January 21, 2009

Finally, Subprime Foreclosure Rates by Race

A variety of evidence has long pointed toward minorities accounting for a disproportionate fraction of the defaulted subprime mortgage losses that set off the economic crash. This would hardly be surprising since the government pushed hard to increase lending to minorities of marginal creditworthiness in the name of increasing minority homeownership.

The Clinton Administration teamed up with leftist groups like Obama's colleagues at ACORN to push for more lending to minorities. The Bush Administration stepped up the pace, denouncing down payments as barriers holding minorities back from the American Dream, in part to convert the growing Hispanic population into homeowning Republicans.
But, like the guns of Singapore in 1941, the government's statistics-collecting apparatus is designed only to make sure that minorities are getting enough loans, not to count how often they default on their mortgages. So, we've been lacking direct data on foreclosure rates in the current Housing Bubble.

Back in October, a reader calculated from the federal Home Mortgage Disclosure Act database that minorities got half the subprime cash (for home purchases and refinancings) handed out in the big years of 2004-2007. Mortgage dollars (prime and subprime) for home purchases leant to Hispanics went up 691% from 1999 to 2006 and 397% for blacks (but only 218% for Asians and about 100% for whites). In other words, mortgage lending to Hispanics almost octupled from 1999 to the peak of the Housing Bubble in 2006. Thus, a sizable majority of defaulted dollars lost are in just four heavily Hispanic states: California, Arizona, Nevada, and Florida (what Wall Street called the "Sand States").
But, what about foreclosure rates by race?

Two economists at the Federal Reserve Bank of Boston, Kristopher S. Gerardi and Paul S. Willen, have published an important paper, "Subprime Mortgages, Foreclosures, and Urban Neighborhoods," which provides a solid indication. For the state of Massachusetts, they laboriously matched up federal Home Mortgage Disclosure Act data (which includes ethnicity but not foreclosures) with county registrar office data, which can tell them if the property wound up in foreclosure but doesn't list ethnicity. By collating the two disparate databases, they wound up with foreclosure rates by race for Massachusetts.
Here's their abstract:
This paper analyzes the impact of the subprime crisis on urban neighborhoods in Massachusetts. The topic is explored using a dataset that matches race and income information from HMDA with property‐level, transaction data from Massachusetts registry of deeds offices. With these data, we show that much of the subprime lending in the state was concentrated in urban neighborhoods and that minority homeownerships created with subprime mortgages have proven exceptionally unstable in the face of rapid price declines. The evidence from Massachusetts suggests that subprime lending did not, as is commonly believed, lead to a substantial increase in homeownership by minorities, but instead generated turnover in properties owned by minority residents. Furthermore, we argue that the particularly dire foreclosure situation in urban neighborhoods actually makes it somewhat easier for policymakers to provide remedies.

They go on to write:
The first column in each panel of Table 3 shows the cumulative percentage of subprime ownerships that end in foreclosure. There are substantial differences between minority and white ownership vintages. For example, approximately 15 percent of black, subprime ownerships initiated in 2005 ended in foreclosure by December 2007, compared with 10 percent of Hispanic subprime ownerships, and 6.5percent of white subprime ownerships.
Here's data based on their Table 3:

Black Hispanic White Black / White Hisp / White
1998 8.5% 7.1% 4.1% 2.1 1.7
1999 9.2% 5.1% 2.5% 3.7 2.0
2000 8.1% 8.1% 5.4% 1.5 1.5
2001 8.7% 8.3% 5.2% 1.7 1.6
2002 8.9% 6.2% 4.8% 1.9 1.3
2003 8.6% 6.6% 5.1% 1.7 1.3
2004 12.9% 10.4% 6.6% 2.0 1.6
2005 15.0% 10.3% 6.5% 2.3 1.6
2006 10.2% 6.8% 4.1% 2.5 1.7

Keep in mind that these are cumulative foreclosure percentages up into 2007, with the year representing their "vintage." Normally, you would expect cumulative foreclosure percentages to decline as you get closer to the present since, say, a 2005 vintage mortgage has had less time for bad things to happen to the borrower than a 1999 vintage mortgage. But we see instead a rising cumulative rate peaking in 2004-2005. (And the 2006 ones will probably end up about as bad, or even worse, as the two previous years once their teaser provisions reset after a couple of years.)

So, in Massachusetts, the Non-Asian Minority foreclosure rate on subprime mortgages was about twice the white rate. That didn't change too much over the years, but the proportion of mortgages that were subprime and the proportion of mortgage dollars going to minorities changed radically in the Bush years, contributing sizably to the disastrous mortgage meltdown that began in 2007 and triggered the more general crash of 2008.
If that two to one minority to white foreclosure ratio seen in Massachusetts holds true nationally, where minorities took out half the subprime dollars, then minorities would account for two-thirds of all defaulted subprime dollars.

