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Peter A. Tatian is a Senior Research Associate at the Urban Institute.
Abstract
As is true nationally, many home buyers in the District of Columbia have made use of subprime loans to purchase a home. Data indicate that use of subprime loans is highest in Wards 4, 5, 7, and 8, and among African-American and Latino borrowers. High use of subprime loans by these groups point to areas where predatory or illegal practices might be occurring. The D.C. Council can consider several measures to address these concerns, including providing better education and credit counseling for homebuyers, requiring more reporting by mortgage lenders, and testing mortgage lenders for fair housing practices.
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Testimony
Good afternoon. My name is Peter Tatian and I am a senior researcher in the Urban Institute's Metropolitan Housing and Communities Policy Center. I am happy to provide this testimony on subprime and predatory mortgage lending with the hope that it will be useful to the Council in its consideration of measures needed to protect homeowner equity.
Subprime vs. Predatory Lending
Subprime loans are those that have higher costs (such as higher interest rates) than prime loans. Subprime loans are designed for applicants with poor credit histories, high loan-to-home-value ratios, or other credit risk characteristics that would disqualify them from lower cost, prime-rate loans.
Subprime lending has made credit available to households with low incomes or credit scores that would not allow them to qualify for prime-rate loans. Nevertheless, as is now becoming all too clear, subprime lending can be detrimental if borrowers who take out higher-cost loans later have difficulty repaying them and risk defaulting on those loans. We do not have any local data on defaults for subprime loans, but national data suggest that is likely to be a growing problem. As reported in this morning's Washington Post, the number of subprime borrowers who missed payments climbed to a four-year high and the number of foreclosures on all homes jumped to its highest level in nearly four decades.
Another problem is that some subprime loans may be predatory. Predatory subprime loans are those that carry unreasonable and unjustifiable fees, penalties, or loan terms. For example, a predatory loan may have an excessively large balloon payment or high prepayment penalties. Predatory lending may also involve outright fraudulent behavior, such as inappropriate marketing strategies and lack of full disclosure of loan terms. Such loans can result in borrowers being stripped of equity or even losing their homes through foreclosures. According to The Center for Responsible Lending, predatory loans stripped District families of $24.9 million in home equity in 2001 (Stein 2001).
Predatory lending may also include steering certain borrowers, such as the elderly, African Americans, or Latinos, to subprime loans. Such practices are already illegal under federal and D.C. fair housing and human rights laws but are currently difficult to detect or prove.
The complete testimony is available in PDF format.
The views expressed are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders.
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.
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