KEVIN CUFF
‘Emerging market’
Before there was a subprime mortgage market, consumers with less-than-perfect or little credit had a very slim chance of securing a home loan. But the subprime market has gained strength in the mortgage industry over the last decade. A report recently released by the national Mortgage Bankers Association shows Massachusetts is now doing subprime business at a steady rate.
“We’ve already determined we have a legitimate subprime market,” said Kevin M. Cuff, executive director of the Massachusetts Mortgage Bankers Association. “[The subprime market] allows viable alternatives to many, many people.”
The Mortgage Bankers Association’s report, “2003 Subprime Mortgage Lenders,” cites statistics from 2003 Home Mortgage Disclosure Act data. According to the report, about 45,100 loans, or 7.5 percent of total mortgages, were considered subprime in Massachusetts. This includes home refinancing loans. The national average was 9.2 percent.
“Ten percent of all the lending going on in the commonwealth is now considered subprime,” Cuff said. “I believe this [study result] is probably accurate and represents the movement of a trend allowing products and availability of credit to an emerging market.”
Kevin Kiley, chief operating officer and executive vice president of legislative and regulatory policy for the Massachusetts Bankers Association, said the data show there are an increasing number of people entering into the homeownership market.
“There is a growing segment of the market being able to access credit on terms classified as subprime,” said Kiley.
‘Bad Reputation’
According to Doug Duncan, chief economist for the Mortgage Bankers Association, the first-ever subprime report grew from public demand. He said people began asking for more information on higher-risk markets.
Duncan said the subprime market has been in existence for about 10 years, and the report now will be published annually. He added that the association was not surprised with the results of the report.
“Generally, it was in line with what we understood to be the case,” said Duncan.
The report also found there were 9,710, or 9.3 percent, home purchase loans considered subprime in Massachusetts last year. The national average was 11 percent.
James Dougherty, executive director of the Massachusetts Mortgage Association, said he saw no real difference between Massachusetts subprime lending data and the rest of the nation.
“[The Massachusetts data] seems very ordinary,” said Dougherty.
Dougherty said it appears that subprime lending was more prevalent in states with more urban areas.
“Subprime tends to be more of an urban phenomenon,” said Dougherty.
For example, the state of New York reported that 11.3 percent of all originations were subprime and 8.2 percent of home purchase loans were subprime last year.
Despite the attention on subprime lending, both Dougherty and Cuff questioned some aspects of the report.
Cuff said the HMDA data used by Mortgage Bankers Association isn’t necessarily complete.
“HMDA doesn’t necessarily catch all data,” said Cuff.
According to statistics from The Warren Group, parent company of Banker & Tradesman, there were 101,516 home purchase loans and 743,646 refinance or home equity mortgages closed in 2003. The statistics do not differentiate between prime and subprime loans.
The HMDA data recorded 558,592 prime loans closed last year in Massachusetts, including both refinancings. HMDA also reports there were 95,110 prime home purchase loans closed last year.
According to the HMDA Web site, there is specific criteria for both nondepository and depository institutions that must submit data. In order to report information to HMDA, a nondepository institution must be a for-profit lender and the institution’s home purchase mortgage originations must equal or exceed 10 percent of its total loan originations, or equal $25 million or more.
Other stipulations include having assets, when combined with the assets of a parent company, exceeding $10 million, or originating 100 or more home purchase loans (including refinancing of home purchase loans).
Depository institutions filing HMDA data must be a bank, credit union or savings association and the institution’s assets must total more than $33 million for the preceding year. In addition to those requirements, the institution must have a branch office in a metropolitan area and originate at least one home purchase loan secured by a first lien on a one- to four-family dwelling.
In addition to existing gaps in data, Cuff also said he is unaware of any official definition of “subprime” loans under HMDA.
Dougherty questions one area of the report that is missing.
“The question that needs to be asked is who are the people not represented in this study,” said Dougherty, referring to borrowers not qualified for subprime loans.
But while the study clearly shows subprime lending is fast becoming a mainstream segment of lending, misperceptions still surround the practice.
Kiley said there often is confusion between legitimate subprime and predatory lending.
“Subprime would be a loan that was graded on credit with some deficiencies,” Kiley said. “There is a level of confusion about subprime Â… what it all entails, what it is referencing.”
Dougherty said the confusion between subprime and predatory lending is detrimental to legitimate subprime lending practices.
“It does have a bad reputation, but it’s undeserved,” Dougherty said. “It jeopardizes the validity of subprime lending.”
While saying he is unsure when subprime officially became a separate lending category, Dougherty said it nevertheless has been “enormously successful” in increasing options for prospective homeowners.
“It grew out of the premise that every American should have suitable access to owning a home,” Dougherty said.
Subprime lending is also creating confusion for Massachusetts regulators who have yet to determine what rules to put in place for high-cost home mortgages. Cuff said many in the industry are still uncertain if all points and fees will go into the calculation of whether a loan is considered subprime or prime; conventional or high cost.
Cuff said if the calculation formulas are not carefully crafted, too many mortgages could be classified as high-cost loans and many lenders will simply decide not to lend in Massachusetts.
Cuff defends prepayment penalties, which have been views by some as a predatory practice. In order for lenders to cover their overheard, a borrower must pay a loan for a certain period of time, Cuff said.
“It’s not predatory,” said Cuff. “It’s a legitimate practice of doing business.”
While the Massachusetts Bankers Association testified at a public hearing devoted to a recently enacted predatory lending law for Massachusetts at which industry practitioners cautioned against quashing legitimate subprime lenders in the pursuit of quelling predatory firms, Kiley said most of the banks represented by MBA do not participate in subprime lending. Because of the risks associated with lending to those with questionable credit, banks have been reluctant to get involved in subprime lending, Kiley said. He said most of these institutions are in the market to serve traditional borrowers and issue conforming.
Duncan said further studies will be released by the Mortgage Bankers Association in the upcoming months. A semi-annual report will be released containing information on quarterly changes for the whole mortgage industry, including subprime lending. However, a more specific report due out will discuss the cost structures of both the prime and subprime market. Duncan said the report will highlight operating costs and revenues for both market segments.
Jennifer Jope may be reached at jjope@thewarrengroup.com