However, Asians probably have a lower default rate. On the other hand, they largely stayed away from subprime mortgages, so it's not a big issue. So, it's likely that minorities accounted for at least 60% of the subprime dollars defaulted.

In reality, what was truly disastrous was not total defaulted dollars per se but unexpected defaulted dollars. The financial industry expected a certain level of defaults each year due to family tragedies and the like, but they stupidly did not expect a systemic disaster from the government's efforts (e.g., President Bush's 2002 call to add 5.5 million minority home owners by 2010 by zero down payments on home purchases and other dubious means) to push minorities into home ownership. Thus, in California, the epicenter of the Bubble, the percentage of first time home buyers putting zero money down went from under 7% under Clinton to 41% in 2006.

Granted, Massachusetts is not the most representative of states. Still, this data seems to roughly fit what we see elsewhere in terms of where the foreclosures happened. So, it now appears likely that a sizable majority of the unexpectedly defaulted subprime dollars were lost on properties owned by minorities.

Many people can't believe that minorities could account for so much of mortgage meltdown, but there are now over 100 million minorities in the U.S. Furthermore, their mortgages tended to be relatively larger than one might expect because they tend to live in fairly expensive urban areas rather than in dirt cheap rural areas. In the 2006 vintage, for example, the average Hispanic's mortgage was slightly larger than the average non-Hispanic white's, and the average black's was only about 15-20% less. (The high cost of Hispanics' mortgages is due in large measure to so many living in California, where median home prices were almost triple the other 49 states average at the peak of the Housing Bubble.)

This is not to say that minorities are "to blame" for the Mortgage Meltdown. The bipartisan consensus in favor of raising minority homeownership rates through laxer credit standards deserves much of the blame. As does the financial industry's refusal to ask politically incorrect questions about how many NAMs (Non-Asian Minorities) in California and elsewhere could possibly earn enough money to pay back the huge mortgages being handed out in 2003-2007, or could find Greater Fools willing to pay even more to live in slummy neighborhoods.


Anonymous said...


John Seiler said...

Another aspect that needs to be looked into is the effect of Greenspan's inflation on housing. After 9/11, he panicked and began vastly expanding the money supply; since then, gold's price has more than tripled. This must have pushed up housing prices. In tandem with Bush's scheme for artificially increasing minority home ownership, which also pushed up prices, housing affordability rapidly dropped even as banks were handing out loan money at a ridiculous pace, especially to minorities. Then the bubble burst. Even with the recent housing crash, prices in Orange County, Calif. still are 67% above what they were on 9/11 -- although who knows if that will last.

Anonymous said...

>>Normally, you would expect cumulative foreclosure percentages to decline as you get closer to the present since, say, a 2005 vintage mortgage has had less time for bad things to happen to the borrower than a 1999 vintage mortgage.

I'm not sure this is true. I'll bet the first few years of a mortgage are the most vulnerable.

Think about it -- the buyer has stretched himself to the limit to buy a house, but over time, he gets pay raises and promotions, and the payment becomes easier. Once you're past the five-year mark, foreclosures probably decline substantially.

Anonymous said...

Where are the Asians? Why is it acceptable to do a national racial breakdown of anything today and leave out Asians?

Anonymous said...

I am Lugash.

Tommy Shanks,

I think you have it right, but you're thinking in terms of prime borrowers. They get raises, cut expenses, clear up the family balance sheet etc. Subprime borrowers lose their jobs, have unexpected expenses etc. The mortgage is always a struggle for them.

The 2005 loans have aged for 4 years right now in 2009. In 2011, when the 2007 loans have aged the same amount of ageing we're going to see the same high default rates.

I am Lugash.

Steve Sailer said...

These are "cumulative foreclosure rates," not annual foreclosure rates.

If, say, 1% defaulted annually due to random family tragedies, then the 1998 vintage mortgages should have a 9% cumulative default rate, the 1999 mortgages an 8% rate, and so on down to a 1% rate for 2006. Instead, you see the opposite pattern, showing the creditworthiness of borrowers was declining, sharply after 2003.

Anonymous said...

Slightly related to this post, but property values here in the US are going to drop anyway even if we do not have a long recession. Since the Brown wave hasn't receded a lot of neighborhoods are going to go Brown, Black or other undesirable minority soon. This means that any person that took out a 30 year mortgage will actually end up being upside down on their loan as the neighborhood changes. So no matter where you live if you did not pay the Mestizo price, you overpaid.

Anonymous said...

Where are the Asians? Why is it acceptable to do a national racial breakdown of anything today and leave out Asians?

