NCPA - National Center for Policy Analysis

Defaults High for Risky Loans

February 10, 2004

"Affordable housing goals" for home mortgage lenders apply to reinsurers like the so-called Fannie Mae and Freddie Mac -- "government-sponsored enterprises" that provide mortgage financing for banks. Housing expert Howard Husock points out that mortgage loan applicants at higher risk of default -- because of income, credit history and/or lack of a down payment -- have access to higher interest, "sub-prime" loans.

Mortgage purchase quotas, set by the Department of Housing and Urban Development (HUD) in the waning days of the Clinton administration, require that no less than 50 percent of the mortgages purchased by Fannie and Freddie be for low and moderate-income households, that 20 percent be specifically for those of low income, and that 31 percent come from "geographically targeted underserved areas."

But housing advocacy groups want subsidized credit on easier terms for potential homebuyers who don't qualify for sub-prime loans. The Federal Housing Administration, for example, has "flexible qualifying guidelines" designed to help low-income households -- down payments are 3 percent or less, with loans insured by the federal government.

  • The delinquency rates for FHA loans runs over 12 percent, more than four times the 2.93 percent rate for prime rate loans, and problematic FHA loans are concentrated in lower-income urban neighborhoods.
  • The Federal Reserve Board has found that higher-than-conventional foreclosure rates also typify so-called Community Reinvestment Act (CRA) "special lending programs" -- a geographically targeted program which banks adopt to fulfill the Act's lending mandates.

The delinquency rates for sub-prime mortgages are also high -- over 11 percent -- says Husock -- but at least these loans hold the prospect of encouraging households to learn from their mistakes and qualify for better credit rates next time.

Source: Howard Husock (Manhattan Institute), "Credit Where It's Not Due, Wall Street Journal, February 10, 2004.


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