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Austin
Focus Study |
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Rapid growth and a hot
housing market resulted in rapidly increased lending since 1997-but thousands
of Austin families now carry the heavy burden of high cost home debt as subprime
lenders filled the gaps left by the prime market. As foreclosure postings rise
steeply across Central Texas,(1) it's time to
examine the potential impact of high cost home lending.
Austin remains a sharply divided city, with growth and prosperity disproportionately
spread across the western hills while subprime lending is concentrated in the
heavily minority near east central neighborhoods. Manufactured home lending
dominates neighborhoods further east. Both subprime and manufactured home loans
cost consumers more in long term interest and fees.
The
Consumers Union study
This study uses 1997
to 2000 Home Mortgage Disclosure Act (HMDA) data to identify lending patterns
for Austinites who purchased or refinanced a home.
Specifically, we identify patterns of subprime lending by borrower gender, race,
and geographical area. Where necessary we combine four years of HMDA data to
identify patterns in areas where lending is historically sparce (lower income
areas, high minority areas) and patterns among individual lenders.(2)
Market
growth
Austin's home loan market continued
to grow through 2000, despite signs of an economic slowdown. The number of loans
made increased by nearly 20 percent in 1998, 22.9% in 1999, and that burning
growth only slowed down slightly by 2000.
Refinance lending peaked in 1998, due to low interest rates and the introduction
of home equity lending, and has now dropped back again. Home improvement lending
started to decline with the opening of the new home equity market and continues
to decline, indicating a shift from home improvement loans to cash-out home
equity lending.
Subprime
lending boom
Prior to implementation
of the new home equity laws, Texans bought, sold and refinanced their homes
with very little help from the subprime mortgage industry. In 1997, loans from
HUD- identified subprime companies in Austin accounted for 5.8 percent of all
single family home secured loans.
That has now changed. By 2000, subprime companies made nearly 10 percent of
all loans in Austin, and 28.4 percent of refinance loans. More than 4,000 families
took a potentially high cost home loan from a subprime company.
Market gaps
| In
a hot housing market, who are the people who turn to subprime lenders? Some
of the same people we have found to be underserved in the past. Lending levels: Black and Hispanic families take home loans at a much lower rate than Whites compared to their proportion in the population. While the total number of home purchase loans made to minority borrowers increased from 1997 to 2000, the proportion of purchase loans going to Black and Hispanic borrowers actually decreased over that period. By 2000, only 3.3 percent of home purchase loans were made to Black borrowers, although Blacks represent 8.1 percent of the Austin/San Marcos MSA population. Similarly, lenders made only 10.8 percent of purchase loans to Hispanic applicants, although Hispanics represent 26.2 percent of the population in this area.(3) |
Subprime refinance lending grows to nearly 30% of all refinance
|
On the other hand, in the refinance market (where subprime lenders are most
active) Black and Hispanic borrowers now represent a higher proportion of the
overall loan pool than they did in 1997--and more than 40 percent of these borrowers
are taking their loans from subprime companies. Subprime lenders appear to be
successfully finding a new market for refinance loans among underserved minority
borrowers.
Denial Rates (see tables left): Over
the four year period, prime lenders denied Black and Hispanic applicants at
nearly double the rate they denied White applicants (the denial ratio). Subprime
companies also denied minorities at a higher rate than White applicants, but
the gap was smaller. Only manufactured housing lenders denied White and minority
applicants at about the same rate.(4)
At higher income levels (families earning more than 60k, or 1.5 times the state
median income) subprime lender denial rates for minority borrowers are more
similar to denial rates for Whites, while denial rates for prime lenders remain
much higher. These findings indicate little change in the market since our 2000
analysis, which found high denial disparities even at the highest income levels
(families earning more than $100,000 per year).
Conventional and FHA: Lenders offer
most borrowers conventional loans, but approve a disproportionate number of
FHA loans for minority borrowers. FHA loans typically cost more than conventional
credit because borrowers must pay an FHA insurance premium of 2.5 percent of
the loan amount up front and an insurance premium every month over the life
of the loan. Borrowers with conventional credit may cancel Private Mortgage
Insurance once they have adequate equity in their homes.
