MBA's Regulatory Compliance Conferenc e by smx43008

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MBA’s Regulatory Compliance Conference

              J.W. Marriott
              Washington, DC




          Political Analysis of The Subprime
                  Mortgage Meltdown

                           by

                Maurice Jourdain-Earl

                   p            ,
                 September 15-16, 2008
                               so called
• Much has been said about the so-called subprime
  lending crisis:
•
    – MortgageImplode.com indicates 282 lenders have gone out of
      business in the last two years
    – Every Presidential candidate has suggested proposals to deal
      with the issue
    – Everyone has heard (and in some instances experienced) the
      horror stories
    – Few if any, however, have discussed the dimensions of this
      issue by race and politics




                                                                     2
1.              groups                   number
1 Which racial gro ps had the greatest n mber and percent of
   subprime rate loans?
2. Which groups were over-served with subprime rate lending?
3. Which Congressional Di t i t of th 110th congress were hit
3 Whi h C          i   l Districts f the
   the hardest by subprime rate lending overall?
4. Among blacks, which Congressional Districts were hit the
   hardest by b i         t lending?
   h d t b subprime rate l di ?
5. Among Hispanics, which Congressional Districts were hit the
   hardest by subprime rate lending?
6. Among Asians, which Congressional Districts were hit the
   hardest by subprime rate lending?
7. Among whites, which Congressional Districts were hit the
   hardest by subprime rate lending?



                                                             3
• Since 2004 HMDA requires lenders to report the spread
  (difference) between the annual percentage rate (APR) on a
  loan and the rate on Treasury securities of comparable
      t it      but l f l         ith       d b       d i
  maturity – b t only for loans with spreads above designatedt d
  thresholds.
       first-lien loans,
• For first lien loans the threshold is three percentage points
  above the Treasury security of comparable maturity. For
  second-lien loans, which tend to have higher prices, the
  threshold is five        t       i t b
  th h ld i fi percentage points above th T                      it
                                               the Treasury security
  of comparable maturity.
• Loans with a spread are considered higher priced subprime
  rate loans and loans without a spread are considered lower
  cost prime loans.


                                                                   4
                                  lending,
• The incidence of higher-priced lending according to
  economists at the Federal Reserve Board “is both an outcome
  of economic factors and a predictor of future delinquencies.”
• The correlation between higher-priced loans and the likelihood
  of delinquencies (and by inference defaults and foreclosures)
  can be used to anticipate increased levels of mortgage
  defaults and foreclosures.
• In short, by measuring the frequency and magnitude of higher-
  priced loans within the population (or within population
  segments) one can arrive at a reliable predictor of the
     e ood of o tgage defaults and o ec osu es o those
  likelihood o mortgage de au ts a d foreclosures for t ose
  borrowers.



                                                                   5
                                                tool,
• LendingPatterns™ an online HMDA analysis tool developed
  by ComplianceTech was used extensively to mine the HMDA
  data to analyze the lending patterns of all HMDA reporting
  lenders in the United States by race, income, gender, and
  geography.
• The online system produces reports by the entire United
  States, Metropolitan Statistical Areas (MSA), states, counties,
  census tracts, and for the 2006 HMDA data, by Congressional
  Districts of the 110th C
  Di i       f h         Congress.
• Using LendingPatterns™ conventional, 1st lien, 1-4 family,
  owner occupied,
  owner-occupied home purchase and refinance loans with a
  HMDA reported spread were isolated.



                                                                    6
• In each year during the period of 2004-2006,
  whites had more subprime rate loans than all
             combined. However,           year,
  minorities combined However in each year the
  white percent of subprime rate loans was lower
           minorities,       Asians.
  than all minorities except Asians

                     2004-2006,
• During the period 2004-2006 compared to all
  other racial groups, blacks and Hispanics had the
  largest p
     g             g        p       p
          percentage buildup of subprime rate loans
  and the highest average spreads.


                                                      7
• Year after year, subprime rate loans were
  increasingly originated in higher proportion in
  census tracts that are inhabited by minorities.




