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Chapter 8. Lending and Race in Two Cities: A Comparison of Subprime Mortgages, Predatory Mortgages, and Foreclosures in Washington, D.C. and Akron, Ohio
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C Ch ha ap pt te er r 8 8 Lending and Race in Two Cities: A Comparison of Subprime Mortgages, Predatory Mortgages, and Foreclosures in Washington, D.C. and Akron, Ohio DAVID H. KAPLAN AND GAIL SOMMERS A new form of housing finance has emerged within the past 10 years. Up until the mid 1990s, studies of mortgage lending were more concerned with whether mortgage lenders avoided loans in the inner city. The volume of loans in poor, predominantly African-American, inner city neighborhoods was disproportionately small and denial rates were disproportionately high. In the extreme form of “redlining,” such neighborhoods were considered too risky and excluded from all mortgage investment. In response to this, several fair housing protections were put into place in the 1970s. Still, residents of poorer neighborhoods enjoyed limited access to mortgages of any kind. The banks were not physically present, the volume of loans was small, and those applicants who did apply for a mortgage were more likely to be denied. This was especially true among AfricanAmerican applicants, where denial rates were roughly double that of white applicants, assuming that they had access to mortgage lenders in the first place. During the 1990s, there was an explosion in so-called “subprime” lending — lending that assessed higher interest rates and fees for some prospective homeowners. At their best, subprime loans allow households to enter a mortgage market from which they would otherwise be disqualified. Subprime lenders are attracted to lower- and moderate-income households while these same households are interested in what these lenders had to offer. While the supply and demand for subprime lenders is found throughout the metropolitan areas, income segregation has led to a concentration of subprime lending activity in specific neighborhoods. Subprime loans are also much more likely to occur in African-American neighborhoods than in white neighborhoods. There is a further problem with several of these mortgage instruments in that some impose an undue financial burden on households by forcing debts that far exceed assets. In the worst case, the result may be foreclosure . In other cases, it means that households are paying more than they should in debt servicing. These types of loans have been termed “predatory” and have become the focus of a great deal of recent community activism. There are several ways to study the phenomenon of predatory lending. One approach is to examine the activities of a known lender. A geographical study would explore the degree to which lender activities are unevenly distributed or where the spatial distribution of this lending covaries with other neighborhood aspects. A second approach would be to examine the distribution of all loans, noting in particular the incidence of foreclosures , subprime loans, and (if information is available) predatory loans. This chapter utilizes both approaches to compare the racial geography of subprime lending in both Washington, D.C. and Akron, Ohio. These two cities, very different in size and importance, reflect the widespread nature of the predatory lending phenomenon. 98 David H. Kaplan and Gail Sommers SUBPRIME LOANS, PREDATORY LENDING, AND FORECLOSURES In 1995, there were approximately 21 subprime lenders making 24,000 loans (not including refinances). By 1998, some 256 subprime lenders were making 207,000 loans (Hong and Sommers, 2000). This rapid increase far outstripped the overall mortgage market, to the extent that subprime lending went from being a tiny fraction of the “prime” market — about one percent — to a substantial proportion that some estimate has closed in on ten percent (Engel and McCoy, 2001). Subprime loans are those loans made available to customers who do not enjoy the credit qualifications necessary to secure a “prime” mortgage loan. In mortgage lending terminology, prime borrowers are rated as “A.” This rating is determined largely on the basis of a credit score and entitles the borrower to the lowest rates and often fewer fees. It may be up to the borrower to pay additional points (each representing one percent of the total cost of the loan) but in return (s)he can expect even lower interest rates. Those borrowers that do not meet the credit criteria to secure a prime loan need to settle for a subprime loan. These borrowers are divided into categories of “A–,” “B,” “C,” and “D,” with nearly two-thirds falling within the A– rating and another one-quarter included as “B” (CRA-NC, p. 3). This has been a large potential market that became much more attractive in the 1990s for several reasons (Engel and McCoy, 2001...