The Rise and Fall of the Subprime Mortgage

The chart above shows the subprime share of mortgage originations from 2001 to 2007, using data from Harvard's "2008 State of the Nation's Housing" study, available here.

1. From 2004-2006 the subprime share of mortgage originations was around 20%, almost triple the 7-8% share from 2001-2003. What a rise!

2. By the end of fourth quarter 2007, the subprime share dropped to only 3.1%, lower even than the 7-8% average during the 2001-2003 period. What a fall!

3. That 20% subprime mortgage share from 2004-2006 was obviously the cause of the subprime crisis. Although that huge amount of subprime mortgage activity from 2004-2006 might create problems for a few more years, it's also the case that a significant correction in subprime lending has taken place - that market has almost completely dried up. Looking forward, this correction suggests a future mortgage and housing market that will be much better than today's.

Comments

[john s. gordon:]

you mean the crooks have scurried back into their ratholes ?
> jack

2008 Jul 18 08:07 AM

[notsosmart:]

a few years & the scammers will be back with some paper & formula by a different name & the same thing will happen again.nothing was learned from the s & L crisis(mccain was one of the keating five) & now might be pres.so dumb-dumb americans that have short memories & dont demand accountability(no blame game here) will fall for this again.10-15 years.

2008 Jul 18 09:03 AM

[msoori:]

I have to agree with John. I think these loans were made to take advantage of people who didn't know the full implications of what they were getting into. It is really sad that the tax payers are going to be put out to bail out these large corporations while the poor families that were put into this situation are loosing their homes to foreclosure.

2008 Jul 18 09:25 AM

[Jimmy Lathrop:]

Mark -

Your article is based around one Harvard study showing origination of subprime loans. What does it really say?

It shows that people with high credit risk flooded the market from 2004 to 2006. It also shows that banks are no longer originating mortgages for these people. Your conclusion that you draw from this is that the future housing market will be better.

Taking another perspective, the housing market from that period of time was flooded with buyers, which artificially inflated home prices. This caused three things - one, homebuyers owned real estate with little equity and precarious financial footing; two, existing homeowners saw their own real estate values skyrocket and they were encouraged to use their homes as ATMs to fuel consumption and three, banks underwrote these subprime loans with 30 year terms.

Your graph also shows that the subprime origination has fallen off. Has the subprime borrowers become more creditworthy in those years? No, they are still there and they cannot refinance their homes. Furthermore, with the pool of buyers shrinking from tightening underwriting policies, the home values are dropping, causing foreclosures. Banks selling homes in foreclosures to get nonperforming loans off of their books further worsen the situation. And finally, existing homeowners drained the equity from their homes to fuel their consumer purchasing and "home improvement" only to see their home equity decline, causing a contraction in the market.

Your article does not address the fact that US the economy has shrank to its 2001 level - that is to say, all the mortgage brokers, appraisers, real estate brokers, homebuilders, construction workers - everyone associated with the housing boom is now out of work.

Finally, your article does not address the fundamental problem with these subprime loans is that they are not short term loans. Many of them were ARMs who are in crisis right now. But not every subprime borrower is in default. Rather, like the majority of Americans, they are living paycheck to paycheck - one illness, job loss or family crisis from defaulting on their mortgage. These mortgages have an average length of 30 years. That is 30 years of watching individual houses of cards sway in financial winds.

Your article is correct. The future housing market will be brighter than today's. However, the point is in the near future, possibly for the next 25 years, the domestic housing market will still be struggling.

2008 Jul 18 09:25 AM

[rm:]

[3. That 20% subprime mortgage share from 2004-2006 was obviously the cause of the subprime crisis. ]

Did you miss the notes on the JPM conference call? Jamie Dimon admitted that even prime is a problem now.

Plus, there are so many other factors that affect this situation that this graph does not account for.

2008 Jul 18 11:43 AM

[CaptBob:]

FLASH:>>- "that market has almost completely dried up. Looking forward, this correction suggests a future mortgage and housing market that will be much better than today's."

One glaring error in the above--use of the word "almost" The only context you could use the word almost in is: mortgages are "almost" non-existent!. And will stay that way a long as the banks are hoarding equity to shore up their "phony books reserves" to legal limits.

You don't need a Harvard study to know the chronological mapping of the "Crime"!! You only have to know 95% of the "victimization" is still out there "Un-repaired" and will be for some time. If you don't think so, try selling some CDO cake anywhere in this universe--AAA icing my A$$, check that chocolate "Tranche"--that's not chocolate!!

It was a pure crime and the criminals are NOT in jail!!
How can anyone have any faith that we want to put it right??
A Govt. entity handing out "Bail money" to private enterprise in my name--NO THANKS!!

2008 Jul 18 11:43 AM

[john s. gordon:]

enron = predatory market rigging.

toxic subprime slime = predatory lending w/resets & usorious prepayment fees.

get the parallel ?
> jack

2008 Jul 18 12:07 PM

[GaryD:]

A week ago Perry said there was no subprime crises, declaring the $1T in losses "relatively insignificant" (seekingalpha.com/artic...). Now he's calling it a crisis. This guy is definitely angling for a job at the Fed. He'll probably get one, too, which is the really scary part.

Him and his neo-con buddies probably hate America, based on what I've read from them in the past. Anyone with that level of disdain for their own countrymen should be sent to Iraq or Afghanistan or something to see what the real world looks like. Maybe he would get a better appreciation for America after that instead of spewing off about it.

2008 Jul 18 04:05 PM

[mkttrdr:]

Capt-Bob is right on.

As a broker and real estate investor will tell you.; without skin in the game(20-25% down payment) the only loans closing are FHA and VA. And those are to risking borrowers with little "skin in the game".
The last of the 5 year Subprimes expire in 2012-enjoy the ride.

2008 Jul 20 12:44 PM