Subprime Mortgages and Race: A Bit of Good News May Be Illusory

Subprime mortgages have been linked to a meltdown in housing and questionable Wall Street practices, and they may have been the original domino that set off America's current economic crisis.

But the loans -- typically made to people with poor credit -- have long been hailed for one reason: They were thought to be a powerful way to increase homeownership rates among minorities, and to provide a mechanism to undo the "redlining" policies of past decades, in which some banks refused to extend loans in predominantly minority neighborhoods, even to applicants with good credit.

Intersecting lines of new sociological evidence, however, suggest that this silver lining may have actually been a part of the cloud: There is growing evidence that the subprime mortgage industry may have both benefited from and contributed to racial segregation in the United States.

The financial industry has strenuously argued that subprime loans were given to people with low incomes and poor credit -- regardless of race.

George Washington University sociologist Gregory D. Squires, however, has been looking at rates of subprime loans issued in about 350 U.S. metropolitan areas. Squires's preliminary findings show that subprime loans were indeed more likely to be issued to people with poor credit and those with limited incomes -- no surprise there. But when Squires holds income and credit factors constant in his analysis, he finds that subprime loans were more likely to be concentrated in areas with higher levels of racial segregation.

"We see these loans heavily concentrated in poor neighborhoods and targeted to minority neighborhoods," he said. "There is some evidence that these neighborhoods were actually targeted -- that lenders have gone after people whom they think are less sophisticated borrowers, including single women and the elderly."

"Credit rating and income would and does explain some of the patterns," Squires added. "But when you control for those, segregation is also a factor. . . . In those metro areas where segregation is highest, the share of loans that are subprime goes up."

The city of Baltimore recently decided to sue a bank over subprime lending practices and race issues. In a lawsuit filed in U.S. District Court, the city argued that it was facing an "unprecedented crisis of residential mortgage foreclosures" and argued that Wells Fargo, a prominent mortgage lender, ought to bear some responsibility for the growing numbers of defaults.

"In contrast to 'redlining,' which involves denying prime credit to specific geographic areas because of the racial or ethnic composition of the area, reverse redlining involves the targeting of an area for the marketing of deceptive, predatory or otherwise unfair lending practices because of the race or ethnicity of the area's residents" the city charged in its complaint.

In 2005 and 2006, according to the complaint and Brad Blower, a lawyer at the firm Relman & Dane that is representing the city, two-thirds of Wells Fargo's foreclosures in Baltimore were in areas that were more than 60 percent African American, whereas only 15.6 percent of the foreclosures were in areas that were less than 20 percent African American.

Wells Fargo rejects the charges and has said racial factors played no role in its lending. If larger numbers of subprime loans were issued in some neighborhoods, in other words, it was only because those neighborhoods tended to have poorer people with weak credit. Individual issues -- not racial patterns -- explains why some people defaulted while others did not, the company argued.

Disparities in lending by race, however, have been striking in many parts of the country: In New York City, for example, an analysis by the Furman Center for Real Estate and Urban Policy found that around 40 percent of subprime loans issued between 2004 and 2006 were made to blacks, and an additional third of such loans were given to Hispanics. Whites, by contrast, received around 10 percent of such loans, as did Asians.

In a rigorous national analysis based on data collected in the 1990s, researchers Carolyn Bond and Richard Williams found the same phenomenon nationwide. But in addition to demonstrating large racial disparities in who got such loans, Bond and Williams also found the loans -- far from reversing racial segregation -- may have actually contributed to increased levels of segregation in the United States.

"By 1999 the proportion of black borrowers receiving loans from subprime lenders was six times what it was in 1992," the researchers wrote in a paper they published in the journal Social Forces.

While the cheap loans did increase black homeownership rates, especially in predominantly minority neighborhoods, they simultaneously increased the risk that homeowners would default on their loans, send houses into foreclosure and drive down the value of entire neighborhoods, making them less attractive for people from other social classes and racial groups who might have once considered moving in.

"Many subprime borrowers are losing their homes, and the deteriorating and destabilized neighborhoods that result are unlikely to foster integration," Bond and Williams concluded. "In the absence of effective action, the findings suggest that persistent or even increasing levels of segregation may be one of the most important long-term consequences of the current home lending crisis." (By Shankar Vedantam, Washington Post)

How-to Monday: Finding foreclosures

The more you hear about foreclosures piling up, the more you may be tempted to buy one. There's a lot to consider if you do -- but first things first: how to find them.

