Study Claims Subprime Lending Significantly Benefits Maine Economy

Subprime mortgage lending makes an enormous contribution to Maine’s economy each year and recent claims that abusive lending is rife in the state have no basis in fact, according to a study released today by the New England Financial Services Association (NEFSA). The study, which was conducted by the Center for Statistical Research, shows subprime mortgage lending provides 2 billion dollars of consumer spending power each year, equivalent to 4% of Maine’s Gross Domestic Product (GDP). This has a significant positive impact on the economy and on jobs available in the state, particularly in the construction, manufacturing and retail sectors. The study shows that in 2004, the amount of money lent in Maine through mortgages with APR’s above the HMDA reporting thresholds was 38.9% of the construction sector’s GDP, 18.8% of the manufacturing sector’s GDP, and 22.9% of the retail sector’s GDP.

The new study also analyzed the findings of a previous report on lending practices in Maine, commissioned by the Center for Responsible lending (CRL), a North Carolina-based advocacy group. It found that the CRL report failed to offer convincing empirical evidence that abusive lending practices are widespread in Maine and that the course of regulatory action being advocated by the CRL would likely reduce the amount of mortgage credit available to Maine residents by $200-400 million per year, significantly impacting the state’s economy.

The new study cites a number of specific examples of inadequate research and questionable findings in the CRL report, including:

• a section that attempts to assess how many Maine subprime borrowers “should” have qualified for a prime loan, based on an inadequate analysis of only three criteria;

• a failure to control against bias when canvassing the opinions of Maine residents as to whether or not they think ‘predatory practices’ are occurring;

• a sweeping assessment of the state of foreclosures in Maine based on an inadequate sample of 339 foreclosures dating back as far as 1999, only a quarter of which the study itself deemed to be potentially predatory.

George Wallace, Executive Director of the Center for Statistical Research, was the principal researcher for the new study. He said, “The study looked closely at claims from consumer advocates that abusive lending practices persist in Maine, and explores the Maine mortgage market to gauge the economic effect of subprime lending in the state and whether subprime loans are appropriately priced. The empirical evidence would suggest that the economic importance of the subprime marketing has been underestimated, while abuses have been overstated.”

James Demers, President of NEFSA, whose members commissioned the study, said, “It is important that we have a clear picture of the reality of the situation in Maine if we are to make sensible decisions about what is good for the state. Our study clearly shows that the situation is far different from that portrayed by the CRL, and that their recent calls for new, more stringent regulations are not in the best interest of Maine residents. Maintaining wide access to credit is essential for Maine’s economic health.”

In addition to various public databases, the study utilized the AFSA Database of Subprime Loans, an enriched data collection that includes all of the creditworthiness characteristics of the loans reported by eight major subprime mortgage loan originators.