The following summary is compiled from excerpts taken directly from the study:
"This study takes a statistical sample of loans with 2004-2007 vintages, examining the borrower, loan and neighborhood characteristics that drove subprime lending and foreclosure.
"The study confirms that disparities in lending have a clear racial component that has not been adequately addressed through enforcement of the nation’s fair lending laws.
"Findings include:
"(a) Individual African-American and Hispanic borrowers obtained subprime loans more often than white borrowers with similar credit scores, incomes, loan-to-value ratios, and neighborhood characteristics.
"(b) Even controlling for other factors, Latinos were 70 percent more likely and African Americans 80 percent more likely than their white counterparts to receive a subprime loan. This finding suggests that race, in and of itself, alters the likelihood of receiving a subprime loan.
"(c) Minority borrowers are facing foreclosure more often than white borrowers, even after controlling for borrower, loan, and neighborhood characteristics. The study finds that minorities are disproportionately affected by the foreclosure crisis, beyond levels that can be explained by objective criteria.
"(d) African Americans were almost 20 percent more likely and Latinos were 90 percent more likely than their similarly situated white counterparts to go into foreclosure. This suggests that race, in and of itself, alters the likelihood a borrower will go into foreclosure.
"(e) A recent survey by the National Community Reinvestment Coalition of borrowers in the loan modification process found that loans held by African Americans went to foreclosure more often than loans held by whites.
"(f) Loans purchased by the Government Sponsored Enterprises (GSEs) are going into foreclosure at roughly half the rate of both portfolio loans and privately securitized loans. This suggests that the standards imposed by the GSEs have encouraged the origination of safe and sustainable loans.
"(g) Loan characteristics, especially payment-to-income ratios, adjustable rates, high-costs (subprime) and balloon payments were found to have a significant effect on loan performance.
"The findings are particularly significant because the study controls for the most important factors used to determine risk during the origination process, including credit score. The study uses regression analysis, which separates out and controls likely causal factors, achieving a greater determination of causation than otherwise possible.
"The study controls for a number of influential factors, including:
"(a) Loan characteristics: Loan-to-value ratio, loan type (purchase or refinance) adjustable rate mortgage, refinance, high-cost (subprime), extent of documentation, interest-only, pre-payment penalty, balloon term, payment-to-income ratio.
"(b) Neighborhood characteristics: percent owner occupied, median year built, House Price Index, income level of zip code, moderate-income vs. upper-income zip code, middle-income vs. upper-income zip code, minority zip code.
"(c) Investor identifiers: portfolio vs. government sponsored enterprises (GSE), private securitized vs. GSEs, year 2005 vs. 2004, year 2006 vs. 2004, year 2007 vs. 2004.
"The findings of the study clearly indicate risky and unfair lending practices that were not addressed by the banking regulators. We recommend the creation of a strong and independent Consumer Financial Protection Agency, dedicated to ensuring responsible access to capital and credit.
"Ongoing race disparities, which are unexplained by objective criteria, support the expansion and strengthening of the Community Reinvestment Act. The law should be expanded to non-covered financial institutions, which have been associated with higher levels of risky lending and foreclosure.
"The abusive and risky loan characteristics studied are not subject to rigorous oversight under the law, despite their problematic nature. We recommend the creation of a strong, national anti-predatory lending law.
"Reform of the Government Sponsored Enterprises (GSEs) should take into account that they may have a beneficial influence on loan quality and sustainability, as supported by this study.
"Studies conducted by other academics and Federal Reserve economists have found similar patterns lending in other geographic areas. Making the data presented here available publicly would have allowed for examination of subprime trends earlier in the foreclosure crisis. Problematic practices could have been identified earlier and perhaps stopped by stakeholders before spreading and creating a crisis. The financial reform bills being considered in Congress currently contain some data enhancements, but do not go far enough.
Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com
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