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Subprime home mortgages back to pre-crisis levels: Fed
2009-10-26
WASHINGTON (AFP) - The market share of subprime US home mortgages, which caused the collapse of the housing market at the epicenter of the financial crisis, has returned to pre-crisis levels, a central bank report showed Monday. But the Federal Reserve Bank of San Francisco study said nearly all of the loans were now owned or guaranteed by the government, which has pumped hundreds of billions of dollars to keep the market afloat. Government-backed agencies Fannie Mae, Freddie Mac and Ginnie Mae "are providing unprecedented support to the housing market -- owning or guaranteeing almost 95 percent of the new residential mortgage lending," said John Krainer, a senior economist with the regional central bank who penned the report. "This shift in mortgage finance has had a profound impact on the types of borrowers receiving loans," he said. The subprime market had shrunk to virtually zero percent in the first quarter of 2008 after triggering the housing collapse following defaults by borrowers. Subprime borrowers, usually lacking good credit histories, find it nearly impossible to obtain mortgage loans from mainstream lenders. Since the January-March period last year, "increased FHA (Federal Housing Administration) lending... has revived this segment of the market," Krainer said. "After plummeting in early 2008, the share of borrowers with FICO credit scores lower than 660 has returned to just higher than 20 percent, the same share as when subprime securitization peaked in 2006," he said. FICO is a company that developed a popular scoring system for assessing credit risk. Subprime loans are usually classified as those where the borrower has a FICO score below 660. The report warned that recovery of the embattled housing industry will be slow amid a credit crunch that has persisted since the crisis. "Credit supply problems, however, still appear to be a major problem affecting the housing market," it said. "With the vast majority of current mortgage lending now intermediated in some form by the GSEs (government-sponsored enterprises), it will be difficult for the housing market to return to normal." According to Federal Reserve flow of funds data, household net borrowing backed by home mortgages has fallen every quarter since the beginning of 2006, and is now negative for the first time since the 1970s, the report said. "It is difficult to disentangle the role played by declining demand for mortgages from the declining supply of credit."
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