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Showing posts with label Series on High Cost Loans. Show all posts
Showing posts with label Series on High Cost Loans. Show all posts

Friday, April 3, 2009

UPDATE: Our report on subprime lending was covered on King 5 yesterday. Click here to watch.


Today, the Budget & Policy Center is releasing a new report on the "High Cost of Subprime Lending in Washington State." We will be blogging on the topic throughout the week. You can read the entire report by clicking here.

In Washington State in 2006, African-American and Hispanic homeowners were most likely to pay a higher premium for their mortgage than whites or Asians.*

The effect on household finances of having a high-cost mortgage can be significant. The cost of a $230,000 mortgage can easily be $600 higher per month, or over $200,000 over the course of a 30-year loan. In the middle of the current housing crisis, having a high-cost mortgage also suggests a higher likelihood of foreclosure.

The graph below shows the share of mortgages that were high-cost in 2006 by the race/ethnicity of the borrower. The differences were stark. Over 40 percent of the mortgages lent to African Americans and Hispanics were high-cost, compared to around 22 percent for non-Hispanic whites and Asians.


It is unlikely that factors such as credit scores, debt-to-income ratios, and loan-to-value ratios can explain a gap of this magnitude. The blue bars show the high-cost mortgage rate for households with high incomes. Even among borrowers whose incomes were twice the area median, 39 percent of African-Americans and 37 percent of Hispanics had high-cost loans.

The difference in loan pricing suggest that the impact of further deterioration in the housing market will likely fall disproportionately on African Americans and Hispanics.


*The federal Home Mortgage Disclosure Act (HMDA) classifies mortgage as “high-cost” based on the loan’s annual percentage rate (APR). The APR is a better measure of the total cost than the contract interest rate alone because it includes points, fees, and other finance charges. Mortgages with APRs above designated thresholds are defined as “high-cost.”

Friday, March 13, 2009

On Monday, the Budget & Policy Center released a paper entitled, “The High Cost of Subprime Lending in Washington State.” Over the week we have posted here about the disproportionate effects of high cost lending on certain lower income neighborhoods and people of color. Today we will take a look at the future of the housing crisis in Washington State.

Washington has been relatively fortunate to avoid some of the deepest mortgage problems seen in other states as a result of the subprime lending crisis. Nationwide in the third quarter of 2008, over five percent of mortgages were seriously delinquent or in foreclosure, whereas in Washington, foreclosure rates were below 2.5 percent. (Only seven states in the country had such low foreclosure rates during this time.)

But the housing situation in Washington may take a turn for the worse in the near future. Nationwide, 77 percent of subprime loans with adjustable rates have already experienced a reset of the initial interest rate. In Washington State however, only 67 percent of loans have reset (see graph) The remainder are still at the original interest rate.


In the next 12 months, it is expected that interest rates will reset on 23 percent of subprime adjustable rate mortgages in the state, a higher share during that period than nearly every other state in the nation.

Problems for strapped homeowners can be exacerbated by prepayment penalties and large loan balances. Thirty-two percent of subprime mortgages in Washington State have prepayment penalties currently in force, a higher percentage than nearly every other state. And only 10 states have larger average subprime loan balances.

This is worrisome because the subprime mortgages that are most likely to go into delinquency or foreclosure are those with adjustable interest rates. Homeowners with these loans see sudden and significant increases in their mortgage bill from one month to the next and the additional cost can lead to late payments and eventually, foreclosure.

Thursday, March 12, 2009

On Monday, the Budget & Policy Center released a new report on the "High Cost of Subprime Lending in Washington State." We will be blogging on the topic throughout the week. Check out the entire paper and part one of the blog series.

Statewide, mortgages in lower-income neighborhoods were almost twice as likely to be high-cost than those in higher-income neighborhoods.* (See graph.)


The effect on household finances of having a high-cost mortgage can be significant. The cost of a $230,000 mortgage can easily be $600 higher per month, or over $200,000 over the course of a 30-year loan. In the middle of the current housing crisis, having a high-cost mortgage also suggests a higher likelihood of foreclosure.

In most areas of the state, lower income neighborhoods had higher rates of high cost loans than wealthier neighborhoods (click on table below to see larger version). In Cowlitz County, for example, 45.5 percent of mortgages in the lowest income neighborhoods were high-cost, compared to 20.8 percent in the higher-income neighborhoods. Whatcom County was the only area where wealthier neighborhoods did not have significantly lower rates of high-cost mortgages than poorer neighborhoods.


The pockets of high-cost mortgages across the state raise the question of whether borrowers in lower income regions and neighborhoods have adequate access to financial education and whether they have a variety of lending options. This has an impact on all homeowners: when foreclosures concentrate within neighborhoods, it is not just the delinquent homeowner that suffers. Other owners are likely to see impacts such as property value decline and increased crime.


*The federal Home Mortgage Disclosure Act (HMDA) classifies mortgage as “high-cost” based on the loan’s annual percentage rate (APR). The APR is a better measure of the total cost than the contract interest rate alone because it includes points, fees, and other finance charges. Mortgages with APRs above designated thresholds are defined as “high-cost.”