Mortgage Meltdown: A subprime disaster area or use of subprime facts?
“Mortgage Meltdown: A subprime disaster area or use of subprime facts?"Gerard C.S. Mildner
Sunday Oregonian, August 12, 2007
Perhaps like me, you were alarmed by Angela Martin’s op-ed article about impending problems in Oregon’s housing market (“Subprime Disaster Heading for Oregon,” 8/5/2007).The alarm turns out to be misplaced, as there is no evidence that Oregon suffers any greater risk than the rest of the country of a housing market collapse due to subprime loans. In fact, borrowing and lending practices in Oregon are surprisingly conservative.
Subprime lending refers to mortgages issued to borrowers with low credit scores and hard-to-document incomes. Because of the increased risk of default, these borrowers are charged higher interest rates. They are often unable to afford traditional fixed rate mortgages and take out higher risk loans, including adjustable-rate loans, no-interest loans, teaser-rate loans, or payment option loans.
In her article, Martin, Director of the Economic Fairness Coalition of Our Oregon, argues that subprime lending in Oregon tripled between 2004 and 2005, that forecloses rose 23 percent in the last quarter, and that Oregon ranked seventh in the nation in negative amortizing loans. This is misleading.
The truth is that Oregon has one of the lowest rates of risky mortgages in the country. In a July 2006 report, the National Association of Realtors found that the Portland metropolitan area had about half the rate of subprime mortgages as the nation as a whole (5.7 percent vs. 10.1 percent) and a much smaller percentage of mortgages with loan to value exceeding 90% as the national average (7 percent vs. 16 percent). And in a September 2006 report, the Consumer Federation of America found that our rate of subprime refinancing was the lowest of any state.
In terms of delinquencies and foreclosures, there is no crisis in Oregon. According to the same National Association of Realtors’ study, the mortgage delinquency rate in Oregon is half the national average: 2 percent vs. 4 percent. Martin’s evidence for an “explosion” in foreclosures comes from a four sentence article in The Portland Business Journal, which in turn is a rehash of a press release by a Web site that promotes the selling of foreclosed homes.
Instead, a March 2007 report by a more credible source, the parent company of First American Title, finds that delinquency rates for prime mortgagees, subprime mortgages, and home equity lines in Oregon are some of the lowest in the country. And where delinquency did occur, the percentage loss to lenders was the lowest among the 50 states, again demonstrating conservative lending practices.
Having said that, there is evidence that Oregonians are high users of adjustable-rate mortgages and negative amortizing mortgages. According to the Realtors’ study, Portland area homeowners are more likely to take out adjustable mortgages than the nation as a whole, at 38 percent vs. 28 percent. And the First American study found Oregon had the fifth-highest adoption of negative amortization loans, at 9.1 percent vs. 7.3 percent nationally.
However, these borrowing practices reflect the high level of home equity experienced by most Oregon homeowners, as well as the high percentage of the elderly within the state. Given the cushion of the recent years of appreciation, many Oregonians feel comfortable taking equity out of their homes, whether to start a business, invest in financial assets, finance their child’s education, or use as income for retirement.
We should increase our efforts to educate consumers about the risks they take on with adjustable rate and interest only mortgages. However, we should also recognize that the creation of new types of mortgages has created significant homeownership and wealth-creation opportunities. People with less-than-perfect credit histories should not be barred from credit markets by ill-conceived policies. And we shouldn’t hype the problem with subprime mortgages by using unreliable and misleading information.
Gerard C.S. Mildner is the Director of the PSU Center for Real Estate and Associate Professor of Urban Studies and Planning at Portland State University.