Unique Original Articles » High-Risk mortgages are actually needed argues economist

In recent years Texas and Real Estate have become synonymous. The Lone Star State is almost unique in that it has enjoyed some of the most sustained growth in Real Estate in the country and has seen some of the most sustainable rise in prices making it both the perfect vehicle for Real Estate investment and the litmus test used by analysts to gauge the health of the country.

Even in Texas, however, sub-prime mortgage defaulting and sub-prime mortgage woes have began to make themselves felt, so much so that many have called for the banning of sub-prime mortgages.

In recent years Texas and Real Estate have become synonymous. The Lone Star State is almost unique in that it has enjoyed some of the most sustained growth in Real Estate in the country and has seen some of the most sustainable rise in prices making it both the perfect vehicle for Real Estate investment and the litmus test used by analysts to gauge the health of the country.

Even in Texas, however, sub-prime mortgage defaulting and sub-prime mortgage woes have began to make themselves felt, so much so that many have called for the banning of sub-prime mortgages.

Texas has always been controversial and Texans are never afraid to speak their mind and this is no exception for Dr James Gaines of the Real Estate Center at Texas A & M University. Dr Gaines? argument goes that sub-prime mortgages, by being available to those who would not normally qualify for ?normal? credit actually enabled the spread of home ownership to social groups which might otherwise have never experienced it.

?The private sector found a way to make loans to low-credit, previously unfinanceable households so that they could own homes,? Gaines said. ?While this effort was spurred by profit, not altruism, the effect on homeownership throughout the country was nevertheless profound.?

In fact, substantially reduced mortgage interest rates and relaxed lending standards caused U.S. homeownership to increase from 64 percent in 1995 to more than 69 percent in 2006, an unprecedented jump.

Since 1998, subprime loans have increased from less than 2 percent to more than 14 percent of the total market, and they are estimated to make up 25 percent or more of all mortgage loans originated since 2003.

Gaines does not doubt that sub-prime mortgages were oversold and in many cases were sold in a misrepresentative, predatory and even fraudulent way which is now the underlying cause of so many of the issues raised by the wobbly sub-prime mortgage sector of the market. This however does not mean that sub-prime mortgages did not serve a vital role and were not instrumental in actually achieving a widespread social change which many other well-meaning, government-led initiatives had patently failed to address with anywhere near the same degree of success.

Gaines suggests regulating the mortgage market a little better might be a solution out of the current predicament: ?It is imperative that the residential mortgage market operate efficiently and with clear, defined limits,? he said. ?The penalty for exceeding or disregarding the limits should be severe.?

Given time, and with better-informed homebuyers, Gaines says illegal practices should cease, opening the door for sound subprime lending practices to expand homeownership to millions of people in the future.

?We need to retain this type of loan to foster homeownership, especially among working-class households,? he said.


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