News Releases
Prof. Alan White outlines case for banning subprime loans
Thursday, February 28, 2008
Banning subprime loans could prevent another deluge of foreclosures that has rocked the United States economy over the past year argues a Valparaiso University law professor, while still allowing more Americans with marginal credit to purchase homes.
Alan White, an assistant professor in Valparaiso’s School of Law, says the government should ban subprime loans and reinvigorate the Federal Housing Administration in his paper “The Case for Banning Subprime Mortgages,” which recently ranked as the most downloaded article on the Social Science Research Network’s “Law and Society” list.
White, an expert on predatory mortgage lending and mortgage foreclosures, currently is serving a three-year term as a member of the Federal Reserve Board of Governors Consumer Advisory Committee and said his paper developed out of the committee’s discussions.
“There were two statements that you hear regularly from people arguing that subprime loans themselves weren’t bad, that the mess was simply a case of some people getting a bit out of control,” White said. “One argument was that subprime loans had increased home ownership rates, the second was that subprime loans had allowed more people access to credit.”
Both of those arguments, White says, turn out to be false.
He noted that studies by the Center for Responsible Lending show approximately 1.4 million first-time buyers from 1998 through 2006 purchased their home with a subprime mortgage, but an estimated 2.4 million subprime foreclosures took place, resulting in a net loss in homeownership of more than 900,000.
At the same time, White said that credit access has increased steadily over the past two decades among all households, with minorities and low-income consumers not closing their credit gap with the population as a whole.
“The subprime mortgage boom was proof less of credit being democratized, than of credit having metastasized,” he said.
Though White said the market for subprime loans has virtually vanished for the moment, lenders could begin pitching the riskier but more profitable subprime loans once the current economic crisis passes.
“After a couple of years, the subprime market will come back if it’s not regulated,” he says.
While there is legislation currently being debated by Congress that would place tighter regulations on subprime loans, White doesn’t believe they go far enough. The most straight forward way to prevent subprime mortgage lending, he said, is limiting first mortgage interest rates to a reasonable range above prime rates or an appropriate index.
Regulations should also limit “innovations” such as interest-only loans and drive more people to the traditional 30-year fixed rate amortizing mortgage, along with doing more to eliminate price discrimination.
“Standardization of loan terms is good for the majority of people, particularly low and moderate income Americans who want to buy homes,” White said. “They don’t need this array of bells and whistles that, frankly, are traps.”
With the subprime mortgage market dried up, White said an increasing number of people already are seeking FHA loans, which are only .25 to 1 percent higher than prime rates versus the 2 to 5 percent premium for subprime mortgages. He believes the agency also can make improvements to speed up the approval process – which is notoriously slow – to become even more attractive to borrowers.
At the same time, he cautioned that FHA reforms should not go so far as to make its loans virtually the same as the subprime loans that got into trouble. The FHA shouldn’t, for example, follow the subprime lender practice of offering “no-doc” loans that do not require documentation of income.
After all, White said, it’s in the interest of the entire nation to make sure loans are responsible.
“The products peddled by the Bank of Subprime were dangerous, unsuitable, unsustainable and highly amenable to fraud,” White said. “The American experiment in mortgage deregulation has produced millions of foreclosures, billions in home equity and investor losses and immeasurable damage to the fabric of the nation’s cities. It is not an experiment that should be continued or repeated.”
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