Well, duh. Leaving Asians out allows the press to continue the "disparity is all racist Whitey's fault." Because, as everyone knows, Whitey may not be color blind but he is completely incapable of distinguishing a slant eye from a round eye.

Anonymous said...

"Where are the Asians? Why is it acceptable to do a national racial breakdown of anything today and leave out Asians?"

There always is a problem, isn’t there?

Anonymous said...

I love how minorities are getting blamed, and not the banks for their SHADY lending practices. They know they are dealing with less educated people than the average home buyer, so they give them a home with a low ARM at say 6%, and their mortgage payment jumps $500 a month when that rate adjusts in 2 years. You are also overlooking the impact the facts hiring mortgage brokers to call existing homeowners to refinance! Say a customer had a 30 year fixed rate, a credit score of 550, and 20k in credit card debt. The brokers offered them a 2 year arm at 8%, where they could pay off their debt with their credit cards, and improve their credit score 100 points bringing it to 650. As long as they made their payments ontime, after the 2 year arm, they would be able to refinance at the original 6%. After these people took the loans and made the payments ontime, the banks changed the minimum credit scores to refinance from 650 to (say for example) 700. Now the guy is stuck with a mortgage that is 2% higher, and on a 300k house, that's an extra $500 a month in interest alone!
But lets not talk about that! Lets instead blame people who were making say 30-40k a year and got laid off because the corporation they were working for, outsourced their job to Mexico, so that they could cut labor costs and increase shareholder profits.

Anonymous said...

Statistics like this certainly help to understand the thinking of the different races of people. Why is it that the white people always seem to be the responsible ones? They have the lowest foreclosure rates meaning most pay their bills on time. But yet, they will now be the ones to "bailout" the other races, including illegal immigrants. Yes, I'm white and I'm tired of being blamed for everyone else's problem but yet have to be the one everybody looks to work his butt off to bail out yet someone else while at the same time watch my 401drop like a rock because of irresponsible people making unrealistic commitments and the government even encouraging it. So while others were playing while I was working, I guess I will continue to work until I'm 90 so I can continue to bailout those who are irresponsible. Seems like government money needs to go towards education for alot of people so they understand the rules next time and won't have excuses when we hit the next recession.

frundle said...

whats interesting is that we do this racial hand out thing to help the loser minorities, like loans and housing projects, but even with gifts they still fail and only look worse for even having had the opportunity. (thinking of these fat obese pigs getting food stamps as well). Discriminatory charity that ignores whites has not only made whites look better by comparison but WITHOUT the free hand outs for whites to even compete with side by side with the loser minorities! amazing, i just wish this graph had asian default rates, which i bet were less than whites... asian houshold income has been much higher than whites for along time, maybe they have more people per house? i think they are just harder working and smarter...

Anonymous said...

Its not the minorities or the banks that are to blame, its the damn government. They made this happen.

Anonymous said...

PEOPLE LISTEN PLEAS!... removing the political spin that is done to promote ideology is important so this crap doesn't happen again... the fact is that the banks new what they were doing... loan originators were making a killing loaning money to PEOPLE OF ALL RACES that couldn't pay it back because they sold the risk down the road.. financial institutions didn't care that they were buying bundles of crappy mortgages cause they new that they could have the rating agencies rate them triple A and they could short the risk after they sold the product. the processing of so many loans drove housing prices through the roof by creating a false demand.. this resulted in good credited people taking out"no doc" loans because the house values were so high that they couldn't realize the american dream if they had to prove their income on paper. foreclosures look great on paper, but nobody talks about all the people "mostly white" who don't have as much spending money cause they have huge mortgage payments. basically if your local community bank turns you down for a loan then rent or buy something cheaper. the wall street banks are criminals and can't be trusted... the government only chartered 32% of mortgages issued so blaming the government is a little irrisponsable.. Blaming greed and ignorance is much more responsible.

Anonymous said...

I hope you read this steve.. you must be a political spin guy.. so i don't expect to see the comment i just wrote

ruth said...

I am now aware that this must have pushed up housing prices. In tandem with Bush's scheme for artificially increasing minority home ownership, which also pushed up prices of the banks.

Marcus said...

Very interesting statistical data here. Well written. I know the post is 3 years old, are there any updated stats on the ratio of foreclosures by race?
foreclosed homes va

Anonymous said...

It would be interesting to see this data by nationality. As a Scotsman I strongly suspect that I am subsidizing other borrowers. Given Scottish "frugality" the income ratios of the general population are totally out of whack (too low)for us. The concept of "honor" in debt repayment means that people of Scottish decent will more likely pay off a loan even if they are "upside down" or in a position of financial hardship. To make believe that a persons "culture" make no difference in borrowing is inherently unfair. Loans are not insurance where risk is pooled.