A foreclosure becomes a foreclosure when the home goes to auction. Frequently, the buyer is the lender -- that's what happens when there's no one else willing to bid at least as much as the lender wants. If you think there's a deal to be had, you can be that bidder.

You'll find ads for impending auctions in the newspapers. Or you can see listings online. Alex Cooper Auctioneers, for instance, keeps a tally of scheduled foreclosure auctions -- typically on courthouse steps. Express Real Estate Auction Services has foreclosure auctions listed as well, as does Tidewater Auctions. Harvey West Auctioneers doesn't separate its foreclosure listings from its regular auctions, but you can see the full list HERE.

Then there are companies you can pay for pre-foreclosure and foreclosure information, such as ForeclosureS.com and RealtyTrac. (Paul R. Cooper, a vice president with Alex Cooper, pooh-poohs the idea of paying. If you're willing to do your own homework, "all the information's free," he said.)

Remember: You have to come prepared to make an immediate deposit if you're going to bid at an auction. Alex Cooper expects cash, a cashier's check or a certified check.

If auctions worry you, there's another option: Buy from the bank afterward.

Some lenders keep a list of their post-auction properties -- known as "Real Estate Owned," or REO -- on their websites. Countrywide, last I checked, had more than 250 in Maryland. Others with lists include Chase Mortgage, Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development (which oversees FHA-insured loans).

Or ask a real estate agent. Realtors often market foreclosed properties for lenders, so they'll be listed for sale. (Agents can, if they choose, note on Metropolitan Regional Information Systems' multiple listing service whether a property is a foreclosure.) You can look for agents who take a lot of foreclosure listings or those who work with a lot of buyers interested in foreclosures.

A note of caution before you rush off to buy: While a foreclosed home could be a great value, seasoned real estate investors say there's no guarantee. The asking price or starting bid could be more than the house is really worth, particularly if the previous owner started with a small down payment. Or the house might need more repair work than you can afford.

That's where research and due diligence come in. You might, for instance, start by looking up the property's assessment record -- click on "property sales" to see recent sales prices elsewhere on the same street -- and by checking out the loan history. ( by Jamie Smith Hopkins, Baltimore Sun)

Baltimore Metro Area numbers for May 2008

Number of homes on the market in the Baltimore metro area for under $250,000 in May 2006: 3,600.

In May 2007: 5,400.

In May 2008: almost 7,400.

Baltimore metro area home sales fell 30 percent in May compared with a year ago, continuing the trend. Average prices were up modestly -- 1 percent, to about $316,000 -- but median prices were down about the same amount. (The median is the midpoint, which means half the homes are more expensive and half are less.)

Seems like the housing market has been playing the same song since last September.

Interested in seeing the figures or checking out county-by-county performance? Go to Metropolitan Regional Information Systems' stats page. (http://weblogs.baltimoresun.com/business/realestate/blog/)

Despite Interest Rate Cuts, Foreclosures Hit Record High

Even though lower interest rates have made many adjustable-rate mortgages more affordable, foreclosures continue to reach new heights as more than 1 million homeowners face losing their home, according to industry figures released yesterday.

That's because what began as a mortgage crisis focused largely on subprime borrowers has spread and is being fed by the slowing economy it helped create. Borrowers once considered the most creditworthy have been hamstrung by declining home prices, making it difficult to refinance their home to dodge a financial crunch.

About 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, up from 1.28 percent during the comparable period last year and the highest point since the Mortgage Bankers Association began compiling figures in 1979. Another 6.35 percent of home mortgages were delinquent but not yet in foreclosure, up from 4.84 percent last year, the survey found. Taken together, that means that almost 9 percent of mortgages nationally were in trouble, even though sharp Federal Reserve interest rate cuts have cushioned payment increases for some homeowners.

More than 60 percent of the loans entering foreclosure are adjustable-rate mortgages, but the problem does not appear to be the "rate shocks" widely forecast about a year ago. Many of "the loans went bad before any of the resets took place, which is why talking about carving out solutions for just ARM reset problems is misplaced," said Guy Cecala, publisher of Inside Mortgage Finance.