The majority of home purchase borrowers in the Austin San Marcos MSA (76.3 percent
in 2000) obtained conventional loans and only 18.8 percent ended up with FHA
loans. But 36.8 percent of home purchase loans to Black borrowers and 37.9 percent
of loans to Hispanic borrowers were FHA loans in 2000. This is nearly the same
share we reported two years ago.
On the other hand, almost all refinance loans to almost all borrowers were conventional
loans. This may be partially explained, to the potential detriment of some credit
worthy borrowers, by the sharp rise in subprime refinance.
Subprime
market segments
In order to look more closely at
subprime activity in the Austin San Marcos MSA, we combined four years of MSA
level HMDA data and information from the new census. We found that subprime
lending was concentrated among minority borrowers, women borrowers, and borrowers
in neighborhoods with a higher concentration of elderly people.
| The chart (right) describes the distribution of subprime loans according to the minority and elderly concentration in the census tract. High elderly tracts generally have a somewhat higher subprime penetration rate than low elderly tracts, and that rate increases as the minority concentration increases. In other words, tracts that are both high elderly and high minority tend to have higher subprime penetration, with some exceptions. |
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Nine Austin census tracts had a very
high concentration of subprime refinance loans (more than 45 percent of loan
volume over four years) and enough loans for closer study. All these tracts
are east of IH35 and generally correspond to the East Austin high subprime areas
on the map, p. 1 (representing subprime purchase, refinance and home improvement
combined).
Within these high subprime tracts, Black women took a disproportionate share
of loans from subprime companies (74 percent of loans to Black women in these
tracts were subprime compared to 58.8 percent over the sample). Black men also
took loans from subprime companies at a higher than average rate for this area
(64 percent).
Two of these East Austin neighborhoods flank Martin Luther King Blvd, from IH35
to Webberville Road. From IH35 east to Airport Blvd., north of Martin Luther
King Blvd, lies tract 4.02 (41 refinance loans: 20 subprime). This is a mixed
ethnic area, 37 percent Black and 26 percent Hispanic, with 16.8 percent of
the population over 65. These borrowers were also ethnically mixed, about one
third Black, one third White and a few Hispanic or race unreported. But ten
of 15 Black borrowers took loans from subprime companies, compared to only 2
of 13 White borrowers.
 |
East
of Airport Blvd, tract 21.09 (59 refinance loans: 40 from subprime companies)
is 67 percent Black and 27 percent Hispanic, with 16.7 percent of the population
over age 65. Nearly all of these refinance borrowers were Black (where race
was identified), evenly split between men and women. Black women borrowed
from subprime companies slightly more often than Black men. While women took an only slightly greater share of subprime home purchase and home improvement loans, women received a far larger share of refinance loans from subprime companies. While 10.2 percent of men took refinance loans from subprime lenders, 16.9 percent of women did. |
Further, while subprime companies
made only 7.5 percent of the refinance loans to White male borrowers over the
four year period, these companies made 45.4 percent of the refinance loans to
Black women. Black women got a far higher share of subprime loans than Black
men.
Because women still make less than men, we re-examined the same data for all
borrowers earning more than $60,000 annually (1.5 times the state median family
income). Generally, higher income women still took loans from subprime companies
at a higher rate than their male counterparts, --with the notable exception
that high income Black men took a greater share of subprime refinance loans
than high income Black women. Higher income minority women took subprime loans
at higher rates than White women.
Austin
major lenders
The top fifteen Austin home purchase
lenders in 2000 were all prime lenders, and many of these lenders had a lower
share of the minority borrower market than their share of the Austin market
as a whole.
Of the major bank lenders at the top of the Austin area market, Wells Fargo,
Bank United and Guaranty Federal made relatively few loans to minority borrowers.
On the other hand, Bank of America made more loans to Hispanic applicants than
its Austin marketshare.