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• Hispanics and Asians used subprime rate loans
  more often for home purchase transactions while
  all other racial groups used subprime rate loans
  more often to refinance an existing mortgage.




                                                     13
– Upper income borrowers had the highest share at 39.37%, followed by
  27.55%                   borrowers,       20.99%
  27 55% for middle income borrowers and 20 99% for moderate income
  borrowers. Contrary to popular belief, low income borrowers had only
  149,173 or 7.57% of 2006 subprime rate loans.

– Low income borrowers had a higher proportion of subprime rate loans
  (35.15%), but low income borrowers had only 7.57% of all 2006
  subprime rate loans.
–U      income b
  Upper i        borrowers ffrom all racial groups h d th l
                                  ll    i l                      t    b    f
                                                   had the largest number of
  subprime rate loans, followed by middle, moderate and low income
  borrowers.

– More than 62% of upper income Asians used subprime rate loans for
  home purchase or refinance transactions in 2006. By comparison,
  49.59% of upper income Hispanics, 57.81% of upper income Hawaiians;
  40.36%                                           37.35%
  40 36% of upper income Native Americans; and 37 35% of upper income
  whites used subprime rate loans to finance their 2006 mortgages. Upper
  income blacks had the lowest proportion of subprime rate loans at
  30.28%.

                                                                               14
• Males and females without co-applicants had the
  highest use of subprime rate loans in 2006 at
  32.60%      32.21% respectively. Combined,
  32 60% and 32 21% respectively Combined
  these presumably single borrowers accounted
  for 64.81% of the 2006 subprime rate loans.

• For all racial groups except black, males without
  co-applicants had the highest share of subprime
  rate loans. For blacks, it was females without
  co applicants
  co-applicants that had the largest share at
  42.10%.


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                             Percent of Loans   Percent of Foreclosures 
                                                        Started




Prime Fixed                      65%                    18%
Prime ARM                        15%                    20%
Subprime Fixed                    6%                    12%
Subprime ARM                      7%                    42%
FHA                               7%                     8%
Source: MBA Delinquency Survey, March 6, 2008



                                                                           16
• Subprime ARMs represent 7 percent of the loans
  outstanding, they represent 42 percent of the
  foreclosures” started. Subprime fixed represent
  6% of the loans outstanding and 12% of
  f    l        t t d
  foreclosures started.

 Together, subprime loans represent 13% of
•T     h     b i     l                    f
 loans outstanding, but 54% of foreclosures
 started.
 started
   Source: MBA Delinquency Survey, March 6, 2008




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Rate Rank      State Name       Total        %Change      %Change        Total             %           Percentage of 
                             Foreclosure    from 2006    from 2005    Properties                      Subprime Rate 
                                                                                      Households 
                               Filings                                with Filings                    Loans in State­
                                                                                      (foreclosure 
                                                                                                        2006 HMDA
                                                                                          rate) 
                                                                                                      ComplianceTech 

    1        Nevada            66,316        215.12       758.68        34,417           3.376            30.47
    2        Florida           279,325       123.96       129.25        165,291          2.002            35.03
    3        Michigan          136,205        68.32       282.22        87,210           1.947            31.92
    4        California        481,392       237.99       681.95        249,513          1.921            26.12
    5        Colorado          71,149         29.96       140.12        39,403           1.919            21.26
    6        Ohio              153,196        87.93       207.35        89,979           1.797            28.49
    7        Georgia           99,578         31.07       118.43        59,057           1.566            28.96
    8        Arizona           69,970        150.91        160.7        38,568           1.516            29.97
    9        Illinois          90,782         25.29        94.3         64,310            1.25            30.05
   10        Indiana           52,930
                               52 930         11.31
                                              11 31        73.57
                                                           73 57        27,980
                                                                        27 980           1.027
                                                                                         1 027            30.28
                                                                                                          30 28
             Subtotal        1,500,843                                 855,728                            29.26


Source: RealtyTrac
Source: RealtyTrac


                                                                                                              18
Overall Congressional Districts >10,000 Subprime
Rate Loans
R t L




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CONGRESSIONAL DISTRICTS IMPACTED BY HIGH SUBPRIME RATE 
LENDING TO BLACKS 
  Rank   Congressional District                        Representative   # Black Subprime   % Subprime


