Subprime borrowers are more middle-of-the-road than lenders and regulators suspect, a recent benchmarking study indicates.
In fact, the average subprime borrower is "middle-income and middle- age," said James C. Weicher, economist at the Hudson Institute, Washington, D.C. "It looks like a cross section of middle America," he said, referring to the borrower pool studied in the institute's Home Equity Lender Leadership Organization survey.
But overall, incomes of subprime borrowers are lower than those of the nation as a whole. More than 75% of subprime borrowers have household incomes of less than $50,000, compared to 64% of all U.S. homeowners.
The study, which includes data from seven of the 16 lenders in Hello, a two-year-old trade group for home equity lenders, and information from the Mortgage Information Corp., a San Francisco research firm, found that about 94% of subprime borrowers pay their loans on time.
This is lower than the 97% national average for prime loans, which are made to borrowers with pristine credit, but substantially higher than the 92% on-time average for government-guaranteed housing, the study found.
In addition, the subprime borrower pool is made up predominantly of single men and middle-aged married couples, the institute found.
"There are not many single women, or elderly people," Mr. Weicher said. These segments of the population are said to be "vulnerable in housing markets," he said, "but they are under-represented in the subprime market."
The subprime mortgage industry has grown phenomenally in recent years. The Hudson survey said that lending by the seven members of Hello who were surveyed grew from $506 million in 1992 to more than $5.175 billion in 1996.
Despite prevailing wisdom that subprime lenders make a killing by foreclosing on borrowers' homes when they default, Mr. Weicher found that lenders lose money on more than 6% of foreclosures and that, in about one- quarter of foreclosures, the lender recovers less than 25% of the loan amount.
"One gets the impression that these lenders foreclose quick and get titles right away," he said. "But I don't see that happening-these lenders lose a substantial amount on their real-estate-owned property," he said.
About 7% of loans to D-quality loans go into foreclosure, the Hudson study found, versus about 1.9% of all A-quality loans.
Mr. Weicher stressed that subprime lending is a "risky business." Such lenders have higher default and delinquency rates than prime lenders, he said, but are compensated for these risks.
Interest rates charged by the Hello members ranged from 11.07% to 16.06%, Hudson found.
