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Elderly
in the Subprime Market |
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Subprime loans are concentrated
in geographical areas with a higher concentration of elderly residents. Even
after accounting for race, income and other factors, the likelihood of getting
a subprime loan increases as the age of residents increases.
Generally, older homeowners have substantial home equity built up, making them
a target for attractive sounding offers. Subprime lenders appeal to homeowners
through phone and mail solicitation, offering tens of thousands in quick cash.
And Texas law does not adequately protect the elderly from high fees and loans
they cannot afford to repay.
The
Consumers Union Study
This study analyzes Texas refinance
loans from 1997 to 2000.(1) We identify subprime lending (loans from HUD identified
subprime companies) at the state and city (MSA) level. With 2000 census information
about tracts, we identify patterns of subprime lending using standard regression
techniques and cross tabulations.
Home Mortgage Disclosure Act (HMDA) data does not include information about
the age of the borrower. Therefore, as a surrogate for borrower age, we examined
the concentration of elderly people in tracts where homeowners have refinanced
their homes. We compared lending in tracts with the lowest concentration of
seniors (the quintile of records where the population over 65 is less than 4.3406
percent) to lending in tracts with the highest concentration of seniors (the
quintile of records where greater than 13.7322 percent of the population is
65 or older) and to the minority concentration.
To compare subprime and prime loans by both the age and racial characteristics
of the tract, we combined four years of HMDA data. This ensures a large enough
loan pool for comparison even in high elderly/high minority areas where lending
is historically sparce. This means that the absolute ratio we calculate for
supprime penetration is significantly lower than the 2000 subprime penetration
rates calculated by other researchers.(2) The rapid rise of subprime lending
in Texas over the period of this study means that subprime penetration rates
for 2000 are higher than the four year averages presented here.
To gain an understanding of point-of-sale lending practices that might lead
large numbers of people into the high priced subprime market, we also reviewed
consumer complaints filed with the Office of the Consumer Credit Commissioner.
This information is essentially anecdotal and incorporated here only to suggest
possible reasons why so many people take high priced home loans.
Finding: Neighborhoods with a high concentration of
elders show higher subprime penetration regardless of race
As expected, minority areas have
much higher subprime penetration. But we also found that at every level of minority
concentration, the subprime penetration is greater for the tracts with an older
population (see Chart 1, p. 2). Even in predominantly white areas, subprime
lenders made a much larger share of the loans in the tracts with more elderly
residents.
The highest minority and elderly census tracts showed a supbrime penetration
over the four year period greater than 70 percent. Since subprime refinance
in Texas has increased in each year of the study, subprime lending in these
high elderly/high minority neighborhoods is now likely to be above 70 percent.
To get more information about the subprime activity in tracts with a high elderly
and high minority population, we examined two urban areas, Dallas and Austin,
and then looked at some individual census tracts.
The distinction between low elderly and high elderly neighborhoods in Dallas
tracks closely with the statewide finding--high elderly neighborhoods see more
subprime lending at every minority concentration, and borrowers in high elderly/high
minority areas took refinance loans from subprime companies most of the time.
In Austin the distinction between high elderly and low elderly tracts is much
less marked, although high minority/high elderly tracts also show high subprime
penetration.
Finding:
Black women borrowing
in selected high elderly/high
minority tracts get loans from subprime companies
Within these two urban areas, a handful
of high elderly/high minority census tracts had a relatively high volume of
refinance lending for closer study. Within these sample tracts, Black women
took a disproportionate share of loans from subprime companies--a finding related
to the broader findings of our report on women borrowers in this packet.
The population of tract 88.01 in South Central Dallas (54 refinance loans total:
43 from subprime companies) is 24.6 percent over 65 and 95.3 percent Black.
Refinance borrowers in this tract were nearly all Black (or race information
was not reported), and almost two thirds of the Black borrowers were women.
Almost all of the Black women borrowers (17 of 20) in this high elderly tract
took refinance loans from subprime companies--including Aames Funding, Full
Spectrum Lending and Long Beach Mortgage.
