Wednesday, October 29, 2008

Foreclosure Rates Comparable Across Incomes

(Housing Wire) A new study, commissioned by the New York-based Local Initiatives Support Corp. and released Wednesday, argues that defaults are more generally tied to the type of loan product than to a borrower’s specific income level — findings that are heating up a vivid political debate over the cause of the financial crisis, and, in particular, the role of the GSEs in driving the current mortgage mess.

“Delinquency and foreclosure rates for subprime borrowers were comparable across communities of all income levels,” said Michael Rubinger, LISC president and CEO. “This reinforces what years of experience have already told us: Low-income residents are not, by definition, poor credit risks. Unsuitable mortgage products are.”

Looking at delinquency and foreclosure rates from McDash Analytics, researchers at LISC compared localized data from March 2007 and March 2008; they found that default rates for all loan types rose significantly over that 12-month period, with subprime defaults vastly outstripping prime defaults — not surprising at all, given that credit risk by definition should predict credit risk.

But among subprime borrowers, LISC also found that income level had little correlation to foreclosure rates: in other words, subprime borrowers in more prosperous communities defaulted at nearly the same rate by March 2008 as those that defaulted in impoverished areas.

Interestingly, as well, only one-third of subprime mortgage loans were made in communities with high rates of poverty, according to the data. “It is difficult to point to low-income communities and the homeowners who live there as the foundation for this crisis when most of the loans driving it were made in other places,” Rubinger said.

The study’s results are particularly important as the country considers the value of the Community Reinvestment Act, which for more than three decades has required banks to lend and invest in the places where they take deposits, including low- and moderate-income communities. CRA has come under fire from critics recently — particularly in the GOP — who have regularly cited the act as a key cause of the global economic meltdown.

“Through CRA, banks were strong-armed to make risky loans and threatened with fines of up to $500,000 per violation if they didn’t reach government quotas,” wrote Mark Hillman, a Republican and former majority leader in the Colorado state Senate, in a recent op-ed from earlier this week. “Banks were encouraged to hire ‘community groups,’ like ACORN, to find ‘qualified’ borrowers.”

A handful of Republican lawmakers last week sent a letter to the U.S. attorney general, as well, asking for an investigation into Fannie Mae and Freddie Mac and blaming in part “overzealous lending under the auspices of the Community Reinvestment Act.” Read the letter here, courtesy of U.S. News & World Report.

LISC’s Rubinger said the study’s results, which show a lack of income distribution among subprime borrower defaults, throw such claims into question.

“This crisis has not been driven by efforts to help qualified families of more limited means become homeowners,” Rubinger said. “It instead reflects the decisions some financial institutions made to maximize gains at the expense of sensible risk management. The numbers bear this out. This is about lending practices, not about poor people and communities.”

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