The Subprime Mortgage Market article summary

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please summarize each article in the website in one page. so Three pages in total

I upload an article, and there are two articles links below.

Please answer these questions in the summary

a- What is the main topic in this article ?

b- What are the main ideas of this article ?

c- What is the conclusion or opinions of this article ?

• The Subprime Mortgage Market (May 2007)

• Housing Bubbles and Homeownership Returns (June 2012)

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The Subprime Lending Crisis The Economic Impact on Wealth, Property Values and Tax Revenues, and How We Got Here Report and Recommendations by the Majority Staff of the Joint Economic Committee Senator Charles E. Schumer, Chairman Rep. Carolyn B. Maloney, Vice Chair October 2007 JOINT ECONOMIC COMMITTEE OCTOBER 2007 Executive Summary As the losses caused by the subprime lending crisis continue to work their way through the financial markets, there is a growing awareness among policymakers and financial market regulators that we need to prevent the continuing foreclosure wave from affecting the broader economy. A significant increase in lax (and often predatory) subprime lending during a period of rapid housing price appreciation put risky adjustable rate mortgages in the hands of vulnerable borrowers who are now facing substantial payment shocks and risk foreclosure when their loans reset this year and next. Part I of this report shows that unless action is taken, subprime foreclosure rates are likely to increase as housing prices flatten or decline, and the effects of the subprime crisis are likely to extend beyond the housing market to the broader economy. The decline in housing wealth will negatively affect consumer spending, and the forced sale of large numbers of homes is likely to negatively impact the prices of other homes. Part II of this report shows that, unless action is taken, the number and cost of subprime foreclosures will rise significantly. For the period beginning in the first quarter of 2007 and extending through the final quarter of 2009, if housing prices continue to decline, we estimate that subprime foreclosures alone will total approximately 2 million. Part II also includes forward looking, state-level estimates of subprime foreclosures and associated property losses and property tax losses, covering the second half of 2007 through the end of 2009. For that shorter period, and assuming only moderate housing price declines, we estimate that: • • • Approximately $71 billion in housing wealth will be directly destroyed through the process of foreclosures. More than $32 billion in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties. States and local governments will lose more than $917 million in property tax revenue as a result of the destruction of housing wealth caused by subprime foreclosures. Part III of the report highlights the underlying causes of the subprime crisis and explains how incentive structures in the subprime market work against the interests of borrowers and have had much to do with the dimensions of this crisis. Finally, in Part IV, policy options aimed at reducing foreclosures and preventing the crisis from reoccurring in the future are offered. 1 JOINT ECONOMIC COMMITTEE OCTOBER 2007 Part I: The Housing Downturn and Its Impact on Subprime Mortgage Foreclosures Over the past few months, as residential investment and housing prices have declined, delinquency and foreclosure rates for subprime mortgages have spiked sharply upward. The deteriorating performance of subprime loans is not suprising. As the subprime market expanded rapidly after 2001, so did the share of adjustable rate, “hybrid” loans issued to financially vulnerable borrowers. The ability of these borrowers to sustain hybrid mortgages has depended heavily on house price appreciation. As housing prices have flattened and declined, the ability of these households to refinance their mortgages has been reduced. The resulting rise in subprime foreclosures is likely to harm an already weak housing market, and the reduction in housing wealth has the capacity to reduce consumer spending and economic growth. HOUSING PRICE DECLINES WILL WORSEN SUBPRIME LOAN DELINQUENCIES AND HOME FORECLOSURES The root of the subprime mortgage crisis is the prevalence of troubling loans called “2/28” and “3/27” hybrid adjustable rate mortgages (ARMs) that were largely sold to financially vulnerable borrowers without consideration for their ability to afford them. A typical “2/28” hybrid ARM has a fixed interest rate during the initial two year period. After two years, the rate is reset every six months based on an interest rate benchmark (such as the London Interbank Bid Offered Rate, or “LIBOR”). In the current environment, resets have caused payments to rise by at least 30 percent, to an amount that many borrowers can no longer afford. As a result, the delinquency and foreclosure rates for subprime adjustable rate mortgages have been sharply rising. For more information about the characteristics of subprime loans and borrowers, see Box A. When housing prices were rising, subprime borrowers could sell or refinance their homes to pay off their loans before they reset to unaffordable rates. As housing prices flatten or decline, these options dwindle. This section explains how the weakening housing market is likely to impact subprime