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Subprime lending dropped in '07, but people of color still bear the brunt of it

February 11, 2009

By Jim Campen

This post originally appeared on Caveat Emptor.

Today marks the release of Changing Patterns XV, the fifteenth annual report on mortgage lending in Massachusetts that I’ve prepared for the Massachusetts Community and Banking Council.

Lots of high-cost subprime lenders bit the dust in 2007, so subprime lending fell dramatically that year.  In Massachusetts, there were 5,085 subprime home-purchase loans made, down from 14,639 in 2006.  As a percentage of all home-purchase loans, subprime loans fell from 19% to 8%.

What didn’t change was the intense targeting of these loans to black and Latino borrowers and neighborhoods. 

Among homebuyers in Greater Boston, 22% of all loans to blacks and 20% of all loans to Latinos were subprime, compared to just 5% of all loans to whites.  If you look only at high-income homebuyers, the disparities are even greater: 32% of loans to high-income blacks and 24% of high-income Latinos were subprime, compared to just 4% of loans to high-income whites.  Homebuyers in Mattapan, the Boston neighborhood with the highest percentage of minority residents, were sixteen times more likely (28.9% vs. 1.8%) to receive subprime loans than were those in Back Bay/Beacon Hill, Boston’s whitest neighborhood.

A growing body of research – including this recent report (PDF link) from the Federal Reserve Bank of Boston – confirms that the current foreclosure epidemic is hitting hardest in the neighborhoods targeted by the subprime lenders.

In case it isn’t obvious enough why subprime lending leads to foreclosure, consider the math.  Take a borrower who received an average size subprime mortgage loan in Greater Boston in 2007 and paid the median interest rate for such a loan.  My report shows that this borrower would pay $8,316 more per year in mortgage payments than a borrower who received a typical prime-rate mortgage.

It would be hard for any borrower to pile over $8,000 more per year onto their mortgage bills.  Subprime borrowers, who are supposedly too risky for cheaper prime loans, seem even less likely to be able to shoulder this burden.

My report also shows that the lenders whose local lending was covered by the Community Reinvestment Act (CRA) – essentially, banks with branches in the state – were responsible for only tiny fraction of all subprime lending (they made just 5.7% of the subprime loans in Greater Boston in 2007).

Many on the right have argued that the CRA encouraged irresponsible lending, and was a root cause of the subprime mortgage meltdown.  But the data tell a different story, as was recently confirmed by Fed Chairman Bernanke (PDF link).

In fact, CRA encourages responsible, sustainable mortgage loans to lower-income borrowers and neighborhoods.  The problem is that it covers neither big banks who lend in areas where they don’t have branches, nor mortgage companies that aren’t related to banks.  Extending CRA-type obligations to all mortgage lenders is a key item on the consumer movement’s agenda for reforming the regulation of the financial industry.

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