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Why do people use subprime lenders?
Many of the people with subprime loans are in such a predicament because
of their greater risk of default. This
is an important assumption. After
all, in today’s risked-based pricing era, borrowers are supposed to pay
interest rates that reflect their ability to repay loans.
This system, in theory, should adequately allocate risk.
The system falls down when borrowers have too
short of a credit history. A
borrower generally needs a credit history with at least with account that is
more than six months old and with a current balance.
Fair Isaac Credit Services, Inc. estimates that 50 million people in the
United States cannot meet this hurdle.
This group cannot access the kinds of prime credit offered by leading
banks. Some of these borrowers take
advantage of loan guarantee programs, community development funds, and other
avenues to home ownership. Nevertheless,
many enter into subprime arrangements.
When borrowers with good credit pay subprime
loans, the risk-based system is not working.
A “high cost loan” is one that, when
originated, bears an interest rate more than three percentage points greater
than the yield for a treasury bill of similar maturity.
In 2004, the longest term bond was the 20 year bond and as a result it is
used as a point of comparison in HMDA analysis.
The yield on a 20 year bond is compared to the APR on a 30 year loan.
HMDA data does not reveal if a loan is adjustable or fixed. Because fixed rate loans normally carry higher interest
rates, many adjustable rate mortgages with higher than normal interest rates may
still slip under the “high cost” screen.
The following charts show the distribution of
high cost loans by race in North Carolina in 2004.
All data comes from records requested by the specific banks.
Washington Mutual
North Carolina
2004
|
Action
|
high cost
|
Native
|
asian
|
black
|
islander
|
white
|
Grand Total
|
|
originate
|
not high cost
|
16
|
70
|
666
|
10
|
3995
|
4757
|
|
|
high cost
|
6
|
13
|
487
|
2
|
469
|
977
|
|
|
pct high cost
|
27.3%
|
15.7%
|
42.2%
|
16.7%
|
10.5%
|
17.0%
|
|
|
ratio to white
|
2.60
|
1.49
|
4.02
|
1.59
|
1.00
|
|
Washington Mutual:
§
Blacks are 4.02 times more likely than white borrowers to
originate a high cost loan.
§
42.2 percent of loans to African-Americans are high cost.
RBC Centura
North Carolina
2004
|
Action
|
High
cost
|
native
|
asian
|
black
|
islander
|
white
|
other
|
Grand
Total
|
|
originate
|
not
|
14
|
50
|
416
|
12
|
3633
|
79
|
4204
|
|
|
yes
|
3
|
|
79
|
1
|
246
|
24
|
353
|
|
Grand
Total
|
|
17
|
50
|
495
|
13
|
3879
|
103
|
4557
|
|
|
pct.
High cost
|
17.6%
|
0.0%
|
16.0%
|
7.7%
|
6.3%
|
23.3%
|
|
|
|
ratio
to white
|
2.78
|
0.00
|
2.52
|
1.21
|
1.00
|
3.67
|
|
RBC Centura:
§
Blacks are 2.52 times more likely than whites to have a high cost
loan.
Countrywide
North Carolina
2004
|
Action
|
High
cost
|
native
|
asian
|
black
|
islander
|
white
|
other
|
total
|
|
originate
|
not
high cost
|
87
|
454
|
1572
|
34
|
12756
|
2393
|
17296
|
|
|
High
cost
|
21
|
20
|
548
|
11
|
1139
|
327
|
2066
|
|
total
|
|
108
|
474
|
2120
|
45
|
13895
|
2720
|
19362
|
|
|
pct
high cost
|
19.4%
|
4.2%
|
25.8%
|
24.4%
|
8.2%
|
12.0%
|
10.7%
|
|
|
ratio
to white
|
2.37
|
0.51
|
3.15
|
2.98
|
1.00
|
1.47
|
1.30
|
Countrywide:
§
Blacks are 3.15 times more likely to have high cost loan than are
whites.
§
About one-quarter (25.8%) of originations to African-Americans are
high cost.
Ameriquest
North Carolina
2004
|
action
|
high
cost
|
native
|
asian
|
black
|
islander
|
white
|
other
|
Total
|
|
originate
|
not
high cost
|
1
|
2
|
30
|
|
222
|
211
|
466
|
|
|
high
cost
|
5
|
6
|
193
|
4
|
650
|
935
|
1793
|
|
Total
|
6
|
8
|
223
|
4
|
872
|
1146
|
2259
|
|
|
pct
high cost
|
83.3%
|
75.0%
|
86.5%
|
100.0%
|
74.5%
|
81.6%
|
79.4%
|
|
|
ratio
to white
|
1.12
|
1.01
|
1.16
|
1.34
|
1.00
|
1.09
|
|
Ameriquest:
§
Two facts make Ameriquest different: 1) they reject over 83
percent of applications for stick built housing, and 2) of the loans that they
accept, 79.4 percent were at high cost rates in North Carolina in 2004.
This is truly subprime lending.
§
Percent high costs are more equivalent among races at Ameriquest
than anywhere else (blacks 1.16 times whites).
§
Nevertheless, being black seems to hold back wealthy borrowers.
High income (income greater than $60K per year) blacks are only 4
percentage points less likely to have a high cost loan than are low income
blacks, whereas high income whites are 20 percentage points less likely to have
a high cost loan than are low income whites.
Bank of America
North America 2004
|
Action
|
high
cost
|
native
|
asian
|
black
|
islander
|
white
|
other
|
Total
|
|
originate
|
not
high cost
|
157
|
726
|
1640
|
70
|
13981
|
1090
|
17664
|
|
|
high
cost
|
|
1
|
11
|
|
30
|
| | 