The Right Place

Subprime lending is here to stay; But protections will be extended to lower-income borrowers

By Sally Duros

The United States gained roughly 12 million new homeowners in the
past decade -- but how?

Not all of the gain can be explained by lending to first-time home
buyers who had previously been denied mortgages.

"There are a lot of moving parts," says Ned Gramlich, an economist
and former governor of the Federal Reserve Board. "The fact that
the usury laws have disappeared. You have securitization. You have
automatic underwriting with computer technology where you can
just log into a Web site and get your mortgage in 15 minutes, which
always struck me as pretty dangerous."

I talked with Gramlich, now a senior fellow at the Urban Institute,
the day before federal and state banking regulators announced they
would step up their scrutiny of lenders that make home loans to
people with lower income and less than pristine credit -- subprime
lending.

Gramlich was appointed by President Clinton and served as Fed
governor from 1997-2005. He recently wrote a book with the catchy
title Subprime Mortgages: America's latest Boom and Bust.

Published by the Urban Institute, it's a slim volume, but gripping
nonetheless if you want to understand the challenges homeownership
is facing as we feel the edges of the last decade's expansion. It's
not a classic "who done it," rather it's a classic "what is it?"
primer providing context on the emergence during the past 14 years
of this vast subprime lending market.

Replete with facts and figures, little-known federal agencies,
arcane-but-useful concepts of mortgage lending and regulation,
Subprime Mortgages is a handy reference for anyone who wants to
understand how the United States gained roughly 12 million new
homeowners in the past decade, why some of those homeowners are in
crisis and how public policy could be reformed to avert a deeper
crisis. It also looks at the rental market, which the author thinks
might be the best housing option for some families. We've culled
some of Gramlich's well-annotated facts and presented them in what
we call a Homeownership Index, elsewhere in today's Sun-Times Real
Estate section.

Ultimately, what Gramlich would like to see is an even playing
field in the mortgage market.

"Where we don't need the safeguards so much, there we have a lot,"
he says. "Where we need safeguards a lot, there we have nothing.

"The main push is a plea to 'let's supervise the subprime lenders,'
" Gramlich says. "We have a lot of mortgage laws. But we do not
have any police on the beat. So enforcement has become the real
issue."

If you haven't bought a house or refinanced lately, the problems
might not be obvious to you.

"The subprime market and the prime market are not the same animals
at all," he says. "People who haven't bought or refinanced lately
don't understand that."

And where that ballgame is going is a subject of intense debate,
although Gramlich says these new types of lending are sure to stick
around.

"There are a lot of people in the prime market who benefit in ways
that they don't realize from pretty rigorous exams we give banks,
whether through the Federal Reserve, the FDIC or the OTC," he says.
"The federal agencies go in every three years and they supervise
the lending process pretty carefully," he says.

"A typical $80,000 per year income prime borrower comes along, and
they don't really have to worry -- the supervisors have made sure
that the bank is doing an honest business."

There's a highly valued banking ethic, Gramlich says, but in the
subprime market the rules haven't been set yet.

"None of that works in the subprime market," Gramlich says. "A lot
of these mortgages -- more than half-- have no federal regulators
whatsoever."

In addition, Gramlich says adjustable rates are tricky for just
about anyone to understand.

Gramlich also spends time in the book discussing the work of the
Home Ownership Preservation Initiative (HOPI), a partnership of
Neighborhood Housing Services, Chicago, the Federal Reserve and
major lenders. HOPI seeks to prevent vacant buildings, and
homeowner distress through hotlines, credit counseling, assessments
of borrowers and properties and face-to-face counseling. They
recently announced an initiative with the Chicago area's
Metropolitan Mayors' Caucus.

"The foreclosures infect certain blocks," he says, "and that's what
needs to stop."

Gramlich says he became intrigued with HOPI when working with
Neighborworks America -- which had funded it. "We are all
tremendously impressed by the work that they do," he says.

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