The American Financial Services Association (AFSA) released a study on Tuesday saying over-regulation in the mortgage market could have the unattended effect of hurting subprime borrowers, rather than saving them from foreclosure.
The study, which was conducted by the Center for Statistical Research (CSR), concluded that excessive mortgage regulations “deny credit not only to those who would actually experience a foreclosure, but also to the whole class of borrowers in a particular risk category — the vast majority of whom could otherwise use the credit successfully.”
To prove the dangers of excessive regulation, CSR developed equations to determine the effects of credit reductions by using 2005-2006 levels. For instance, CSR says if a 10-percent or 20-percent credit reduction went into effect against 2005-2006 lending levels, the country would see 580,000 borrowers (under the 10-percent equation) and 1.1 million borrowers (under the 20-percent equation) lose access to a loan.

CSR’s study also examines the fallout in subprime loans and found that based on historical levels “current rates of foreclosures, including those for subprime loans, fall within the range of historical fluctuations recorded since 1998.”
CSR added that foreclosures in subprime are “mirrored” by an increase of foreclosures in prime loans and other types of loans, which essentially means “economic conditions” rather than loan type are playing a role in rising defaults, according to the study.
George Wallace, executive director of the CSR and principal author of the study, said, “We have seen many reports in the press that our country is headed for a foreclosure disaster, but the empirical evidence on actual foreclosure levels existing today does not support this. Foreclosures are trending upward, but so far they are within historical ranges.”
Wallace added that, “We are beginning a period of contraction and adjustment in the prime and subprime mortgage markets that, if prior history is any guide, will permit investors, borrowers and lenders to work their way through current rising delinquency pressures. There is a real danger that a shift in mortgage lending policy now could exacerbate the effect this contraction has on the availability of credit, leaving huge numbers of Americans out in the cold.”