Credit Crunch May Follow Mortgage Crisis, Warns Study

New mortgage laws that restrict access to certain loans would be an overreaction to the current foreclosure situation and deprive hundreds of thousands of Americans the opportunity to own their own homes, according to a study released today by the American Financial Services Association (AFSA).

The study, conducted by the Center for Statistical Research (CSR), finds that more restrictive mortgage regulation would deny credit not only to those who would actually experience a foreclosure, but also to the whole class of borrowers in a particular risk category — the vast majority of whom would otherwise use the credit successfully.

The study looks at the effect of a 10% and a 20% reduction in available credit, considered against 2005-2006 lending levels. It finds that reducing available subprime credit by 10% would result in about 580,000 borrowers (1% of homeowners) and $94 billion rendered unavailable to borrowers. A 20% reduction would mean that 1.1 million borrowers (2.3% of homeowners) would be denied a loan and $188 billion would not be available to American consumers.

The study further examines foreclosure trends in prime, FHA/VA and subprime loans using data on mortgage foreclosures through the end of the fourth quarter of 2006. It finds that current rates of foreclosures, including those for subprime loans, fall within the range of historical fluctuations recorded since 1998. Foreclosure rates were at historical highs during 2001- 2003, and current foreclosure rates are again beginning to reach those levels, after a significant drop in 2004-2005. The data do not demonstrate that current foreclosure rates are unusually high. Furthermore, the study finds that rising foreclosure start rates in subprime fixed and adjustable rate loans are mirrored by a rise in prime and FHA fixed and adjustable-rate loans, strongly suggesting that economic conditions are driving the current upturn. The study also notes the majority of foreclosure difficulties are centered on geographical regions with serious economic problems and high unemployment.

George Wallace, Executive Director of the CSR and principal author of the study, said, "We have seen many reports in the press that our country is headed for a foreclosure disaster, but the empirical evidence on actual foreclosure levels existing today does not support this. Foreclosures are trending upward, but so far they are within historical ranges." He continued, "We are beginning a period of contraction and adjustment in the prime and subprime mortgage markets that, if prior history is any guide, will permit investors, borrowers and lenders to work their way through current rising delinquency pressures. There is a real danger that a shift in mortgage lending policy now could exacerbate the effect this contraction has on the availability of credit, leaving huge numbers of Americans out in the cold. A far more sensible policy would be to monitor the extent to which the market tightens, as it could well make new regulation unnecessary."

Chris Stinebert, Chief Executive at AFSA, said, "These findings raise questions about the statistics touted by interest groups pushing for increased regulation of subprime lenders. For this reason, I welcome the announcement that the GAO will conduct its own investigation into the current situation."

He continued, "I agree wholeheartedly with Federal Reserve Chairman Ben Bernanke, who recently noted that any new laws must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime lending. Balancing this with consumer protection is the only way policymakers can avoid disenfranchising huge numbers of aspiring American homeowners and the social and economic consequences that would bring."