Several prime mortgage companies specializing in FHA and VA loans made a notably
greater share of loans to minority borrowers than their overall Austin marketshare--in
line with our earlier findings that minority borrowers take FHA loans at a greater
rate than White borrowers. National City Mortgage, a conventional mortgage lender,
penetrated the market for both Black and Hispanic borrowers at a higher rate
than its overall share as well.
Almost all the top fifteen Austin refinance lenders in 2000 made as great or
greater a share of refinance loans to minority borrowers as their overall marketshare.
Only Wells Fargo and Flagstar made relatively few refinance loans to minority
borrowers. Bank One made more refinance loans to Hispanic borrowers than its
overall share of the Austin refinance market.
On the other hand, five of the top fifteen refinance lenders in Austin were
subprime companies, and these five companies alone made nearly half the refinance
loans to Black borrowers and a quarter of the refinance loans to Hispanic borrowers.
The top subprime refinance lender, Ameriquest, makes fixed and variable rate
loans at initial rates ranging from 6 percent to 14.99 percent, with an average
rate of 8 to 9.5 percent. In recent securitizations, about a quarter of borrowers
have credit scores over 650.(5)
High
cost refinance loans
| When Texas inaugurated home equity lending, the state capped fees that could be charged at closing, gave consumers a 12 day "cooling off" period to consider the loan terms and a three day right of recission after closing. These protections were intended to prevent predatory practices from taking hold. |
 |
Yet today, closing costs routinely
exceed the three percent cap set out in the Texas Constitution, and other problems
have emerged. For example, an Austin couple reported paying a ten percent "loan
origination fee" totaling $5,000 for a home equity loan. Unfortunately,
the Office of Consumer Credit wrote them back to say that an "origination
fee" paid to a lender (rather than a broker) is actually not a fee. Instead
it is prepaid interest, and interest charges are not included in the three percent
fee cap. Without an effective fee cap, consumers report paying thousands at
closing for subprime refinance loans. And once they have made the mistake of
taking a high cost refinance loan in the first place, it may cost thousands
more in new closing charges to get out of that loan and take a new one at a
lower interest rate.
This same Austin couple also reported that the lender required them to pay off
unsecured debt as a condition of approval. Texas law currently states that a
lender may not require a borrower to "apply the proceeds of the extension
of credit to repay another debt except debt secured by the homestead or debt
to another lender." The state takes the position that a lender "could
require direct payment to creditors, especially if that action is needed to
attain the desired income to debt ratio."
Recommendations
Home equity is the one of the most
important ways families develop wealth over the long term. High cost refinance
turns family wealth into cash, cash that is frequently turned back over to the
lender in high loan fees.
To prevent the stripping of equity from the most vulnerable families, the Texas
Legislature should reduce the fees associated with high cost home refinance.
The AARP, the National Consumer Law Center (NCLC) and others have defined loans
as "high cost" if they have an interest rate that equals or exceeds
six percentage points over the weekly average yield on five year treasury bills
(currently about 3.5 percent but more typically ranging from 4 to 6.5 percent
over the period of this study). These groups also define "high cost"
as loans that contain fees in excess of three percent of the loan amount.(6)
The Texas Legislature should set standards for "high cost"
loans:
For all home equity lending we recommend:
_______
Notes
1 Breyer, Michelle, "Foreclosure
sale a boon for the savy," Austin American Statesman, October 2, 2002.
2 Owner occupied, single family refinance, purchase and home improvement loans,
excluding loans made by HUD identified manufactured home lenders unless noted
(a total of 156,112 loans over four years).
3 Office of the State Demographer, "Projections of the Population of Texas
and Counties in Texas by Age, Sex and Race/Ethnicity for 2000-2040," December
2001, Austin-San Marcos MSA.
4 In order to retain a significant baseline of subprime, minority, high income
borrowers for denial rate comparison, we elected in this analysis to combine
four years of data for the Austin area.
5 Ameriquest Mortgage Prospectus, Form 424, Securities and Exchange Commission,
June 21, 2001, September 2001, June 2, 2002, and August 21, 2002.
6 Consumer Complaint, Office of the Consumer Credit Commissioner, 1/25/1999.
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