delinquencies and foreclosures in the months ahead. For a detailed examination of the subprime market and its expansion, see Box B. Subprime Lending Has Depended on Rapid House Price Appreciation The period of rapid housing price appreciation that began in 1997 has helped fuel increased volumes of subprime lending and masked the weaknesses in underwriting quality and predatory tactics that accompanied it. Beginning in 1997, the U.S. witnessed house price appreciation that was highly unusual in historical terms. Between 1997 and 2006, real home prices increased by nearly 85 percent.1 Sustained price increases near this magnitude have only been observed once during the twentieth century, in the period immediately after World War II2 (See Figure 1). In fact, during 2 OCTOBER 2007 JOINT ECONOMIC COMMITTEE Figure 1: U.S. Housing Market in Historical Perspective Shiller U.S. Real Housing Price Index and Other Economic Indicators, 1938-2007 250 1000 900 200 800 Percent Home Prices 150 600 500 100 400 Building Costs 300 50 Interest Rates 200 100 Population 0 1938 Population in Millions 700 0 1949 1960 1971 1982 1993 2004 Source: Irrational Exuberance, 2nd Edition, 2005, by Robert J. Shiller, Figure 2.1 as updated by author. the period 2001 through 2005, the annual rate of house price appreciation accelerated. The S&P/Case-Shiller® Home Price Index shows annual price appreciation rising from slightly over eight and one-half percent in 2001 to more than 15 percent in 2005. Not every part of the housing market witnessed this rate of home price appreciation. In some states and cities there was significant price appreciation, while it was more moderate in others. For example, Figure 2 shows the difference between home price appreciation in Michigan, Ohio, California, and Florida. But price increases were sufficiently widespread to produce significant nationwide increases in housing prices. Housing Price Appreciation Reduced Subprime Delinquencies and Foreclosures The deterioration in underwriting standards in the subprime market as the market expanded is well documented. (For a discussion on declining underwriting standards in subprime lending, see Box B.) Although underwriting standards in the subprime lending market began to decline after 2001, the effects of this decline were, until recently, mitigated by house price appreciation. If a borrower is struggling to make mortgage payments, but the value of his house has appreciated, he can solve his financial problems at least temporarily by refinancing the mortgage. Cash can be withdrawn from the increased equity in the house, and the new, higher mortgage can be sustained for a while. The house can also be sold, and the loan principal repaid. However, when house price appreciation does not create equity, borrowers’ financial weakness cannot be disguised and default rates rise. 3 JOINT ECONOMIC COMMITTEE OCTOBER 2007 Figure 2: House Price Appreciation Has Varied Across States House Price Index for Homes in Michigan, Ohio, California and Florida, Q1:1995-Q2:2007 700 California 600 Florida Percent 500 Michigan 400 300 200 Ohio 100 1995 1997 1999 2001 2003 2005 2007 Source: Office of Federal Housing Enterprise Oversight There is systematic evidence that when home prices appreciate, subprime mortgage defaults decline. Using a very large sample of subprime mortgages securitized between 1999 and 2002, researchers at the Center for Responsible Lending found statistically significant correlations between the odds of foreclosure and cumulative price appreciation in a Metropolitan Statistical Area (MSA).3 The option to sell or refinance also should reduce delinquencies, which are the precursors to default and foreclosure. Recent work by economists at the Federal Reserve Bank of San Francisco shows strong negative correlations between delinquency rates and cumulative house price appreciation across MSA’s during 2006.4 This research also indicates that house price appreciation significantly improved the performance of subprime loans. SUBPRIME PROBLEMS ARE LIKELY TO ACCELERATE HOUSE PRICE DECLINES The Housing Market Is Contracting Unfortunately, conditions in the housing market indicate that house price appreciation will no longer be able to disguise the financial precariousness of the millions of borrowers whose subprime adjustable rate mortgages are about to reset. The decade of steady house price appreciation appears to be at an end. Nationally, house prices began to decline in 2006 and are now down approximately 3.2 percent from their peak in the second quarter of 2006.5 4 OCTOBER 2007 JOINT ECONOMIC COMMITTEE Figure 3: Home Production Has Outpaced Demand 12 600 New Homes for Sale 10 400 8 300 6 200 4 100 Months of Supply Homes for Sale (in thousands) 500 2 Months Supply of New Homes 0 0 1980 1984 1989 1993 1998 2002 2007 Source: Bureau of the Census, U.S. Department of Commerce. In fact, the housing market has contracted significantly for more than a year. Inventories of unsold new homes have increased, and the monthly supply of new homes has risen (See Figure 3). The Federal Reserve has estimated that so far, declines in residential investment have reduced the annual rate of GDP growth by about three-fourths of a percent over the past year and a half.6 A Housing Asset Bubble May Be Bursting As residential investment in construction declines and house prices fall, there is reason to be concerned about the longer term prospects for housing values. There is apprehension that the economy is experiencing the bursting of a housing price “bubble” – a situation in which housing prices are high only because market participants believe that prices will be high tomorrow. In other words, home prices deviate significantly from the equilibrium level consistent with market fundamentals. When an asset bubble bursts, large price appreciation can be followed by sudden and large price declines. If a housing price bubble does exist, then house price levels can be affected dramatically by shifts in expectations.7 There is some evidence that expectations about housing prices are changing. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI), based on monthly surveys of a panel of homebuilders, reached an historic low in October 2007.8 See Figure 4. 5 JOINT ECONOMIC COMMITTEE OCTOBER 2007 Subprime Foreclosures Will Put Additional Downward Pressure on the House Prices It is widely expected that, as the large number of subprime 2/28 and 3/27 hybrid ARMs originated during and after 2004 reset to their higher payment rates, the volume of subprime delinquencies and defaults will rise substantially. Many financially vulnerable borrowers will be facing substantially higher payments, and the lack of house price appreciation will prevent sale or refinance. The Federal Deposit Insurance Corporation (FDIC), citing First America LoanPerformance data on securitized subprime and near-prime (so-called “Alt-A”) mortgages, estimated in March 2007 that there were approximately 2.1 million hybrid nonprime ARMs outstanding. LoanPerformance data cover about 70 percent of subprime originations.13 This implies that as of March there were roughly 3 million nonprime mortgages, many of which will reset in the next three years. From Mortgage Bankers Association (MBA) data we know that the average value of all subprime ARM loans in 2005 was about $200,000. If we use this number as the average value of for all nonprime loans then there were approximately $600 billion in outstanding nonprime mortgages as of March. Since then, the number and amount of hybrids yet to reset will be somewhat smaller. However, the numbers are significant. Figure 4: Expectations About Housing Market Reached Historic Lows in October 2007 NAHB/Wells Fargo Housing Market Index (HMI) and Its Three Components Seasonally Adjusted, January 1985-August 2007 100 90 80 70 Percent 60 50 40 30 20 10 HMI Single Family Sales: Present Single-Family Sales: Next Six Months Traffic of Prospective Borrowers 0 1985 1991 Source: National Association of Homebuilders 6 1997 2003 2007 OCTOBER 2007 JOINT ECONOMIC COMMITTEE A NOTE ON THE HOUSING BUBBLE DEBATE There is a substantial body of economic research that attempts to explain housing prices in terms of supply and demand fundamentals such as construction costs, interest rates, employment growth, and household income.9 On the basis of this line of research, some economists argue that the housing price appreciation we have witnessed is not a bubble. These economists focus on the characteristics of local markets, and argue that once accurate measures of local supply and demand factors are carefully examined, there is scant evidence that housing prices have deviated significantly from fundamental values.10 There is, however, substantial evidence pointing in the other, less sanguine direction. Using statelevel data for 1985 through 2002, Case and Shiller provide econometric evidence that, in eight states, fundamentals do not explain home price appreciation.11 Dean Baker from the Center for Economic and Policy Research argues that at the aggregate level it is difficult to point to changes in economic fundamentals that convincingly explain why housing prices began to increase in the mid-1990’s, rather than at some other time.12 He points to data showing that GDP, income, and population growth during this period were not unusually high, and notes that any constraint on supply caused by urban density or building regulation surely existed well before prices began to climb. The data in Figure 1 are consistent with the points made by Baker. While many outstanding subprimes are hybrids, there are many other subprime borrowers who are also at high risk of default. Several studies of subprime mortgages show that cumulative default rates are very high. Estimates range from almost 18 percent to more than 20 percent.15 Should housing prices decline further, cumulative defaults are likely to increase. Using data on individual subprime mortgages originated between 1998 and the first three quarters of 2006, researchers at the Center for Responsible Lending estimated cumulative foreclosures of 2.2 million, with losses to homeowners of $164 billion.16 Although this forecast tried to take account of the effect of slowing house price appreciation, it was published in December 2006. Since that time housing prices have continued to decline. THE EFFECTS OF FORECLOSURES AND HOUSE PRICE DECLINES WILL BE SIGNIFICANT Foreclosures Will Harm Neighboring Home Owners and Local Housing Markets Foreclosures can have a significant impact in a community in which the foreclosed property is located. This is particularly true when the factors that led to one foreclosure drive a concentration of foreclosures in the same neighborhood, for example in a spatial concentration of subprime lending. A concentration of home foreclosures in a neighborhood hurts property values in several ways. A glut of foreclosed homes for sale depresses home market values for