Tract 112.00 (79 refinance loans: 54 from subprime companies) lies further to
the South in South Dallas, bordered by IH35 and I20 on the South and West. This
area is 79 percent Black and 14 percent Hispanic. Again, refinance borrowers
in this area were nearly all Black, but more were men than women (23 women,
28 men). The Black male borrowers took loans from subprime companies about half
the time (15 subprime: 13 prime), but the Black women borrowed mainly from subprime
companies (17 subprime: 6 prime). Subprime loans were spread among a number
of lenders, including Ameriquest, Aames, and Long Beach Mortgage.
Two East Austin neighborhoods flanking Martin Luther King Blvd, from IH35 to
Webberville Road are both high elderly and high minority areas with a high subprime
penetration. 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.
A large number of subprime companies are active in these two contiguous Austin
neighborhoods, led by Ameriquest and Aames Financial. Bank owned subprime companies,
including Citifinancial, Bank One Financial Services and NationsCredit are also
active here.
These small vingnetts of urban minority tracts with a high concentration of
elderly people support the findings of a recent American Association of Retired
Persons (AARP) national survey of older refinance borrowers. AARP found that
older borrowers who were women, widowed, Black and less educated held a significantly
greater share of subprime loans. More than half the older subprime borrowers
surveyed reported responding to advertisements or sales calls guaranteeing approval.(3)
Finding:
Even factoring out gender, income and more, a higher concentration of elderly
people in a neighborhood significantly predicts higher subprime penetration
To determine the significance of
only the concentration of elderly people for subprime lending, Consumers Union
predicted the probability that a consumer would end up with a subprime refinance
loan holding constant other factors: the race of the borrower, the gender of
the borrower, the minority concentration and income of the neighborhood, borrower
income, loan amount, population density, and the loan to income ratio.
We find that for every 1 percent increase in the concentration of people over
65 in a neighborhood, a borrower's likelihood of taking a refinance loan from
a subprime company increases by 1.3%.
We believe this analysis--while testing an indirect factor (the concentration
of elderly in the census tract where a home is refinanced)--indicates a relationship
between borrower age and subprime lending.
Further research along the lines of the recent AARP survey can fill in details
about individual elderly borrowers who end up with subprime loans.
Some anecdotal information is also available. Consumers Union reviewed 40 consumer
complaints about home equity lending filed with the Office of the Consumer Credit
Commissioner (OCCC). Most complainants did not provide their age, but some of
the complaints touch on subjects familiar to older people--fixed income and
the high costs associated with subprime lending.
Ability
to Pay
As most subprime lenders will explain,
risk-based pricing is not necessarily a bad thing. Subprime lending-the practice
of setting a higher price on a loan to a riskier borrower-has enabled families
with a history of credit problems to get homes.
On the other hand, some people may be borrowing more or at higher cost than
they can afford to repay. Lenders emphasize that the value of the home matters
more than other factors in loan approval.
Aames Funding sends direct mail offers to homes in East Austin touting easy
access to loans in excess of $20,000. " Even if you have credit problems,"
says one letter, "we can probably still help you out. That's because it's
your equity, not your income or credit that matters most."(4) But home
equity loans must be repaid, so a consumer's ability to repay is critical.
Mrs. T. of Lubbock, Texas was 79 years old and still working when she applied
for a home equity loan with Conseco. Conseco based its loan offer on her credit
(she was an A-2 borrower) and her current earned income and debts. But at $463
per month, the new loan cost more than she would be able to pay once she finally
retired.
"I am making the payment now because I am still working," she wrote
to the OCCC. "but, at 79, I may have to stop working any day. $463 a month
for 20 years is too much...if I could pay that long, and I will not live to
99."
In May 2001, Conseco had offered her a cash-out refinance, initially promising
$6,000 that she could use to install central air conditioning. But by the time
the prepaid points and fees were paid, her cash amounted to only $2,848-not
enough to pay for the central air. And her new loan bears an interest rate of
nearly 14 percent.
Although her settlement charges amounted to more than 8 percent of the new loan
amount, her loan did not violate any existing constitutional protections because
most of the fees (an origination fee to the lender and "points") do
not count towards the 3 percent fee cap. They are "interest" incorporated
into the APR.
"I realize I should not have signed a contract like this. But I did not
realize my mistake until my children told me I had been fleeced by Conseco,"
she wrote. "...It should be against the law for someone to take advantage
of naive seniors."(5)
Texas did not pass, among its home equity protections, a requirement that lenders
evaluate a person's ability to repay the note. Without such a protection, some
lenders might make loans based largely on the available equity in the home.
