Study on Subprime Borrowers Defy Stereotypes

MBA (7/28/2008 ) Palaparty, Vijay
A majority of subprime mortgage borrowers are non-Hispanic whites and upper-income borrowers, according to a study from ComplianceTech, Arlington, Va. The study departs from common portrayal that most subprime borrowers were minorities and low-income individuals.
The report, using the latest available data from 2006, said that though a disproportionate amount of loans made to minorities and low-income borrowers were subprime, a majority of subprime loans were made to whites and upper-income borrowers.

“The demographic impact of the subprime mortgage meltdown has been under-analyzed,” said Maurice Jourdain-Earl, co-founder and managing director of ComplianceTech. “Although it is true that disproportionate shares of minority loans are subprime, it is also true that more subprime rate loans are made to whites. To suggest that the subprime mortgage meltdown and the foreclosure crisis is a minority and low-income problem is tremendously flawed.”

Of 1.9 million subprime loans originated in 2006, white borrowers held 70.82 percent and 56.23 percent of subprime loans with a spread. The report also revealed that upper-income borrowers had the highest share of the subprime loans at 39.37 percent, followed by 27.55 percent for middle-income borrowers and 20.99 percent for moderate-income borrowers.

Jourdain-Earl said the problem with portraying the foreclosure crisis as a minority and low-income issue affects how solutions would be approached.

“If subprime loans were predominately made to black, Hispanic or low-income households, housing policymakers might approach solutions with biases about qualifications of those groups, such as low education, bad credit and low-paying jobs,” Jourdain-Earl said. “There could be a tendency to write-off the subprime lending debacle as a type of affirmative action gone bad. We must acknowledge that the foreclosure crisis affects broader and more demographically diverse segments of society. This politically responsible approach will likely change the tone, climate and context of how solutions are crafted.”

Low-income borrowers had only 149,173—7.57 percent—of 2006 subprime loans. The report also concluded that the majority of subprime loans were originated in predominantly White geographic regions—areas representing less than 30 percent minority.

The report also revealed that single men and single women received the highest share of 2006 subprime loans when compared to joint applicants—64.81 percent of subprime loan borrowers were single. The frequency of subprime loans for males without co-applicants and females without co-applicants was 32.6 percent and 32.21 percent, respectively.

“These presumably single borrowers do not have two income sources to support the mortgage and are single-head of households experiencing trouble making their mortgage payments,” Jourdain-Earl said.

Jourdain-Earl added that more research and media attention is necessary to other causes of the subprime crisis—relating to race and ethnicity. “Issues of steering, weak underwriting, fraud and discrimination have not been aggressively investigated,” he said. “Despite the presence of federal regulation and periodic examinations for Safety and Soundness, Community Reinvestment Act and Fair Lending compliance, efforts to uncover whether subprime loans can be explained by legitimate risk factors will be impaired if they are based on erroneous assumptions about the demographic distribution of subprime loans.”

“To resolve the true issues, the subprime lending meltdown must be addressed as a nationwide problem with aspects that affect Whites as well as minorities, in suburban, rural and urban communities,” Jourdain-Earl said. “Erroneous assumptions about the demographics of subprime rate lending will only lead to poor decisions that result in ineffective solutions.”