeownership in the country—at the time of mortgage origination. Unfortunately, many homebuyers with subprime loans defaulted within a couple of years of origination. The number of such defaults outweighs the number of first-time homebuyers with subprime mortgages.

Given that there were more defaults among all (not just first-time) homebuyers with subprime loans than there were first-time homebuyers with subprime loans, it is impossible to conclude that subprime mortgages promoted homeownership.

The Center for Responsible Lending offered a rougher version of this analysis a couple of years ago, noting that subprime loans led to more foreclosures than long-term homeowners. Here are their numbers, which cover 1998-2006:

15,175,609 subprime loans originated

1,435,472 of these went to first-time homebuyers

2,366,90110 projected foreclosures, based on an anticipated rate of 15.6%

(931,429) net loss of homeowners.

So please, no more of this “don’t forget that subprime helped more people become homeowners” crap – it didn’t.

July 22nd, 2009 | Tags: Center for Responsible Lending, subprime
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