Feb022015

Most former subprime borrowers are no longer homeowners

Subprime lending temporarily increased the home ownership rate, but now with the rate hitting 20-year lows, all subprime gains are completely wiped out.

Subprime-mortgageSubprime lending as an industry barely existed prior to 1994 because few lenders loaned to people with poor credit, and no secondary mortgage market existed to purchase these loans even if they were originated. By 1995, the fledgling secondary mortgage market began buying subprime loans, so lenders could originate them and sell them off their balance sheets.

Once lenders no longer had responsibility for holding the loans they originated, their incentive was to increase volume; quality meant nothing and quantity meant riches. The easiest way to increase volume was to lower standards, and since lenders didn’t have consequences for loans going bad, the race to the bottom was on. The only thing holding back this race to the bottom today is the “put back” requirements forcing lenders to buy back their bad loans, which is why lenders complain about it.

Subprime and the home ownership rate

For years the political left tried to force lenders to loan to subprime borrowers through GSE mandates, but from 1965 to 1995, thirty years of effort by the political left did little to increase the home ownership rate. Then in the mid 1990s the private market began doing what the politicians couldn’t achieve by mandate: the private market found a way to loan money to subprime borrowers and make money at it. Needless to say, politicians on the political left loved subprime lending.

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As subprime lending took off, so did the home ownership rate.

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Unfortunately, it didn’t last. As with most things on Wall Street, a little is good, but once a few start making a profit, the herd floods the market with capital and what was once a virtue quickly becomes a vice. The extraordinary influx of capital culminated in the complete abandonment of lending standards and the proliferation of unstable loan products, not just to subprime borrowers, but to the whole spectrum of would-be homeowners.

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Home Ownership Rate Collapses

Declines in the home ownership rate were inevitable when the housing bubble popped. Foreclosures pushed people out of their homes and into rentals at an unprecedented rate, and while policymakers have managed to manipulate supply to cause a rise in home prices, demand still hasn’t picked up, and the home ownership rate continues to slide.

The decline in home ownership rates may also reflect a generational shift in attitudes toward home ownership. I believe the current generation won’t have the unbridled enthusiasm of the previous generation — thankfully — and they will be more cautious about buying, which is a natural reaction to the carnage they witnessed, but ownership is primal, and no matter how bad lenders and government officials screw everything up, people will still want to own if it’s advantageous for them to do so, and probably even if it’s not.

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Effective home ownership rate is under 50%

Lost in the discussion about home ownership rates is the issue of negative equity. People who don’t have equity in their homes don’t own anything other than their loan. When you consider that 15% of those whose name is on title have no real ownership, you must subtract 15% of the 64% from the home ownership rate. That puts it at about 49%.

The home ownership low is caused by failed housing policy

There is no question that the low home ownership rate is a direct result putting people into homes under circumstances where they couldn’t sustain ownership. It’s not the direct correlation through the GSEs that political right would have us believe, but the connection is just as real. Failure to regulate derivatives caused a massive amount of capital to flow into unregulated toxic loan products. It was a double failure of the Greenspan federal reserve exacerbated by government subsidies and policies that encouraged too many people to buy houses they could not afford.

U.S. Homeownership Rate Falls to 20-Year Low 

By Nick Timiraos, Jan 29, 2015

The U.S. homeownership fell to its lowest level in 20 years at the end of 2014—levels last seen when national leaders embarked on a broad push to expand homeownership in the mid-1990s.

This is a key point: it was lenders who pushed up homeownership rates with private subprime loans. It was not the GSEs responding to government mandates.

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The Commerce Department’s estimates published Thursday show that, after adjusting for seasonal factors, some 63.9% of U.S. households owned their homes in the fourth quarter, a level last recorded in the third quarter of 1994. The homeownership rate hasn’t fallen below that level since 1988. …

The homeownership bubble is fully deflated.

Thursday’s report offered some signs that the long slide in the homeownership rate may be nearing an end, said Paul Diggle, an economist at Capital Economics. Foreclosures and mortgage delinquencies are near their lowest levels in eight years, and the vacancy rate in the rental market is near a 20-year low.The homeownership rate has fallen steadily since 2005, when it peaked at 69.2%. That followed a decadelong campaign to expand the homeownership rate, launched by President Bill Clinton in 1995 and embraced by President George W. Bush in the early 2000s.

Republicans have been spinning this issue hard with bold-faced lies, but the truth is the failure was a bi-partisan effort.bush_housing_bubble

Our homeownership strategy will not cost the taxpayers one extra cent. It will not require legislation. It will not add more federal programs or grow federal bureaucracy,” said Mr. Clinton in a White House speech in June 1995, unveiling a “National Homeownership Strategy,” which set a goal of boosting the homeownership rate to 67.5% by 2000 by adding 8 million new homeowners.

The policy enjoyed bipartisan support. In 2004, the Republican Party’s official platform said that down payments presented the “most significant barrier to homeownership” and added, “We support efforts to reduce that barrier.” Mr. Bush set a goal of adding 5.5 million new minority homeowners by the end of that decade.

Clinton was right: the strategy did not require legislation, mandates, or taxpayer money — at least not until the collapse required a $150 billion bailout….

Over the past year, President Barack Obama and other administration officials have voiced alarm that lending has gone from one extreme during the bubble—too loose —to the other—too tight—in the aftermath of the bust.

Officials have walked a fine line in attempting to bar a return of the reckless products and practices that allowed the bubble to inflate 10 years ago while loosening some standards elsewhere to provide broader access to homeowners without perfect credit or big down payments.

The subprime lending experiment was clearly a failure. Rather than permanently boosting the home ownership rate, subprime lending temporarily boosted it, raising the hopes of millions of borrowers, only to see those hopes dashed in millions of foreclosure auctions across the country.

Subprime is coming back. Let’s hope subprime 2.0 won’t be a repeat performance.

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