African-Americans in Cleveland face foreclosure nearly four times as often as whites do. Similarly, those earning less than half of the median income (AMI) are more than twice as likely to be in foreclosure as those earning more than 120% of AMI. And non-owner occupied homes are nearly three times as likely to be foreclosed upon as those that are owner-occupied. These are a few of the stark findings from a recent report from researchers at Case Western Reserve University, which develops a direct link between foreclosures, the characteristics of borrowers, and the terms of recent purchase and refinance mortgage loans in Cuyahoga County, OH, in which Cleveland is located.
Lenders in Cuyahoga County foreclosed on 28% of all home loans made to black borrowers in 2005, compared to 8% of all loans made to whites the same year. Lenders also foreclosed on 20% of loans made that year to low income borrowers (under 50% AMI), as compared to 9% to upper income borrowers (at more than 120% AMI). For owner-occupied homes with loans originated in the same year, the foreclosure rate was 11% compared to 31% for those claimed as not owner-occupied in the loan process.
The study also looks at foreclosure rates by the characteristics of the neighborhoods in which they occur. Foreclosures on mortgage loans from 2005 have occurred over five times more often in areas with poverty rates above 40% than in areas with poverty rates below 10%. Neighborhoods where three-quarters or more of the population is African American have witnessed foreclosure rates on loans from 2005 nearly 4 times greater than neighborhoods with populations that are less than a quarter African-American.
Along with foreclosure, the study looks at disparities in lending practices. The authors found that African American were consistently two to four times more likely to receive high cost subprime loans on home purchase loans than whites across all income levels. These loans were roughly 12 times more likely to end in foreclosure.
On a positive note for those seeking policy solutions, the study finds that loans originated with local banks were nearly 8 times less likely to result in foreclosure as those made by banks without a branch within a short distance of Cuyahoga County.
Though less time has elapsed since they were originated, 2006 loans, which are also analyzed, show similar foreclosure rates and characteristics.
To develop these findings the researchers used “probabilistic matching techniques” to associate data from the Cuyahoga County Recorder to data from the Home Mortgage Disclosure Act (HMDA). HMDA requires lenders to supply mortgage and borrower characteristics data to the Federal Reserve to be made public. This link between loan terms, borrower characteristics, and foreclosure has been largely absent in previous research.
To improve the mortgage industry, the authors argue that better information, improved borrower knowledge of financing options, and increased access to local banks are needed to guarantee fair lending practices and safe loan products.
The full report is available at http://blog.case.edu/msass/2008/06/23/Pathways_to_foreclosure_6_23.pdf.