A new study shows that African-American and Latino borrowers were much more likely to get subprime loans, even after important underwriting criteria have been taken into account. A few years later, subprime loans are six times more likely to fall into foreclosure. The authors conclude that the short and tragic lifespan of subprime products should compel legislators to draft a CFPA that protects housing wealth, and indirectly, our nation’s economy.
“Foreclosure in the Nation’s Capital: How Unfair and Reckless Lending Undermines Homeownership” gathers loan data from 2004 to 2007 in the Washington, DC metro area. A unique feature of NCRC’s research is that it has linked HMDA data, a common source for many mortgage studies, with loan performance data available through a proprietary set of servicing records.

Foreclosure Trends in Washington, DC. (NeighborhoodinfoDC)
The chart at left shows trends in foreclosures in DC on a quarterly basis. The blue line represents the inventory of foreclosed homes. From a low in 2006, DC now has more foreclosed homes than at any time in the last ten years. Moreover, these numbers may be false positives. It is possible that with a glut of pre-existing REO properties on the market, that lenders have been holding off on starting new foreclosures.
The research used a (ALERT: Data talk ahead!) logistic regression model to identify subprime loans. No one factor made a loan subprime in their definitions. Instead, a set of loan terms, borrower credit, and interest rates were used as independent variables that contributed to a nominal label of prime or subprime.
Key findings include:
- African-Americans and Latinos were 80 and 70 percent more likely, respectively, to get a subprime loan than were white borrowers, after controlling for the credit score, income, loan-to-value, and neighborhood characteristics.
- Mortgages made to African-Americans and Latino borrowers were 20 and 90 percent, respectively, more likely to enter into foreclosure.
- Loans purchased by the GSEs were half as likely to enter foreclosure as those held by private MBS investors.
- The most telling loan terms for gauging subprime: the presence of either a balloon payment (72 percent subprime) or a prepayment penalty (54 percent subprime).
Other data points confound what might be expected. For example, the share of subprime loans was highest in moderate-income (more…)