Subprime mortgages did not open the door to more homeowners, contrary to widespread popular belief, according to a just-released analysis from the Federal Reserve Bank of St. Louis.
Between 2001 and 2006 the number of terminated subprime mortgage loans exceeded the number of first-time home buyers seeking to obtain subprime mortgages.
The study was conducted by Yuliya Demyanyk, a senior research economist formerly with the St. Louis Federal Reserve Bank and currently at the Federal Reserve Bank of Cleveland.
Demyanyk's study revealed that nearly 50 percent of the subprime loans granted during the 2001 to 2006 period were prepaid or defaulted on in two years or less, with some 80 percent prepaying or defaulting within three years.
"The extent of their [subprime mortgages] risk...was hidden by the rapid appreciation in house prices, allowing termination of the mortgage by refinancing or prepayment," Demyanyk said, quoted by National Mortgage News Online.
"When prepayment became costly — with zero or negative equity in the house increasing the closing costs of refinancing — defaults took their place."
Subprime mortgage defaults and housing foreclosures continue, meanwhile, spreading now to once-credit worthy homeowners who lost their jobs in the ongoing downward economic spiral.
What’s more, now one in five homeowners in underwater on their loan, subprime or not, meaning the value of the home is lower than the mortgage debt owed to bank.
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