Since the home can be repossessed in the event of default, the lender is protected...but
the consumer is ruined.
Consumer
Protections
Texas did pass several important
consumer protections that have helped some elderly people. A home equity loan
may be rescinded within three days of closing if the consumer doesn't like the
final terms of the loan agreement. This allows people to get out of home equity
loans if they determine it costs too much.
An elderly Waco couple, Mr. and Mrs. R., refinanced their home in April, 2000
with Beneficial. With only $18,350 left on their existing mortgage, they borrowed
$27,259 to pay off two credit cards, a small Beneficial loan, and take some
cash out.
But the new home loan bore an interest rate of 15.98 percent APR, nearly 6 percent
higher than their existing home loan. Settlement fees, totaling 11.5 percent
of the amount borrowed, included more than $2,500 in "points" and
credit life insurance (neither fee counts towards the fee cap set in Texas law).
The new settlement charges actually totaled more than they owed on loans they
were paying off.
Furthermore, the couple believed that Beneficial intended to back date the loan
documents. Mr. R told the OCCC that the broker told them to "come by Saturday
morning, 4/29/00, and pick up the check and sign the other check for pay-off
and we will back date this so we closed. (sic)" They wanted to cancel the
transaction within their three day recission period.
Beneficial denied any effort to backdate the loan documents. The couple signed
a request to rescind their loan contract and Beneficial cancelled the transaction.
The OCCC sent a followup letter to the company advising them to "again
advise your branch employees of the impropriety of backdating loan documents."(6)
For this couple, the right to cancel the loan allowed them to back out of a
deal that offered a relatively small benefit at a very high cost.
Recommendations
Since elderly people on a fixed income are unlikely to be able to come up with more money to pay for a new, more expensive mortgage the Texas Legislature should set special standards for high cost loans--loans with an interest rate that equals or exceeds six percentage points over the weekly average yield on five year treasury bills or contains fees in excess of three percent of the loan amount. These standards should:
________
Notes:
(1)
Owner occupied, single family, refinance home loans made in tracted areas of
the state where 2000 census information is available for the age and race of
residents (402,639 loans). We excluded refinance loans made by HUD identified
manufactured home specialty lenders. The crosstabulation used to create scatter
charts (page 2) incorporates 98 percent of all single family, non-manufactured,
refinance loans made in Texas during this period (a total of 409,354 loans).
In order to factor in more borrower information and census data, additional
records were eliminated for the regression analysis. Consumers Union's regression
model is based on a logistic regression of 262,329 refinance loans originated
in Texas over 1997-2000 as reported under HMDA. The base of data is smaller
because we eliminated all loans where the lender did not report the race or
gender of the borrower, and where income or loan amount were not reported or
reported as zero.
The regression controls for the sex, race and income of the borrower, the size
of the loan, the size of the loan in relation to the income of the borrower,
the presence of a co-applicant, the racial composition and population density
of the home's census tract, as well as the relative wealth of that tract to
the rest of the MSA. The logistic model successfully predicts the outcome 74
percent of the time.
(2) Bradford, Calvin, Risk or Race? Racial Disparities and the Subprime Refinance
Market, Center for Community Change, May 2002. Finds subprime penetration rates
of more than 40 percent in several Texas cities by 2000, and rates of more than
60 percent among Black borrowers in selected Texas MSAs. Over all, Consumers
Union finds that refinance loans by subprime companies grew from 6.3 percent
of the statewide refinance market in 1997 to 34.8 percent in 2000. The total
number of refinance loans made by subprime companies increased from 2454 loans
in 1997 to 23,300 loans in 2000.
(3) Hermansen, Sharon, "Older Subprime Refinance Mortgage Borrowers,"
AARP, July 2002. Fifty four percent of older subprime borrowers reported taking
the loan as a result of an ad or sales call touting guaranteed approval. Far
fewer prime borrowers selected their loan company on the basis of such an offer.
(4) Aames Funding, "Dear Preferred Homeowner," Austin, Texas, no date.
(5) Consumer Complaint, OCCC, Lubbock, Texas, 12/27/2001.
(6) Consumer Complaint, OCCC, Waco, Texas, 4/26/2000.
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