Subprime Mortgages: What, Where, and to Whom?

Over the last two years, the housing market has turned sharply in many parts of the country. House prices have swung from steady rates of appreciation to outright declines, while sales and construction of new homes have dropped steeply. Much of this turmoil appears related to the boom and bust in mortgage markets over the last five years. It was not supposed to work out this way. Securitization and other innovations in mortgage markets led to new loan products with the potential to make home ownership easier and more accessible to buyers who could not access credit previously through conventional means. These so-called subprime and near-prime mortgage products allowed buyers with lower credit scores, smaller down payments, and/or little documentation of income to purchase houses. These new products not only allowed new buyers to access credit, but also made it easier for home owners to refinance loans and withdraw cash from houses that had appreciated in value.

Despite the economic implications of the credit boom and bust, there have been only a handful of studies on who received subprime loans during this most recent housing cycle, where these loans were made, and what the loans were used for. In part, the lack of studies is due to data limitations. The most timely source of data on subprime loans, data from Loan Performance (LP), is not freely available to researchers. In addition, there is no consensus among either lenders or researchers about what types of mortgages should be considered subprime.

We begin to fill this void in this paper. We focus our empirical analysis in two areas. First, we describe the strengths and weaknesses of three different datasets on subprime mortgages. These datasets embody different definitions of subprime mortgages. We show that estimates of the number of subprime originations are somewhat sensitive to which types of mortgages are categorized as subprime. Second, we describe what parts of the country and what sorts of neighborhoods had more subprime originations in 2005, and how these patterns differed for purchase and refinance mortgages.