A subprime solution

Published: 2013-09-10

Itzhak Ben-David, Neil Klatskin Chair in Finance & Real Estate, and Associate Professor

Is there a way to safeguard against another housing crisis? Research by Fisher's Itzhak Ben-David suggests that it is possible to limit the damage from future subprime mortgage catastrophes caused by predatory lending.

The study examined a pilot program that sought to identify evidence of predatory lending and the extent to which such lending played a role in the subprime mortgage crisis. Under the program, risky borrowers and/or risky mortgage contracts -- identified through mortgage default rates -- triggered reviews by housing counselors who shared their findings with state regulators.

The study found that the pilot program cut lending market activity in half because of two factors:

  • Lenders specializing in risky loans exited the marketplace
  • The number of potential subprime borrowers was greatly reduced

Ben-David's study suggests that predatory lending practices -- defined as unfair and abusive loan terms or loans that contain terms and conditions that ultimately harm borrowers -- contributed to high mortgage default rates among subprime borrowers, raising the number of defaults by about a third.