Murray State University
Subprime Lending and Housing Market Values: Is there a Relationship?
Institution
Murray State University
Faculty Advisor/ Mentor
David Eaton
Abstract
Over the past five years, housing values have increased nationally by an average of 68.3%. While low-interest rates have contributed to the recent surge in property values, subprime lending has also played a pivotal role. Subprime lending is lending to consumers with "bad" or nonexistent credit, as well as lending to consumers with "good" credit by offering a wide variety of products that the prime market does not have. For example, "good-credit" borrowers are offered financing on 100% of the home's value using an interest-only loan, and also financing on second mortgages which allow consumers to extract up to 115% of the home's value. Products such as these have not only brought about many changes to the mortgage industry, but also have made housing more affordable and attractive. The Depository Institutions Deregulatory and Monetary Control Act in 1980 helped launch the idea of subprime lending by lifting constraints on rate caps and allowing mortgage companies to cater their products to a diverse consumer base in terms of risk. The subprime market hit an all time high in 2005, capturing 23% of the market share by originating $650 billion in nonconforming loans. By increasing the amount of potential home-buyers in the market, I anticipate that subprime lending will cause housing values to increase. Specifically, this study will use differences in state usury laws to isolate the impact of the subprime market on the housing market values.
Subprime Lending and Housing Market Values: Is there a Relationship?
Over the past five years, housing values have increased nationally by an average of 68.3%. While low-interest rates have contributed to the recent surge in property values, subprime lending has also played a pivotal role. Subprime lending is lending to consumers with "bad" or nonexistent credit, as well as lending to consumers with "good" credit by offering a wide variety of products that the prime market does not have. For example, "good-credit" borrowers are offered financing on 100% of the home's value using an interest-only loan, and also financing on second mortgages which allow consumers to extract up to 115% of the home's value. Products such as these have not only brought about many changes to the mortgage industry, but also have made housing more affordable and attractive. The Depository Institutions Deregulatory and Monetary Control Act in 1980 helped launch the idea of subprime lending by lifting constraints on rate caps and allowing mortgage companies to cater their products to a diverse consumer base in terms of risk. The subprime market hit an all time high in 2005, capturing 23% of the market share by originating $650 billion in nonconforming loans. By increasing the amount of potential home-buyers in the market, I anticipate that subprime lending will cause housing values to increase. Specifically, this study will use differences in state usury laws to isolate the impact of the subprime market on the housing market values.