The Center for Responsible Lending released two studies in 2006 that are, in my opinion, important reference sources for every real estate professional.
Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages
Released in May, 2006, the study revealed a pricing disparity in the sub-prime lending market targeting borrowers with a racial and ethnic bias. The report suggests the difference in pricing is at least partially driven by the yield spread premium (YSP).
Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners
I haven't had a chance to entirely read this recent study (December 2006), but I have picked up on a number of startling bullet-points:
- 2.2 million sub-prime home loans made in recent years have failed or will fail;
- Foreclosure of sub-prime loans will cost homeowners 164 billions dollars primarily in the form of lost equity;
- 1 out of every 5 sub-prime mortgages originated during the past 2 years will end in foreclosure;
- Myth: sub-prime loans are a "stepping stone" to originating higher quality loans in time. Not true: a sub-prime borrower is most likely to refinance multiple times in the sub-prime market losing equity each time to cover the extraordinary associated costs.
Causation factors:
- Loan guidelines requiring "limited documentation";
- Pre-payment penalties;
- Loans that fail to escrow for taxes and insurance;
- Loose underwriting standards;
- Predatory lending practices.
The wave of foreclosures and societal costs is predicted to affect every major metropolitan market. The most devastating consequences, if the report is correct, can be anticipated in the following states:
- California;
- Arizona;
- New Jersey;
- Nevada;
- Michigan;
- District of Columbia.
For anyone interested in reading my perspective on the real estate industry's lack of responsiveness to real estate and mortgage fraud, see the featured post on Flipping Frenzy.
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