There's a good side to subprime lending

Economist and commentator Susan Lee

KAI RYSSDAL: Mortgage lenders are sick and tired and they're not gonna take it any more. They want their money back is more to the point. An industry report out today shows foreclosures were up 62 percent in April over the same time a year ago. Largely because borrowers have gotten into trouble with risky and subprime mortgages. More than 147,000 homes were foreclosed on last month. Subprime lenders are going bankrupt and Congress has been holding hearings on predatory lending. But commentator and economist Susan Lee still thinks there's an upside to subprime.


SUSAN LEE: OK, so the subprime mortgage market is plagued with fraud and abuse. But what would the housing market look like without subprimes?

For starters, homeownership wouldn't be at a record high of 69 percent. It would be several percentage points lower.

And those percentage points represent lots of would-be minority buyers — blacks and Latinos who would've been shut out of the market.

Credit is a good thing. It allows people to use the services of something without having to pay for it all at once, up-front.

Credit lets people drive cars, go to college and live in houses. It's axiomatic that an efficient economy runs on a well-functioning credit market.

Until the subprime mortgage market came along, about 17 years ago, home ownership was mostly restricted to the rich and middle class.

It wasn't until financial innovations like variable-rate mortgages and securitization that housing credit was extended to lower-income people.

The problem is that lower-income people are greater credit risks. Their rates of delinquency and foreclosure are higher than richer people's. And they have to pay higher interest rates to compensate lenders for that risk.

And so it's no wonder that as soon as interest rates started climbing and the housing bubble began popping, the subprime market began to totter.

But let's not exaggerate.

So far, fewer than 15 percent of subprime borrowers have been late with their mortgage payments.

And even if 20 percent of subprime mortgages end up in foreclosure, it still leaves the other 80 percent of subprime borrowers cutting their own lawns and, most important, creating wealth in the form of home equity.

Yes, let's clean up the subprime market and help salvage the homes of people suckered by aggressive lending. But let's not forget the subprime market serves poor minorities — and that's a good thing.

RYSSDAL: Economist Susan Lee lives in New York City.

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