Home -> Law Blog Directory -> Law Students Blogs -> Urban Law Journal

Law Students

: Urban Law Journal

Prime Mortgage Defaults Grow Faster than Subprime Defaults

By 3L at Seton Hall University School of Law and Editor-in-Chief of the Law Review.

Defaults in prime mortgages -- loans made to borrowers with relatively high credit ratings -- outpaced delinquencies in subprime loans, as reported by the Economic Times. However, overall delinquency rates for subprime loans remains considerably higher for subprime loans. To wit: "Overall, delinquencies on 2007 prime jumbo loans rose to 3.22 per cent in July, while Alt-A loan delinquencies increased to 14.56 per cent, S&P said. Defaults on subprime loans from last year hit 31.25 per cent."

On a related front, Fannie Mae and Freddie Mac will no longer guarantee subprime loans made in New York. The decision was prompted by a recently enacted state law "that's aimed at helping troubled borrowers but also puts some legal liability on those who buy subprime loans considered to be predatory lending." This withdrawal provides a salient example of barriers to entry into the ranks of the ownership society created by legislation aimed at protecting existing homeowners. As Rachel Godsil and I argue in our forthcoming Fordham Law Review article, barriers to entry are created in a variety of ways, including increases in mortgage rates that reflect shifts in risk allocation in extending mortgages (particularly in response to legislation that alters traditional foreclosure processes). Such legislation protects the most vulnerable existing homeowners (and without means testing, "undeserving" investors) but works to exclude new entrants by erecting barriers to ownership, and creates risks of moral hazard by reducing the risks assumed by investors who gambled on continued upward trends in the housing market.

Full post as published by Urban Law Journal on August 26, 2008 (boomark / email).