   1              IL‐02           IL‐02 Jesse L. Jackson, Jr. (D)           11,835           63.6%
   2              FL‐23           FL‐23 Alcee L. Hastings (D)                9,397           54.6%
   3              IL‐01           IL‐01 Bobby L. Rush (D)                    9,259           60.4%
   4              FL‐17           FL‐17 Kendrick Meek (D)                    7,782           56.8%
   5             MI‐14            MI‐14 John Conyers, Jr. (D)                7,753           75.2%
   6             MD‐07            MD‐07 Elijah E. Cummings (D)               7,644           53.5%
   7             VA‐03            VA‐03 Robert C. Scott (D)                  7,220           50.5%
   8             MO‐01                   illi         l ( )
                                  MO‐01 William Lacy Clay (D)                6,954               %
                                                                                             65.3%
   9             GA‐05            GA‐05 John Lewis (D)                       6,865           51.2%
   10             FL‐03           FL‐03 Corrine Brown (D)                    6,814           57.5%
   11            TN‐09            TN‐09 Steve Cohan (D)
                                  TN‐09 Steve Cohan (D)                      6 373
                                                                             6,373           67.0%
                                                                                             67 0%
   12            MI‐13            MI‐13 Carolyn Cheeks Kilpatrick (D)        5,965           77.0%
   13             IL‐07           IL‐07 Danny K. Davis (D)                   5,539           58.1%
   14             NJ‐10                             y ( )
                                  NJ‐10 Donald M. Payne (D)                   ,
                                                                             5,301           54.6%
   15            WI‐04            WI‐04 Gwen Moore (D)                       5,040           68.7%

2006 HMDA Data and Census Boundaries for 110th Congress


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       CONGRESSIONAL DISTRICTS IMPACTED BY HIGH 
         SUBPRIME RATE LENDING TO HISPANICS 
         SUBPRIME RATE LENDING TO HISPANICS
Rank    Congressional                    Representative    Hispanic    % Subprime
           District                                       Subprime

 1          AZ‐04        Ed Pastor (D)                     11,654        59.2%
 2          FL‐17        FL‐17 Kendrick Meek (D)
                         FL‐17 Kendrick Meek (D)            7,851
                                                            7 851        51.5%
                                                                         51 5%
 3          FL‐14        FL‐14 Connie Mack IV (R)           6,284        54.1%
 4          FL‐11        FL‐11 Kathy Castor (D)             4,939        51.3%
 5          TX‐15        TX‐15 Ruben Hinojosa (D)           4,247        51.3%
 6          TX‐29        TX‐29 Gene Green (D)               3,998        57.0%
 7          AZ‐03        AZ‐03 John Shadegg (R)             3,164        51.3%
 8          TX‐18        TX‐18 Sheila Jackson‐Lee (D)       2,879        53.8%
 9          TX‐09        TX‐09 Al Green (D)                 2,346        51.8%
 10          IL 01
             IL‐01       IL‐01 Bobby L Rush (D)
                         IL 01 Bobby L. Rush (D)            1,325
                                                            1 325        50 0%
                                                                         50.0%
 11          RI‐02       RI‐02 James R. Langevin (D)        1,110        50.6%

2006 HMDA Data and Census Boundaries for 110
2006 HMDA Data and Census Boundaries for 110th Congress

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       CONGRESSIONAL DISTRICTS IMPACTED BY 
       HIGH SUBPRIME RATE LENDING TO ASIANS
       HIGH SUBPRIME RATE LENDING TO ASIANS
Rank    Congressional District                Representative    # Asian    % Subprime
                                                               Subprime



1              NY 06
               NY‐06             NY‐06 Gregory W. Meeks (D)
                                 NY 06 Gregory W. Meeks (D)     1,060        40.1%

2              MN‐04             MN‐04 Betty McCollum (D)        509         37.5%

3               CA‐20
                CA 20            CA‐20 Jim Costa (D)
                                 CA 20 Jim Costa (D)             483         33.3%
                                                                             33 3%

