Subprime Mortgage Loans Attacked

The Department of Housing and Urban Development (HUD) has released a study purporting to show predatory lending to minority and low-income borrowers. In response to this study, HUD Secretary, Andrew Cuomo has announced that he will co-chair with Treasury Secretary Lawrence Summers a task force including community and mortgage groups to study the issue and propose new regulations during this year. 

The six-page study (plus exhibits) prompting these concerns is titled “Unequal Burden: Income and Racial Disparities in Subprime Lending in America,” April 2000.

The study is based on an analysis “of almost one million mortgages reported nationally in calendar year 1998 under the Home Mortgage Disclosure Act (HMDA).” About 80,000, or about eight percent, of these loans were defined as “subprime.” Eighty percent of these loans (about 6.4 percent of the total sample) were home refinancing loans. 

The report does not provide a precise definition of a subprime loan, but observes, “Subprime lending involves providing credit to borrowers with past credit problems, often at a higher cost or less favorable terms than loans available in the conventional prime market.” And, since these borrowers do not meet the credit standards of the prime market, “subprime lending can and does serve a critical role in the Nation’s economy.” 

The authors’ basic findings are as follows:

1.      From 1993 to 1998, the number of subprime refinancing loans increased ten-fold.

2.      Subprime loans are three times more likely in low-income neighborhoods than in high-income neighborhoods.

3.      Subprime loans are five times more likely in black neighborhoods than in white neighborhoods.

4.      Homeowners in high-income black neighborhoods are twice as likely as homeowners in low-income white neighborhoods to have subprime loans. 

Since the HMDA data do not show whether the borrowers have “blemishes in their credit records, insufficient credit history or non-traditional credit sources,” the authors of Unequal Burdens face an insurmountable burden in proving that race influences the frequency of subprime loans.  For example, “While subprime refinance mortgages accounted for one-tenth of the refinance mortgages in predominately white neighborhoods in 1998, in predominately black neighborhoods, half of the refinance mortgages were subprime.” The basic issue is how much of the difference between rates of subprime lending is explained by the credit information that is unavailable in the HMDA data.