Subprime lending and subsequent resulting foreclosures were led by the private market and contained a clear racial component not explained by objective underwriting criteria, according to a new study by the National Community Reinvestment Coalition (NCRC). African American and Latino borrowers were more likely to receive a subprime loan, and to go into foreclosure, than similarly situated white homeowners, controlling for credit risk and other borrower, neighborhood and loan characteristics, the study finds.
Contrary to the claims of some lawmakers, the government-sponsored enterprises (GSEs) appeared to have a moderating effect on risky and abusive lending practices, the NCRC says, adding that privately securitized loans went into foreclosure twice as often as loans backed by the GSEs.
"Private-market players, from brokers to mortgage lenders to Wall Street, created a lending pipeline typified by risky, abusive and unfair practices," says John Taylor, president and CEO of NCRC. "It is a shameful condition that borrowing while black or Latino remains a hazard in this country."
The study used regression analysis to examine a statistical sampling of loans in the Washington, D.C., area. According to its results, Latinos were 70% more likely and African Americans 80% more likely than their white counterparts to receive a subprime loan.
Minority borrowers are facing foreclosure more often than white borrowers, even after controlling for borrower, loan and neighborhood characteristics, the NCRC adds. African Americans were almost 20% more likely and Latinos were 90% more likely than their similarly situated white counterparts to go into foreclosure.
Loans purchased by the GSEs are going into foreclosure at roughly half the rate of both portfolio loans and privately securitized loans, which the NCRC says suggests that the standards imposed by the GSEs have encouraged the origination of safe and sustainable loans.
The study demonstrates the need for the creation of an independent Consumer Financial Protection Agency, Taylor says.
"The existing regulators have simply failed in their duty to protect American consumers," he states. "What's more, the troubling racial disparities demonstrate the ongoing necessity of the Community Reinvestment Act, which needs to be strengthened and expanded to cover mortgage lenders and Wall Street – the chief purveyors and purchasers of risky subprime loans."