Magazine article American Banker

Woes May Last at Low End of Home Lending

Magazine article American Banker

Woes May Last at Low End of Home Lending

Article excerpt

Some economists are warning that the problems of credit quality in low income mortgage lending could prove to be stubbornly persistent.

Falling buying power, coupled with increased consumer debt among households below median income, will inevitably lead to higher mortgage delinquencies, these economists say.

They are adding their voices to those of some major lenders, who have been warning for the past year of rising delinquencies in the lower income brackets.

"A lot of debt has been piled on low-income groups at the same time that their incomes are being constrained, and they are getting loans with high loan-to-value ratios," said Mark Zandi, chief economist at Regional Financial Associates.

"You put it all together, and you have substantially more credit problems for lenders who are focusing on these groups," Mr. Zandi said.

Added Sung Won Sohn, chief economist at Norwest Corp.: "Consumer debt is concentrated in low- and moderate-income households, whose real income has been trending down for some years now." As the economy slows down, he said, these borrowers will find it particularly difficult to make timely mortgage payments.

A mix of regulatory pressure and business opportunism has pushed many lenders into low-income lending in recent years, and they are unlikely to pull back, said Sam Lyons, a senior vice president at Great Western Bank, Chatsworth, Calif.

But concerns about delinquencies could bolster a trend toward extending subprime credit to low-income borrowers, Mr. Lyons said. Such loans are made at higher interest rates, allowing lenders to price for extra risk. But, he noted, they also raise thorny issues of discrimination.

Mr. Zandi's concerns are based on a couple of long-term economic trends.

First, inflation-adjusted incomes of those at the bottom end of the economic ladder have been declining over the past two decades. …

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