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Now What? Key Trends from the Mortgage Crisis and Implications for Policy

Now What? Key Trends from the Mortgage Crisis and Implications for Policy
2009Fair Credit/Fair Housing

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From a fair housing and fair lending perspective, the U.S. mortgage crisis has had, and will continue to have, a wide variety of mid-to-long-term effects on housing finance and housing patterns more broadly. This brief memo touches on just a few of the likely impacts.

Homeownership Finance

Even after accounting for the demise of many high-risk subprime lenders, most lenders have tightened underwriting standards. According to the Federal Reserve’s Senior Loan Officer Survey, prime lenders began tightening standards in 2007, as the subprime crisis worsened, and this continued through at least the spring of 2009, although the pace of ongoing tightening began to slow some in late 2008. However, even in early 2009, 49 percent of lenders continued to tighten standards, while no lenders reported easing standards. At the same time, FHA market share, which had dropped to around 5-7 percent of home purchase loans in 2005 and 2006 increased to an estimated 25 percent by early 2009. The FHA expansion, combined with the conservatorship of Fannie Mae and Freddie Mac meant that the federal government has become the critical driver of the mortgage market by late 2008. As had been the case earlier, FHA loans currently constitute a disproportionately large share of the market in lower-income and minority neighborhoods.1 This may be due to differences in real or perceived risks across zip code types (including differences in credit scores and down-payments), to differences in lending practices of lenders or private mortgage insurers across neighborhoods, and/or to other factors. Regardless of the reasons behind these disparities, they are important to recognize. In part because FHA loans are generally more expensive, such disparities could have significant consequences for lower-income and minority communities and households.2 More work is needed to understand what lies behind these disparities and their implications for lower-income and minority communities. Substantial attention to this issue by regulators and fair lending advocates is warranted.

Homeownership Rates and Related Segregation

After climbing from the mid 1990s through the early 2000s, the homeownership rate in the U.S. began dropping during the peak of the subprime boom in late 2004 and early 2005, driven by surging foreclosures. By early 2009, the national homeownership was down 1.9 percentage points to 67.3 percent (a decline of 2.8 percent in the homeownership rate), roughly equivalent to the rate in early 2000. While this decline itself is significant, national changes mask steeper declines in many local communities. From late 2005 to early 2009, for example, the homeownership rate had fallen by 10 percent in the Toledo metropolitan area and by 8 percent in the Riverside metro. As homeownership rates fall, there are likely to be implications for racial and economic segregation. Because rental housing in many low-poverty and low-minority communities is scarce, less access to homeownership may bring with it decreased access to such neighborhoods by lower-income and minority households.