Raphael Bostic, professor of real estate and associate director of USC’s Lusk Center for Real Estate, has a simple solution for subprime lending.
He and Xudong An, a former student who is now a professor at the University of San Diego, recently authored a study on Freddie Mac and Fannie Mae.
Fredde and Fannie, often called government sponsored enterprises or GSEs, aren’t allowed to directly buy subprime loans. (They can buy a limited amount of securities that are backed by subprime loans.)
Bostic, however, found that when they were aggressive about buying loans in a certain market, they tended to crowd out subprime lenders. In other words, when the GSEs went after more borrowers on the margin of their credit limitations, they essentially expanded the market of prime borrowers.
That’s a good thing, he says. GSEs play fair with people and their customers avoid paying excessive interest rates and fees.
His conclusion: If the government would allow GSEs to buy subprime loans, they would standardize the industry and borrowers would benefit.
Here’s a clip from his study:
“Moreover, the effects tend to be stronger in neighborhoods with significant minority populations, precisely the neighborhoods where subprime lending has been concentrated and growing the fastest. A rough calculation shows that a ten percent increase in GSE market share could lead to 20,000 borrowers using prime instead of subprime loans, at a cost savings of about $100 million.”