the other owners. Neighboring businesses often experience a direct monetary loss from reduced sales and neighborhood landlords experience a loss or reduction in rental income. Moreover, 7 JOINT ECONOMIC COMMITTEE OCTOBER 2007 BOX A: CHARACTERISTICS OF SUBPRIME LOANS AND BORROWERS Subprime Loans Go to Higher Risk Borrowers, Who Pay Higher Rates Subprime mortgages are issued to higher risk borrowers. They typically have inconsistent credit histories, lower levels of income and assets, or other characteristics that increase the credit risk to lenders.14 This is reflected in lower average FICO credit scores, and greater average loan-to-value ratios. These borrowers pay substantially higher interest rates and fees than other borrowers, and are more likely to be subject to prepayment penalties, which make it costly to refinance loans in the early years of their life (See Figure 15 in Appendix). Subprime Loans Typically Have Higher Delinquency and Default Rates Because of the higher risk characteristics of subprime borrowers, subprime loans typically have higher delinquency and default rates. As can be seen from Figure 11 in Appendix, the delinquency rates for subprime mortgages are usually several times that of comparable prime mortgages. The same is true for foreclosure rates, as can be seen in Figure 13 in Appendix. It is notable, however, that delinquency and foreclosure rates of subprime adjustable rate mortgages have diverged the homes left vacant by foreclosure lower the desirability of the neighborhood since there is often an increase in crime associated with a vacant house.17 As concentrated foreclosures persist in a community, the value of surrounding homes may decline. Dan Immergluck and Geoff Smith survey the literature on this subject and estimate the impact of foreclosures on nearby property values using data on foreclosures and neighborhood characteristics in the Chicago area.18 They found that conventional foreclosures have a statistically and economically significant effect on nearby property values. In particular, they found that each conventional foreclosure within a one-eighth mile of a single-family home produces at least a 0.9 percent lower property value, and may be closer to 1.5 percent in low to moderate income communities. Similarly, Shlay and Whitman find significant affects of abandoned property on nearby housing values in Philadelphia.19 They find that an abandoned property will lower property values on homes located within 150 feet by $7,627 (or 10.1 percent) and will lower property values on homes located within 450 feet by $3,542 (or 4.7 percent). As did Immergluck and Smith in Chicago, Shlay and Whitman find that the effects of abandoned properties on nearby home values are cumulative. They find that, on average, home values on the block decline by 9.1 percent in the case of one abandoned home on the block, and decline on average by 15.0 percent for 5 abandoned properties on the block. Large House Price Declines Have the Potential to Reduce Growth and Employment Should housing prices decline dramatically, the effects could be significant. To the extent that price declines reflect a decline in demand for new housing, construction activity will decline. This contraction is already under way, and has reduced residential investment sufficiently so that GDP growth has declined markedly in the past year. 8 OCTOBER 2007 JOINT ECONOMIC COMMITTEE THE IMPACT OF SUBPRIME FORECLOSURES ON HOMEOWNERSHIP In addition to property value reductions, foreclosures in the subprime market have eroded some of the gains in homeownership rates for minority households. For example, the Center for Responsible Lending (CRL) estimates that the 2005 vintage of subprime loans will lead to 98,025 foreclosures by black homeowners relative to only 50,925 ne ...
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The Subprime Mortgage Market
Thesis: The topic of the article is The Subprime Mortgage Market. The author has tried
to explain to him some of the questions related to subprime mortgage like how the subprime
mortgage market as adjusted? How the problem related to subprime mortgage effects the
housing market as well as the economy so broadly?

Main topic


Main ideas



Running head: ASSIGNMENT


Instructor name
Student name



The Subprime Mortgage Market
Main topic
The topic of the article is The Subprime Mortgage Market. The author has tried to
explain to him some of the questions related to subprime mortgage like how the subprime
mortgage market as adjusted? How the problem related to subprime mortgage effects the
housing market as well as the economy so broadly?
Main ideas
Subprime mortgage means the loan given to the borrower having high credit risk
because of strong credit history or the high probability of default. Subprime mortgage begin
to take off in the mid 1990s. This happens due to the advancement in technology that makes
it easy for the lender to collect and 78 the information related to the creditworthiness of the
borrower. The growth of secondary mortgage market resulted reinforced innovations and also
given the mortgage lenders greater access to the capital market. The subprime mortgage
lending has also made the ownership of home possible for people who might have
disqualified in past. This has benefited the home owners to obtain rental income and
participate in Civic organizations want people were able to accumulate wealt...

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