The map to the right shows the overwhelming majority of subprime loans and foreclosures in New York City have been in minority neighborhoods. (Created by NEDAP via NY Times) The map tells an often-overlooked fact: the subprime crisis has hit minority neighborhoods harder than white ones.
The banking industry sometimes claims the differences in lending between whites and blacks and Hispanics are due to differences in credit and income. Although income plays a role, last year the New York Times reported that after controlling for the size of the loan and income of the borrower, blacks were 2.3 times more likely and Hispanics two times more likely than whites to have a high-cost loan. They cite the example of two neighborhoods in Detroit, both with median incomes around $50,000 — 70% of loans in the black neighborhood had high interest rates, while only 17% did in the white neighborhood.
Another study found that homeowners in upper income black neighborhoods (income above 120% AMI) were twice as likely to have subprime loans as homeowners in low-income (income below 80% AMI) white neighborhoods. Almost 40% of the loans in the affluent black neighborhood were subprime, versus 18% in the low income white neighborhood.
One article (PDF) thinks it is precisely that statistic that suggests something more – whether discrimination or a simple lack of prime lenders — is to blame:
The finding that upper income African-American borrowers rely more heavily on the subprime market than low-income White borrowers suggests that a portion of subprime lending is occurring with borrowers whose credit would qualify them for lower cost conventional prime loans. There is also evidence that the higher interest rates charged by subprime lenders cannot be fully explained solely as a function of the additional risks they bear. Thus, a greater presence by mainstream lenders could possibly reduce the high up-front fees and interest rates currently being paid by residents of low-income and minority neighborhoods.
The Times speculates in addition to a lack of prime lenders, other reasons could include aggressive sales in minority neighborhoods, less financial saavy, and lower net worth of minority lenders. Regardless, the stark numbers show that while the worst redlining may be behind us, the problem of equitable housing finance for urban neighborhoods still eludes us.
> NYTimes: What’s Behind the Race Gap?
> W. Post: Subprime Mortgages and Race
> HUD: Subprime Market Growth and Predatory Lending (PDF)
Is it possible that sub-prime lenders were more aggressive in recruiting African-American brokers and originators? The result might be this hypothetical: “The nice young lady from the church suggested that I could borrow ____ thousand at 1%.” The person then borrows against the house (which had substantial equity) to pay for some furniture, a nice vacation for the first time in a long life of working, or to help younger family members with their own bills and to get a start on life.
The nice young lady would in this hypothetical be an independent broker, or working as an originator for a larger lender. She might even be simply an earnest striver, who didn’t realize that the 1% figure was simply a teaser rate and that there would be a swinging payment reset if the borrower kept paying the minimum for a number of years. A prevalence of African-Americans brokers and originators in the sub-prime markets (as opposed to, say, Chase, Citi, Wells Fargo) would also explain why upper-income African-Americans were getting these awful loans.
I am a real estate broker. The first transaction I was involved with showed how the sub-prime product is supposed to work. The buyer had a good civil service job and was looking to buy a place in a decent area. She had been taking care of an elderly lady who lived in one side a two-family home, in return for living in the other side for a much reduced rent. The owner was now moving into an assisted living community and selling the two-family house. Unfortunately, the buyer’s credit was not the best. The terms of the sub-prime loan reflected the credit.
In this case, the good news was that by diligently making the payments for two years, the person was able to develop a good enough credit history to be able to qualify for a more normal loan. She also had her own lawyer (provided through her union) who emphasized the absolute need to refinance the sub-prime loan in two years. I think having good, independent legal representation (as opposed to relying on the lender’s own lawyers, as so many people do not knowing better) was the fundamental difference between this story and the sad situations that have been happening.