Economist Proposes Subprime Mortgage Reforms in New Book

A new Urban Institute Press book offers a slate of reform opportunities for the ailing subprime mortgage market and provides one of the first comprehensive analyses of this still-evolving segment of the mortgage industry.

In "Subprime Mortgages: America’s Latest Boom and Bust," available beginning June 29, economist Edward M. Gramlich offers a timely look at the ins and outs of the subprime mortgage market, an industry that has enabled nearly 12 million low- and moderate-income families to become homeowners since 1994. But the successes of subprime mortgages have been offset by an increase in foreclosures.

"The good news is that most of these homeowners are building wealth, living in better neighborhoods, and participating in the American dream. The bad news is that a small but growing share is stretched thin," observes Gramlich, a senior fellow at the Urban Institute and former governor of the Federal Reserve Board. "They are vulnerable to the least shock, saving very little, contending with high levels of consumer debt, at the mercy of predatory lenders, being forced to sell their houses early, and often ending up in foreclosure."

But all is not lost. Gramlich offers an array of reform options that would preserve the benefits of subprime financing while safeguarding homebuyers. Among Gramlich’s policy recommendations:

• Supervision. Increase the federal supervision of now largely unsupervised lenders and brokers. Force lenders to evaluate a borrower’s ability to pay using the maximum possible interest rate, not the lower teaser rate.
• Government regulation. Expand the Home Owner Equity Protection Act, which battles predatory lending. Reorient Fannie Mae’s and Freddie Mac’s practices to complement HOEPA.
• Community-based organizations. Increase the capacity of these watchdog and consumer-support groups to provide education, counseling, and alternative sources of credit.
• Market pressure. Encourage self-enforcement practices by lenders that strengthen borrowers’ rights, lessening foreclosures and benefiting both homeowners and the mortgage industry.
• Rental markets. Ensure an adequate supply of rental housing so families won’t become homeowners just because they have no other option.

"Subprime Mortgages" is "a clear and judicious analysis of both the benefits and drawbacks resulting from the rapid growth in the subprime home mortgage market, with thoughtful recommendations for reforming subprime lending," writes John C. Weicher, director of the Hudson Institute’s Center for Housing and Financial Markets.