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.

My published articles are archived at iSteve.com -- Steve Sailer