SEPTEMBER 2004

Subprime Mortgage Lending Growing Rapidly

The pace of mortgage loan originations may have slowed in the prime market due to rising interest rates, but the subprime market roared ahead during the first six months of 2004. According to estimates published in the industry newsletter Inside Mortgage Finance (Bethesda, MD), overall originations in the 1-4 family residential mortgage market fell by about 30 percent ($800 billion) on a year-to-date basis through June 30, 2004. But, subprime originations were actually up 87.1 percent during the same period. Subprime originations during the first six months of this year totaled $252.6 billion, the highest six-month total ever recorded for the subprime market. Consequently, the share of total residential mortgage originations for the period accounted for by subprime lenders grew to 18.2 percent, the highest share since 1997.

Inside Mortgage Finance offers several possible reasons for the stronger growth in the subprime segment of the market. First and foremost, the rise in interest rates that signaled a slowdown in refinancings in the prime market had much less impact on subprime borrowers. In addition, a wider range of subprime loan products gained traction in the market, such as adjustable rate mortgages and interest-only loans, both of which were designed for marginal borrowers to ease the impact on affordability of rising housing prices. Securitization has also played a very supportive role. About 60 percent of subprime loans originated during the first half of 2004 are in securitized pools.