By Alan White
The Wall Street Journal has a story today confirming that nearly half of homeowners with subprime mortgages could have qualified for prime-rate loans. While many of us have pointed this out before, the WSJ analysis, based on the best loan database available, shows how much the steering problem has worsened in the last three years. One industry response is that a 620 credit score is a bit low as a definition of a prime borrower. But even if you set the bar higher, 40% of subprime borrowers were over 640 FICO, and 30% were over 660. There is no getting around the fact that the mostly unregulated subprime market is neither efficient nor fair, and is costing homeowners billions in excess interest costs, quite apart from the devasting cost of foreclosures.
The dramatic contraction in the subprime mortgage market undoubtedly has a human toll, for the workers in the housing and mortgage industries who are losing income and jobs. On the other hand, the rapid expansion to the point where $600 billion in subprime loans were made in 2006 has done many consumers (and lately, investors) more harm than good. Hopefully this debacle can lead to the emergence of a smaller subprime market offering regulated, tailored products to the small group of homeowners with marginal credit who can benefit from buying or refinancing a home.
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