Real Property Issues

The Federal Reserve Bank of Boston published a research paper regarding the foreclosure crisis and credit crunch in the United States. The report differentiates between borrowers who used subprime mortgages to finance an initial housing purchase and those who used subprimes to refinance pre-existing mortgages. Data was analyzed over the period from 1989-2007.

Key Findings:

Negative house price appreciation is the main determinant of foreclosures.  Borrowers who financed a purchase with a subprime morgage in 1998 benefited from the states historic run-up in house prices through 2005. Subprime borrowers who took out purchase loans in 2005 were disproportionately vulnerable to declining property values and hence to default.

Much of the dramatic rise in Massachusetts foreclosures during 2006 and 2007 is attributable to a decline in house price appreciation that began in mid-2005. Approximately 30% of foreclosures that took place in 2006 and 2007 were traced to borrowers who used a subprime mortgage to purchase their house, up from 10% in 2003 and 2004. However, almost 44% of the 2006-2007 foreclosures were tied to borrowers whose most recent mortgage was issured by a subprime lender; of this group, almost 60% had initially financed their residential purchase with a mortgage from a prime lender. The subprime mortgage market has played an important role in the foreclosure crisis by creating a class of homeowners who were vulnerable to declining house prices. As a group they had higher LTV ratios and thus a smaller financial cushion against negative appreciation.