4               CA‐28            CA‐28 Howard Berman (D)         366         30.9%

5              MN‐05             MN‐05 Keith Ellison (D)         280         35.9%

6              WI‐04             WI‐04 Gwen Moore (D)            230         40.9%

7               AK‐00            AK‐00 Don Young (R)             214         30.7%

                                     f            g
2006 HMDA Data and Census Boundaries for 110th Congress

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       CONGRESSIONAL DISTRICTS IMPACTED BY HIGH 
          SUBPRIME RATE LENDING TO WHITES
Rank     Congressional                  Representative      White         % 
            District                                       Subprime   Subprime
1           CA‐38                            l
                          CA‐38 Grace Napolitano (D) ( )     5,071          %
                                                                        34.8%
2           AR‐01         AR‐01 Marion Berry (D)             3,900      36.7%
3            KY‐01        KY‐01 Edward Whitfield (R)         3,562      34.4%
4            IL‐03
             IL 03        IL‐03 Daniel Lipinski (D)
                          IL 03 D i l Li i ki (D)            3 289
                                                             3,289      36.1%
                                                                        36 1%
5            PA‐04        PA‐04 Jason Altmire (D)            3,044      43.7%
6            FL‐07        FL‐07 John L. Mica (R)             2,823      33.1%
7            FL‐03
             FL 03        FL‐03 Corrine Brown (D)
                          FL 03 C i B            (D)         2 729
                                                             2,729      35.4%
                                                                        35 4%
8           NC‐10         NC‐10 Patrick T. McHenry (R)       2,615      33.2%
9           CA‐17         CA‐17 Sam Farr (D)                 2,586      33.9%
10          WI‐01
            WI 01         WI 01 Paul Ryan (R)
                          WI‐01 Paul Ryan (R)                2 384
                                                             2,384      43.9%
                                                                        43 9%
11          GA‐04         GA‐04 Hank Johnson (D)             2,287      33.6%
12          MA‐05         MA‐05 Martin T. Meehan (D)         2,273      41.6%
13          GA 07
            GA‐07         GA 07 John Linder (R)
                          GA‐07 John Linder (R)              1 114
                                                             1,114      40 7%
                                                                        40.7%
14          CA‐30         CA‐30 Henry Waxman (D)             1,027      36.0%

2006 HMDA Data and Census Boundaries for 110th Congress


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• While many believe the current crisis is a
  “minority” problem, the data show that the
  subprime lending crisis has had a bi-racial impact.
  Whites in fact have far more subprime rate loans
  than all the minority groups combined.

              speaking                          bi-
• Politically speaking, the subprime impact is bi
  partisan. In terms of the number of subprime rate
  loans in the 44 worst districts, they were split
          50-50/Democrat-Republican.
  nearly 50-50/Democrat-Republican This means
  that both sides of the aisle should have a strong
  interest in crafting workable solutions.




                                                        40
• Income-wise, middle and upper income
  families were hit much harder in the
                  low/mod.
  aggregate than low/mod

• The proportion of loans that minorities
  receive as a percentage of total lending
          y                   gg
  in is way out of line and suggest a
  serious credit supply, consumer choice
  and/or a steering problem.



                                             41
                                p      y                  yp
– Better HMDA data collection especially loan instrument type
  (ARM I/O Neg AM) and pricing information like APR i t d
  (ARM, I/O, N          d i i i f         ti lik      instead
  of spread.

                             middle-income
– Make FHA a true option for middle income Americans

– Make the income approach to appraisals, e.g., determining
  value by reference to market rents a clear alternative to
  looking at comparables that have been excessively
  influenced by foreclosures.

– Outlaw some types of loan instruments - we could have
  done without the 2/28s and 3/27s.

– Lower the HOEPA thresholds.

– More effective enforcement of the fair lending laws.

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  Maurice Jourdain-Earl
     202-842-3800
     202 842 3800

jourdainearl@compliancetech.com
    www.compliancetech.com




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