September, 2008

Mercatus on Policy: Subprime Lending

  • Todd Zywicki

    George Mason University Foundation Professor of Law, Antonin Scalia Law School, George Mason University
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When the American housing bubble almost audibly popped several months ago, the arcane terms of subprime loans became front-page news. As foreclosures rise, the collapse of the subprime market has generated calls for reform from Congress to the campaign trail. Foreclosures have risen dramatically, and there is little doubt that the excesses of recent years were marked by fraud and recklessness by borrowers and lenders. But this crisis calls for sensible regulation, not demonization. The growth of subprime lending has had both benefits and costs, not only to private homeowners, but to neighborhoods and communities. Subprime lending has raised home ownership rates, especially among the lowest-income Americans, and has contributed to stronger neighborhoods and the happiness of homeowners and their families. At the same time, default rates for these riskier borrowers have risen in recent years, resulting in higher foreclosure rates and adverse neighborhood impacts. Sensible regulation of subprime lending should seek to curb abusive practices while preserving this important tool for economic mobility.