Home market took a costly subprime advance

By Patrick Rucker

WASHINGTON (Reuters) - The subprime mortgage industry rushed so many buyers into the housing market that it opened an ownership gap, pulling in people who likely would have bought a home only years later, and that gap will stall a recovery in the sector.

The relaxed standards of subprime loans coaxed many borrowers with damaged credit to hurry a purchase during a five-year run-up in home values. Many buyers in that stretch were also relative youngsters who would have otherwise delayed buying a home.

In 2005, when the housing boom hit its peak, one in five new mortgages was offered to subprime borrowers.

Many of those buyers were prospective owners who did not yet have the income or savings typically required to purchase a home. Subprime loans gave those buyers a turbo boost, but have recently driven many to foreclosure as their low, early loan rates spiked and became unaffordable.

Subprime loans sped up and burned a class of future homeowners, said Frank Nothaft, chief economist for mortgage finance company Freddie Mac.

"If they had delayed their initial decision to buy, they would have had a higher likelihood of transitioning," he said. "Now they've had a taste of (homeownership) and are back in the tenant pool -- maybe forever."

Besides favorable terms, many borrowers found low, low interest rates irresistible. Mortgage rates on 30-year loans set new records almost every week through early 2003.

"That did pull housing demand from the future into the present," said David Seiders, chief economist with the National Association of Home Builders. "When all that demand supply pressure started to push prices up, the whole thing died under its own weight."

While subprime lenders probably coaxed some consumers into the market prematurely, they also enticed some borrowers who simply were not fit to own a home, said Jack Guttentag, a former finance professor at the Wharton School of the University of Pennsylvania.

"You can look at it from a perspective where you have a pool of potential homeowners for whom the chance of home ownership failure is high," Guttentag said. "Ordinarily, lenders would not accept people who came out of that pool. The subprime lender said 'We will accept these people.'"

While the share of subprime loans grew during the recent housing boom, so did the percentage of young borrowers.

In 1996, 18 percent of homeowners were younger than 25, according to the Census Bureau. In 2006, that share grew to 24.8 percent.

"We knew that we were borrowing forward by bringing in young people at ages that we had not seen in past years," said Jay Brinkmann, an economist with the Mortgage Bankers Association. "We can see a decline in terms of future home buyers because we have brought forward a certain cohort of the age."