The once red hot housing market has been cooling down over the last year and half. The Housing sector indicators such as new housing starts, unsold homes inventory, median prices of new and existing homes, all present a mixed picture. And over the last several months, the running subtext has been that of rising number of deliquencies, foreclosures and the associated rise in bankrupticies declared by subprime lenders. Since late last year more than 90 subprime lenders have gone bankrupt and millions of borrowers have lost their homes. So how did this happen? To get a little insight one has to go a few years back in time to early 1990s when the subprime sector began.

The subprime lending sector was one of the most innovative in terms of offering mortgage products and in evaluating risk to lenders as well as creditworthiness of buyers. It quickly gained popularity among those who could not afford a large down payment and/or whose not-so-stellar credit ratings would disqualify them from ever getting mortgage loans. Those who could not dream of owning a home, were buying houses with the help of subprime loans. Many of these loan products with exotic names such as Adjustable Rate Mortgage (ARM of 3 or 5 or 7 years), Balloon Mortgage, Capped and Collar mortgage, Discount Rate mortgage, Cash back mortgage etc., had one thing in common. These loans essentially amounted to luring those with low income and risky credit to own a property they could barely afford.

The historically low interest rates and all these subprime lending schemes led to higher demand for housing, which in turn drove the prices of new and existing homes through the roof. Those with homes suddenly found that their homes were worth a lot more, giving them an inflated home equity, which in turn allowed them to refinance their properties with risky adjustable interest rates. Since everybody was involved in this, taking (undue) risk seemed to be the mantra of the day. It appears that one of the former Reserve Board members did suggest crackdown on subprime lenders, the unofficial suggestion was all but ignored. Any way, that suugestion is some what peripheral to the problem with the subprime lending, because none of this would work if there were no willing customers who bought into the idea of ever increasing home values that would help them tide over any future problems and lenders who seemed to tap into unlimited funds pouring in from the investors who were awash with money, mainly due to very low interest rates and comforted by their dealings in the securitized mortage financing. Many home owners treated their homes as their personal ATMs by refinancing their homes multiple times, adding to their already high volume mortgage debts. Its estimated that, from 1991 to 2005, extraction from refinancing of home equity pumped in an additional $1.5 trillion into the U.S economy in the form of personal consumer spending. This certainly helped the economy but at the personal level it pushed many under the rising mountain of debt.

What happens when "borrowing beyond your means" can't last forever. With rising interest rates and initial low payment periods ending for ARMs and other exotic home mortgages, many home owners are now facing the reality of their monthly mortgage payments go through the roof. And when they cant afford to pay the monthly mortages, the Subprime lenders see their revenues vanish. This in turn causes worried investors to stop funneling funds to subprime lenders. For the subprime lenders with huge number of bad loans, no revenues and no investors backing, the only option left is to declare bankruptcy. As the home credit markets have tightened and lending practices have became more strict, there are fewer home buyers, which in turn has increased the inventories of unsold homes. All of these factors have contributed to the current downturn in housing sector. Its too early to say whether there are more bad loans out there that could affect the markets to greater degree and whether it could take toll on the U.S. economy. We may be witnessing the beginnings of an apparent meltdown in subprime sector.

We at FortiusOne decided to explore the spatial extent of the subprime markets. Below is a heat map that shows at census tract level borrowers of the now bankrupt subprime lender (New Century Financial ). The data is based on loan reports submitted by lender to Federal Reserve under the HMDA (Home Mortage Disclosure Act).

The map shows rate spread by census tract. Technically the rate spread is the difference between the mortgage interest rate charged to a borrower and the yield on annual treasury security. In layman's terms, subprime lender will set higher spread rates for higher risk loans. The data in this map shows average APRs range from a low of 8.75 (3.5 rate spread in Zipcode 49095, MI) for the so called less risky loans to as high as 14.75 (rate spread of 9.5 in San Antonio, TX) for high risk loans. Further analysis of the data at census tract level reveals that high APR loans were located in the ensus tracts that had high percentage of minorities and high values for the loan to income ratios. If you wish to further explore subprime space, please visit the Geocommons website and do a search using key words Subprime or Foreclosures

Explore a slice of the subprime lending market by panning and zooming in to different geographic locations in the U.S.

Who do you think is responsible for the current higher rates of deliquencies and foreclosures: The Feds for not cracking down on excesses commited by subprime lenders, the greedy/risky borrowers or the unscrupulous subprime lenders. If you wish you could voice your opinion below.

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