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: Urban Law Journal

The Housing Bubble -- Part 1 of 3

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

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The Washington Post recently opened a three part series on the mortgage crisis and housing bubble. Part One opens with a Gatsby-esque soiree of housing industry barons. The article then takes a more thoughtful turn to the historical underpinnings of the modern mortgage market. In describing some of the unique trends of the current crisis, the article explains:

There was something very new about this particular housing boom. Much of it was driven by loans made to a new category of borrowers -- those with little savings, modest income or checkered credit histories. Such people did not qualify for the best interest rates; the riskiest of these borrowers were known as "subprime." With interest rates falling nationwide, most subprime loans gave borrowers a low "teaser" rate for the first two or three years, with the monthly payments ballooning after that.

Expanding homeownership opportunities for borrowers who have been traditionally excluded from the ownership society is long over due (currently, the racial gap in home ownership rates is at an all time low). Some of the disparity in home ownership rates across races can be attributed directly to post-WWII federal lending policies. However, the racial disparity in ownership rates are also a product of current lending practices -- a recent study by Thomas Shapiro revealed that African Americans are rejected for home mortgages at a sixty percent higher rate than equally creditworthy whites. Broadening access to the ownership society has a host of salutary benefits -- both for homeowners individually and the communities in which they live.

However, the recent lending frenzy also produced unethical practices that often steered certain borrowers (Blacks and Latinos, in particular) into unnecessarily high costs loans. A recent study revealed that nearly fifty percent of home loans given to Blacks and slightly more than forty percent of those given to Latinos in 2006 were subprime -- with some localized data revealing even higher concentrations of high cost, subprime loans. Again, this data reveals that equally credit worthy whites in those same areas are less likely to receive subprime loans.

The "ballooning" payments described in the excerpt above are very real -- particularly over the life of a mortgage (assuming a borrower can afford the mortgage for the entire term). For example, the total cost (principal + interest) of $200,000 loan, fixed for 30 years at an interest rate of 6% is $385,341. If a homeowner borrows that same $200,000 through a 5/1 adjustable rate mortgage (ARM), beginning at an interest rate of 6.375%, the total cost would be $535,608. A three-year interest only ARM, beginning at an interest rate of 6.5% costs the borrower $575,491 over the life of the loan.

* Photo courtesy of the Washington Post.

** Much of the analysis above comes from Protecting Status: The Mortgage Crisis, Eminent Domain, and the Ethic of Homeownership, co-authored with Rachel Godsil (forthcoming in the Fordham Law Review).

Full post as published by Urban Law Journal on June 17, 2008 (boomark / email).