Credit Crunch May Follow Mortgage Crisis, Warns Study

Predicts 20% reduction in subprime lending levels would deny 1.1 million

Americans Mortgage Credit

    WASHINGTON, May 29 /PRNewswire-USNewswire/ -- New mortgage laws that
 restrict access to certain loans would be an overreaction to the current
 foreclosure situation and deprive hundreds of thousands of Americans the
 opportunity to own their own homes, according to a study released today by
 the American Financial Services Association (AFSA).
     The study, conducted by the Center for Statistical Research (CSR),
 finds that more restrictive mortgage regulation would deny credit not only
 to those who would actually experience a foreclosure, but also to the whole
 class of borrowers in a particular risk category -- the vast majority of
 whom would otherwise use the credit successfully.
     The study looks at the effect of a 10% and a 20% reduction in available
 credit, considered against 2005-2006 lending levels. It finds that reducing
 available subprime credit by 10% would result in about 580,000 borrowers
 (1% of homeowners) and $94 billion rendered unavailable to borrowers. A 20%
 reduction would mean that 1.1 million borrowers (2.3% of homeowners) would
 be denied a loan and $188 billion would not be available to American
 consumers.
     The study further examines foreclosure trends in prime, FHA/VA and
 subprime loans using data on mortgage foreclosures through the end of the
 fourth quarter of 2006. It finds that current rates of foreclosures,
 including those for subprime loans, fall within the range of historical
 fluctuations recorded since 1998. Foreclosure rates were at historical
 highs during 2001- 2003, and current foreclosure rates are again beginning
 to reach those levels, after a significant drop in 2004-2005. The data do
 not demonstrate that current foreclosure rates are unusually high.
 Furthermore, the study finds that rising foreclosure start rates in
 subprime fixed and adjustable rate loans are mirrored by a rise in prime
 and FHA fixed and adjustable-rate loans, strongly suggesting that economic
 conditions are driving the current upturn. The study also notes the
 majority of foreclosure difficulties are centered on geographical regions
 with serious economic problems and high unemployment.
     George Wallace, Executive Director of the CSR and principal author of
 the study, said, "We have seen many reports in the press that our country
 is headed for a foreclosure disaster, but the empirical evidence on actual
 foreclosure levels existing today does not support this. Foreclosures are
 trending upward, but so far they are within historical ranges." He
 continued, "We are beginning a period of contraction and adjustment in the
 prime and subprime mortgage markets that, if prior history is any guide,
 will permit investors, borrowers and lenders to work their way through
 current rising delinquency pressures. There is a real danger that a shift
 in mortgage lending policy now could exacerbate the effect this contraction
 has on the availability of credit, leaving huge numbers of Americans out in
 the cold. A far more sensible policy would be to monitor the extent to
 which the market tightens, as it could well make new regulation
 unnecessary."
     Chris Stinebert, Chief Executive at AFSA, said, "These findings raise
 questions about the statistics touted by interest groups pushing for
 increased regulation of subprime lenders. For this reason, I welcome the
 announcement that the GAO will conduct its own investigation into the
 current situation."
     He continued, "I agree wholeheartedly with Federal Reserve Chairman Ben
 Bernanke, who recently noted that any new laws must be careful not to
 inadvertently suppress responsible lending or eliminate refinancing
 opportunities for subprime lending. Balancing this with consumer protection
 is the only way policymakers can avoid disenfranchising huge numbers of
 aspiring American homeowners and the social and economic consequences that
 would bring."
     The study, US Mortgage Borrowing: Providing Americans with Opportunity,
 or Imposing Excessive Risk, used the AFSA database, which contains
 loan-level data on mortgage originations provided by several major
 financial institutions. A full copy of the study is available on CSR's
 Website, http://www.centerstats.org.
     Based in Washington, D.C., AFSA (http://www.afsaonline.org) has 350
 active, commercial and associate members, including industrial banks, auto
 finance institutions, mortgage lenders, finance companies, credit card
 issuers and diversified firms that provide credit to consumers and small
 businesses.
     CSR, based in Alexandria, VA, is a non-profit entity dedicated to
 performing objective social policy research on housing, consumer credit and
 wealth distribution issues in the United States. The Center's principal
 mission is to provide the legislative, executive and judicial branches of
 national, state and local governments with high quality statistical
 information and related policy analysis on topics within the Center's
 general scope of interest.
 
 

SOURCE American Financial Services Association