Report: Subprime Lending a Major Factor in Credit, Housing Crunch
By Maegan Smith
Special to the AFRO
In the five-year span between 2000 and 2005, the price of homes in Washington D.C. increased more than at any other point in the previous three decades. Yet, in the same time span, homeownership also increased exponentially. Had anyone, during that time, questioned how this could happen, they might have seen the impending doom that loomed just out of public view.
In a study released Monday, the Department of Insurance, Securities and Banking (DISB) outlined one of the practices that allowed such a phenomenon to take place and contributed to conditions that led to the current credit and housing market crunches -- subprime lending.
“Subprime loans were disproportionately made in lower-income communities and communities of color.”
According to the report, titled “Subprime Mortgage Lending in the District of Columbia,” the subprime mortgage market was designed to offer homeownership opportunities to borrowers with impaired or limited credit histories who would not qualify for more traditional loan products. This market used to be a small “niche market,” as it is called, but one that has now grown to about 25 percent of all loans originated.
“There was a lot of incentive for brokers to underwrite loans to people who they knew were not going to be able to pay them back,” said Brenda Muniz, national legislative director for the Association of Community Organizations for Reform Now (ACORN).
She went on to explain the underwriting process. “A broker sits down and reviews the financial information for a client and tells them what they are eligible for. Responsible underwriting makes sure a person has the income to afford the loan,” Muniz said.
Of the 11 percent of subprime loans the study found to have originated in the District, almost 70 percent of them were made to African Americans. This was one pattern identified by the report; subprime loans were disproportionately made in lower income communities and communities of color.
The highest numbers of subprime loans were in Wards four, five, seven and eight, all majority African-American and areas where there has been a significant increase in cost.
David Berenbaum, executive vice president of the National Community Reinvestment Coalition (NCRC), an organization that helped the DISB with the study, said that as the District’s lending patterns tend to mirror those in the rest of the country, these results are indicative of the larger national crisis.
“Sub-prime loans had some of the problematic features that we are concerned about nationwide…Many loans were originated with little or no income verification…Many consumers inappropriately received subprime loans when they were eligible for prime loans,” Berenbaum said.
According to the report, the effects of this crisis are felt not only by those whose loans have defaulted, causing foreclosure, but also by the community as a whole, as property values decrease in areas with heavy foreclosures.
When asked what could be done about the crisis at this stage, Berenbaum said, “I think there is a real need for a strong anti-national predatory lending bill. In the absence of that, D.C. could strengthen its local laws.”
The report laid out five strategies for combating the subprime loan and foreclosure crisis. They included creating leadership initiatives for financial literacy, establishing interagency committees to coordinate consumer education, standardizing homebuyer training and ensuring that homeowners in default know that foreclosure counseling is available.