(Washington, DC) — Subprime loans in the District of Columbia disproportionately went to single, low- and moderate-income households in wards 4, 5, 7 and 8, according to a recently completed study on subprime mortgage lending and foreclosure, commissioned by the DC Department of Insurance, Securities and Banking (DISB). The study was part of a broader consumer protection initiative on behalf of the Government of the District of Columbia.
“We now have a clearer picture on the make-up of the vulnerable populations in the District of Columbia and where they reside,” said DISB Commissioner Thomas E. Hampton who released the study to the public today. “Interestingly, these are some of the same populations identified in earlier works produced by academics, nonprofit community-based organizations and others. And these findings are consistent with industry practices throughout the country.”
The Subprime Mortgage Lending Study in the District of Columbia*, which was led by the Center for Responsible Lending with the assistance of a coalition of research organizations, is intended to help the District better understand the impact of subprime lending on its residents and to suggest changes that might be needed to help protect residents. The 168-page study contains more than 100 findings and recommendations that provide a road map for possible courses of action by District officials and agencies, lenders and consumers.
The subprime market was designed to offer homeownership opportunities to borrowers with impaired or limited credit histories who have difficulty qualifying for financing under conventional terms.
- Among key findings in the study, which was finalized May 2008, are that about 11 percent of all loans originating in the District in 2005 were subprime. That is, out of a total of 37,385 loans, about 4,151 were subprime. These loans were slightly more often used to refinance an existing loan rather than to make a home purchase. There were 1,615 subprime loans made to purchase a home; of that, about 70 percent or 1,131 loans were made to African Americans. And out of 2,536 subprime loans to refinance an existing loan, about 84 percent or 2,130 loans were made to African Americans.
- Subprime loans were most often made in wards 4,5,7 and 8.
- Only 13 percent of the homebuyers who participated in a telephone survey by the researchers had received information about the home loan process from a homebuyer training or financial education workshop. This was true for both prime and subprime borrowers. The city has at least 15 housing counseling agencies and it appears that the majority of consumers do not use their services.
- The most frequently used type of subprime loan is the adjustable rate mortgage with an initial two- to three-year introductory rate followed by rate adjustments for the remainder of the loan term.
Other findings were that more than 90 percent of those surveyed had inflated their incomes and almost 60 percent of the stated amounts were exaggerated by more than 50 percent.
“This suggests that a significant number of foreclosures were unavoidable since the income levels needed to support the mortgage never existed,” Commissioner Hampton pointed out. “Even further, the drop in home values will make the sale of these properties difficult without lenders willing to accept a short sale where the property is at a price lower than the actual loan amount.”
The study projected that nationally, 2.2 million subprime loans originating between 1998 and 2006 will be subject to foreclosure. And nearly one in five of the most recent loans—those made in 2005 and 2006—will be foreclosed. Researchers found that one foreclosure will lower surrounding single family home values and multiple foreclosures compound this effect making the impact even greater in lower-income areas.
List of Recommendations from the Subprime Mortgage Lending Study
- Create a highly visible initiative with strong city leadership to highlight the importance of financial literacy and enhance financial-education resources. Building and sustaining an effective financial literacy agenda requires cooperation from public, private and nonprofit partners, with strong leadership. Consumer education and protection services are spread across several District agencies and better coordination will make it easier for residents to access help and information they need.
- Expand the availability of homeownership education classes that could provide significant benefits to borrowers. District residents could benefit from classes on purchasing a home and getting a mortgage that included information on shopping for a broker/lender, the risks of refinancing and the closing process.
- Increase consumers’ awareness of loss mitigation strategies. Borrowers need to communicate with their lender when things are not going well and seek assistance from housing counselors and other sources. Many owners wait until they receive a Notice of Foreclosure before seeking assistance. Many borrowers could prevent or defer foreclosure if they were aware of potential loss mitigation strategies and might be able to find a lender willing to make a new loan. Foreclosure notices should include language that urges recipients to contact an approved mortgage counseling agency.
- Establish a loan pool capitalized by public or private sources. The District of Columbia, perhaps through its Housing Finance Agency (DCHFA), could work to establish a loan pool that could be capitalized with funds invested by active lenders in the Washington, DC, area or with lenders that already have a relationship with DCHFA. The loan pool could be used to help borrowers refinance and pay off their delinquent mortgage.
- Provide consumers an earlier notice of mortgage trouble. Currently, two notices are sent to homeowners when in default: a notice of acceleration from the lender telling them their loan will be foreclosed upon, and the actual notice of foreclosure from the lender’s representative. The homeowner can receive these notices at about the same time. The earlier a financially troubled homeowner can be reached, the more likely he or she will be able to recover from missing loan payments. It is important to get information to homeowners earlier about available resources, and to seek assistance from authorized housing counselors sooner, so they can provide information and advice on how to address the consumer’s financial problems.
- Change the District’s foreclosure statute and create a judicial foreclosure process. It is the position of groups such as the National Consumer Law Center that a judicial foreclosure process with the availability of a hearing before an impartial officer (including associated due process protections), is better for consumers and will keep more residents from losing their homes.
- Provide better foreclosure-related tracking, data collection and record keeping by the Recorder of Deeds. Providing better information to homeowners, housing counselors and other District agencies could help identify patterns and lessen the probability of foreclosures. Policymakers could benefit from being able to assess current trends and develop forecasts on the location of the highest concentrations of foreclosure.
Predatory Lending Laws
- Require mandatory credit counseling for high cost loans. All borrowers of “covered” loans should take credit counseling before taking out the loan to ensure that the borrower is fully informed of the terms of the loan and the possible increases in monthly payments if the interest rate were to be adjusted higher.
- Require a return to sound common-sense underwriting practices. Require lenders and brokers to (1) determine if the borrower has the ability to repay the loan at the fully indexed rate and assuming fully amortizing payments, (2) consider the borrower’s debt-to-income ratio and verify income, and (3) escrow real estate taxes and property insurance for subprime and nontraditional loans.
- Ban prepayment penalties (PPPs) and yield spread premiums (YSPs) for subprime and nontraditional loans. PPPs are often used to trap borrowers in unaffordable loans, usually subprime loans. YSPs put the broker in direct conflict of interest with the best interests of the client borrower given the broker receives additional compensation for arranging excessively expensive loans.
- Require lenders and brokers to have a duty of agency, good faith and fair dealing to their customer. Require that mortgage lenders and brokers act in the borrower’s best interest. Hold mortgage brokers and lenders accountable for abusive lending practices by establishing rigorous affirmative duties to serve the best interests of their customers.
For a copy of the complete study, please contact Senior Public Affairs Specialist Michelle Phipps-Evans in DISB’s Office of Communication and Public Affairs at (202) 442-7822 or by emailing firstname.lastname@example.org. Or visit DISB’s website at disb.dc.gov.
Editors’ Note: The study was led by the Center for Responsible Lending, with assistance by the Capital Area Asset Builders, the National Community Reinvestment Coalition, The Reinvestment Fund and The Urban Institute.