Contact:  Geoff Smith, Project Director
(312) 427-8070

Woodstock Institute Releases Reinvestment Alert 28:  New Mortgage Pricing Data Sheds Light on Subprime Mortgage Market

– A Woodstock Institute analysis of new federal mortgage lending data
confirms that high cost subprime mortgage lending tends to be
concentrated in minority communities and to African-American and
Hispanic borrowers––costing borrowers tens of thousands more in
interest and fees.  

“Although responsible
subprime lending can be credited with expanding access to mortgage
finance in previously underserved markets, it is clear that there are
many African-American and Hispanic borrowers in the Chicago area who
qualify for low-cost prime loans who instead receive high cost subprime
mortgages,” says Geoff Smith, Project Director for Woodstock Institute.
“This can cost borrowers tens to hundreds of thousands of dollars more
over the life of a loan.”
Last week, Elliot
Spitzer, the New York state attorney general, requested pricing data
for as many as ten of the largest financial institutions operating in
New York state.  The Wall Street Journal indicated that it may
indicate an investigation into the general lending practices of major
financial institutions.

The new data allow for detailed
analysis of all Chicago area lenders who make subprime loans including
banks, thrifts, and mortgage companies previously classified as “prime”
lenders.  Although the complete 2004 HMDA dataset will not be
available until late summer 2005, Woodstock Institute has obtained 2004
HMDA data from most of the Chicago area’s top 20 mortgage lenders and
their affiliates.

An analysis of conventional single-family mortgage lending for the Chicago six-county area made by these lenders shows:

African-American and Hispanic borrowers were more likely to receive subprime loans regardless of income
In the Chicago region, less than 15 percent of conventional mortgages
were subprime (Table 1). However, over 36 percent of African-American
borrowers received subprime loans and more than 20 percent of Hispanic
borrowers received subprime loans. Middle- and upper-income
African-American and Hispanic borrowers were even more likely to
receive subprime loans than whites of all income levels. Upper-income
African-American borrowers were nearly four times more likely to
receive a subprime loan than upper-income white borrowers, and
upper-income Hispanics were over twice as likely to get a subprime loan
as upper-income whites.

Subprime loans are concentrated in minority census tracts.
Nearly 31 percent of the Chicago area’s subprime loans were in census
tracts with populations 80 percent or greater minority (Chart 1).
Conversely, only 10 percent of the area’s prime loans were in these
tracts. Over 46 percent of the area’s subprime loans were in census
tracts 50 percent or greater minority, while only 23 percent of the
area’s prime loans were in these tracts.

Middle-income, minority census were the most likely to receive subprime loans.   
Thirty-eight percent of loans to middle-income census tracts that are
80 percent or greater minority were subprime (Table 2). This was the
highest subprime lending share in any type of census tract. Overall,
roughly 16 percent of loans in middle-income census tracts were
subprime and just over 34 percent of loans in highly minority census
tracts were subprime.  In tracts between 80 and 50 percent
minority, middle-income areas also had the highest share of subprime
loans, nearly 20 percent. Middle- and upper-income minority communities
consistently have a higher share of subprime loans than non-minority,
middle- and upper-income areas. 

About the New Data

in 2004, lenders are required to report the spread (or difference)
between a loan’s annual percentage rate (APR) and the U.S. Treasury
rate for securities of comparable maturities if that spread is equal to
or greater than 3 percentage points for first lien mortgages or equal
to or greater than 5 percentage points for junior lien mortgages. For
the purposes of this report, any loan where an APR spread was reported
was classified as “subprime” and any loan for which the spread was not
reported was classified as “prime.” 

In 2003, the
lenders included in this report made over 50 percent of Chicago area
single-family loans.  The dataset includes over 240,000
conventional mortgages on single-family properties. 

Institute, founded in 1973, is a nationally-recognized resource on
credit and capital needs of low-income and minority communities. The
Institute engages in applied research, policy development, and
technical assistance to promote community economic development.

The full version of the report is available for download:

icon Reinvestment Alert 28 – New Mortgage Pricing Data Sheds Light on Subprime Market