Subprime loans are often justified on the grounds that some borrowers will never qualify for a prime loan, and a risky subprime loan is their only chance.  Therefore the industry is increasing total home ownership rates, despite the sad foreclosure stories we so often read. Not so, says the Center for Responsible Lending. Their recently released study found that subprime lending caused a net loss of home ownership. 

The study (pdf) found that between 1998 and 2006, about 1,400,000 first-time home-buyers used a subprime loan. The Center estimates that in the same period of time, 2,400,000 homeowners have lost or will lose their homes due to a subprime loan. The disparity exists because many homeowners who did not originally have a subprime loan refinance with a subprime loan. In fact, more than half of all subprime loans issued in 1998-2006 were refinancing loans.

The study works by comparing the number of first-time homeowners receiving subprime loans to the number of homeowners with subprime loans who lost their homes. This may well be the best strategy available, but it isn’t perfect.

First, the number of first-time homeowners who received subprime loans is not the same as the number of homeowners who could have become homeowners only with subprime loans. Due to redlining, discrimination and lack of information, some borrowers end up with subprime loans when, with a little luck and better enforcement of fair lending law, they could have qualified for a prime loan. Therefore, using the number of subprime loans as a proxy for the number of people who could become homeowners only with a subprime loan is likely to inflate the number, making subprime lending look more beneficial than it is.

On the other hand, the study does not accurately measure the number of people who would have lost their homes whether they refinanced with a subprime or prime loan. It simply assumes that all subprime loans in foreclosure are in foreclosure because they are subprime. This would tend to inflate the number of homes lost because of subprime lending. Additionally, the study does not account for the theoretical possibility that a homeowner could successfully avoid foreclosure through a subprime refinancing. Those refinancings would not create a new homeowner, but would stop the number of homeowners from decreasing.

Overall, however, the study is an interesting attempt at measuring something very difficult to quantify. The decrease in home ownership due to subprime loans, 1,000,000 in eight years, is large enough to make the measurement problems seem less significant. As a follow-up, don’t miss the Center’s rebuttal (pdf) to the Mortgage Bankers’ Association’s critique of their findings.