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Study Critical of Subprime Research

A recent study on the subprime mortgage market argues that despite the existence of predatory lending practices, malpractice allegations against an industry that nonetheless has helped increase homeownership rates among minority, low-income and credit-impaired borrowers nationwide, appear to have resulted from misguided research.

"Assessing the Subprime Mortgage Market" report responds negatively to these four questions:

* Do homeowners with good credit get steered to the subprime market?

* Does the subprime market seek out unqualified borrowers with poor credit records?

* Does the subprime market discriminate against minority homeowners?

* Are delinquencies and foreclosures in the subprime market disproportional to risk?

The report was commissioned by the Coalition for Fair and Affordable Lending, an advocate of uniform fair legislative nonprime lending standards nationwide, primarily to evaluate the industry in general, and the accuracy of the four most common malpractice allegations against subprime lenders in particular.

Andrew Lyon, associate professor at the University of Maryland and the leading author of the study, told MSN existing research data from various sources including Freddie Mac, Association of Community Organizations for Reform Now and the National Community Reinvestment Coalition, have contributed to the widespread belief that due to subprime lenders, individuals whose credit score is good enough to qualify them for less costly prime rate credit end up receiving subprime loans, poor credit clients who should be denied credit are also given subprime loans, and that minority borrowers disproportionately receive subprime loans.

The report provides an insight on "what is really going on in the subprime market," based on multiple data sources and studies conducted by a range of agencies, organizations and customer groups, he said, showing that "these allegations are totally refuted by data in all cases."

According to Mr. Lyon, one of the oldest allegations and "an urban legend" is a 1996 Freddie Mac document stating that between 10%-35% of subprime borrowers could have qualified for a conventional loan, while "another survey claimed that up to 50% of the subprime borrowers" could have qualified for prime loans.

He finds it a matter of data interpretation as these surveys "did not intend to separate prime and subprime loans," leaving it to the lender to decide when a loan is an "A" quality loan. But "lenders themselves say these loans would not qualify with any of the government agencies because they may contain minor credit blemishes," such as two late payments on a mortgage for instance, which eliminate the borrower from the prime 'A' category," he argued, which is why "that type of survey is not to be leaned on for evidence." Among other studies referred to in the CFAL report is a 2003 Office of the Comptroller of the Currency survey that analyzed credit score data on subprime borrowers more current than the data analyzed by Freddie Mac, which "doesn't necessarily refute the Freddie Mac data," he said.

Consequently, what looks like a discrepancy between these studies may also indicate how data have developed and changed over time.

Mr. Lyon pointed to a few reasons behind the data change. It may be due to increased competition between and within prime and subprime markets, and because the profile of the borrower in each niche market has changed leaving less variation between prime and subprime.

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