High Cost and Investor Mortgages

The text below is an excerpt from the complete document. Read the full report in PDF format.

Abstract

Neighborhoods likely to be the hardest hit by foreclosure impacts in 2009 are those that experienced the highest densities of subprime (high-cost) lending during the peak 2004-2006 period. This brief examines patterns of such lending in the 100 largest metropolitan areas. The very highest subprime densities were found in minority neighborhoods that were, interestingly, at the higher rather than the lower end of the income spectrum. But there was considerable variety in characteristics among the most troubled. Of the fifth of census tracts that ranked highest in subprime density, 35 percent had predominantly white populations and 60 percent were in the suburbs.

The peak period of subprime lending in this country was from 2004 to 2006. Even though the foreclosures of Alt-A and prime loans will be increasingly important in the future, in early 2009 it is likely that the neighborhoods where the densities of those subprime loans were highest are the ones in greatest need of stabilization because of foreclosure impacts to this point.

This brief examines the characteristics and locations of such neighborhoods in the United States' 100 largest metropolitan areas. We define subprime density as the number of high-cost loans from 2004 through 2006 per 1,000 housing units in one- to four-unit structures. The brief also examines neighborhood patterns in the share of high-cost loans made to investors (as opposed to owner-occupant borrowers). High investor shares suggest higher rates of rental occupancy and, thus, the need for different approaches to neighborhood stabilization.

Main Findings

The neighborhoods hardest hit by the subprime crisis have been those where minority residents predominate, but among those, the highest subprime densities are found in census tracts with the lowest poverty rates.

• In predominantly Hispanic neighborhoods, for example, densities varied from only 47 in high-poverty tracts (those with a poverty rate of 30 percent or more) up to 84 where the poverty rate was low (below 10 percent). In predominantly black neighborhoods, the comparable range was from 51 in high-poverty areas to 79 in those with low poverty.
• The subprime density in predominantly white neighborhoods averaged a muchlower 32 and did not vary much by poverty level (although, as pointed out below, significant numbers of these had densities well above the average).

Average densities of subprime lending also varied by region: lowest in the Northeast (21) and more than twice as high in the South (49) and West (47), with the Midwest about halfway between (36). The U.S. average was 40.

But contrasts within metro areas were also striking. For each metro, we divided all tracts in the central city into three rings based on their distance from the central business district and then did the same for the suburbs.

• In the Northeast, the highest densities (27?30) were in the middle and outer rings of the central city.
• In the Midwest, densities were higher in all locations, but the pattern was similar—the highest subprime densities (49?51) were in the middle and outer rings of the central city.
• In the South, in contrast, the highest density (55) was in the middle rings of the suburbs.
• In the West, the highest density (53) was in the outer rings of the suburbs.

To sense the composition of probable neighborhood-stabilization workloads, this brief examines the characteristics of tracts with the very highest subprime densities. Defining that group as the top fifth of all tracts (a density of 58 or more), we find substantial diversity:

• 60 percent were in the suburbs and of those, 53 percent were low-poverty neighborhoods and 45 percent had predominantly white populations.
• Of the 40 percent in the central cities, however, 18 percent were low poverty and 18 percent were predominantly white.
• 36 percent of the total were in the South and another 32 percent were in the West.

On average, 17 percent of all subprime loans over this period were made to investor-borrowers. In contrast to the more evenly spread pattern of subprime lending overall, subprime investor loans were much more concentrated in highpoverty, African American neighborhoods in central cities:

• Investor shares were highest at 31 percent in the inner rings of the central cities, dropping gradually to 18 percent in the cities' outer rings, and then ranging only from 13 to 15 percent in the suburbs.
• Across locations, investor shares averaged 32 percent in high-poverty neighborhoods, in contrast to only 13 percent in low-poverty neighborhoods.
• In predominantly African American neighborhoods, the investor share averaged 30 percent, more than twice the level where the predominant group as Hispanic (13 percent) or white (15 percent).

(End of excerpt. The entire report is available in pdf format.)

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Usage, posting and reprint of materials on the UI web site:

Most publications may be downloaded free of charge from the web site in PDF format. This information may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required.

Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact paffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.