A borrower with a typical-size subprime ARM could expect payments to increase about $70 a month if it reset now, compared with about $450 a month if it had reset in December, according to the American Securitization Forum, a financial industry group.

"So we're not going to see rate shocks causing defaults," said Christopher Mayer, real estate professor at Columbia Business School.

Also, while delinquency rates among subprime borrowers continue to rise, prime borrowers are a growing part of the problem, Mayer said. During the first quarter, the number of prime loans that began foreclosure increased faster than subprime loans, according to the Mortgage Bankers Association.

"The recent increases have been coming from the safer group of borrowers. They are the next shoe to come down," Mayer said.

And although the Fed's interest rate decreases have helped some homeowners with adjustable-rate mortgages, those with artificially low teaser or introductory rates are still experiencing significant increases, said Mark Goldman, a real estate finance lecturer at San Diego State University. "Most of the adjustable-rate loans are resetting to very modest rates, but it can still be a big shock," he said.

Even a slight increase in payments, compounded by rising food and fuel prices, can push homeowners to the financial edge, analysts said. "There is no question: The softening economy, gas prices, all that is just throwing more lighter fluid on an already inflamed situation," Cecala said.

For instance, a growing percentage of troubled borrowers who contact the Consumer Credit Counseling Service of Greater Atlanta have reduced income, having lost overtime pay or a second job, according to data collected by the group. Last year, 22 percent of homeowners listed reduced income as the reason they are in distress. So far this year, it is about 28 percent.

In April, clients spent an average of $335 a month on groceries, up from $291 during the comparable period last year. They spent $242 on gasoline this year, up from $181 in April 2007.

Many clients have adjustable-rate mortgages, but that is not necessarily what caused their problem, said Scott Scredon, a spokesman for the counseling service. "Their rate is going up, plus they lost their job. . . . Then you throw in the rising costs of fuel and food, and it takes away more and more of their disposable income," he said.

The intensity of the foreclosure problem, which is expected to worsen, varies across the country. In the District, 2.39 percent of loans included in the survey were seriously delinquent or in foreclosure in the first quarter, according to the Mortgage Bankers Association. That is up from 1.09 percent during the same period last year. In Maryland, 3.02 percent of mortgages were in trouble, compared with 1.21 percent. And in Virginia, the rate rose to 2.52 percent from 1.99 percent.

The bulk of the problem remains in California and Florida, which reported, respectively, that 9.24 percent and 8.25 percent of subprime ARMs were entering foreclosure, said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association. "Clearly things in California and Florida are going to get worse before they get better," he said. (By Renae Merle, Washington Post Staff Writer. Friday, June 6, 2008)

A Growing Problem: Overgrown Lawns At Foreclosed Homes

The number of foreclosures has skyrocketed around Maryland, jumping a whopping 40 percent between April and May. While there isn't always a foreclosure sign in front of the home, there's a very good chance the grass hasn't been mowed.

The foreclosure crisis is affecting more than just people; it's affecting lawns.

Frederick city officials tell NBC25 they simply can’t keep up. They’re getting an explosion of calls from residents complaining about out-of-control lawns in their neighborhoods.

"The foreclosing market has tripled our complaint basis," said Michael Blank, who works in code enforcement for the city.

Grass and weeds above 10 inches tall are violating the City of Frederick's rules. That's when officials step in to do something about it.

"Anything over 10 inches get a notice for them to remove and cut the grass within five days," Blank said.

But since the foreclosed homes are vacant, no one's there to clean up. That's when the city hires people to mow and manicure the lawn for a pretty penny.

Blank says the average bill runs around $200 per cut.

It could be even higher, depending on how much there is to clean up.

The city doesn't just absorb the costs. They forward the bills to the last known owner, or to the mortgage company.

It's not just a city issue; Frederick County officials are getting a lot of complaints, too.

There's not much the county can do about it though because they don't have a lawn ordinance.

"There's really no advice that we can give to them that will in fact, provide a remedy for them," said Larry Smith, a Frederick County zoning administrator.

Frederick city officials are considering assigning someone full-time to do grass, weed and trash inspections on foreclosed homes. (www.your4state.com)