The Harrisons’ plight is hardly unique. Indeed subprime mortgages are more likely to end in foreclosure when compared with conventional loans. Still, the recent financial turmoil is hardly a black problem. The best way to refute those charges is to examine the evidence.
The Majority of Subprime Loans Didn’t Fall Under the Community Reinvestment Act
Nowhere in the act’s language does it tell lenders to offer subprime products. In fact, it calls for loans that utilize “safe and sound banking practices,” points out Warren W. Traiger, a partner with Traiger & Hinckley L.L.P., a law firm based in New York City. In a January 2008 study, Traiger & Hinckley found that banks subject to the act are two-thirds less likely to offer borrowers high-cost mortgage loans, compared with other lenders. They were 58% less likely to offer high-cost loans to low- and moderate-income borrowers. Kathleen Day, a spokeswoman for the Center for Responsible Lending, points out that the act applies only to federally insured banks. Between 2004 and 2006, however, about half of all subprime loans were made not by such banks but by independent lenders, according to the Center. In testimony before the U.S. House of Representatives Committee on Financial Services last February, Michael S. Barr, a law professor at the University of Michigan Law School, noted that an additional 30% of subprime loans were made by bank subsidiaries, which are also not subject to the act. That leaves roughly 20% of subprime loans that may have been influenced by the Community Reinvestment Act.
Subprime Products Were Risky—Not Borrowers
At the heart of the conservatives’ claim, is the notion that efforts to promote minority homeownership led bankers to lend to high-risk borrowers who subsequently foreclosed on their homes. However, a study by the University of North Carolina’s Center for Community Capital found that the borrowers weren’t the problem. When tracking the mortgage default rate of low-income and minority borrowers with similar credit histories, researchers found that those who were issued subprime mortgages were three to five times more likely to default than those who received other types of loans. “The people weren’t risky, the products were,” says center director Roberto G. Quercia.
African Americans Were Steered Into High-cost Subprime Loans
African Americans are 2.7 times more likely than their white counterparts to be issued subprime loans, according to a report from the Association of Community Organizations for Reform Now on data compiled as part of the 2005 Home Mortgage Disclosure Act. “Even high-income African Americans were just as likely to be sold a bad subprime loan as a low-income white person,” says Austin King, director of the ACORN Financial Justice Center. So, were blacks, like the Harrisons, steered toward subprime loans when they could have qualified for something better? Yes. An estimated 35% to 50% of minority subprime borrowers could have qualified for prime market loans, according to research by the Fannie Mae Foundation.