National Data | Immigrants And The Subprime Mortgage Mess: Market Forces—Not Discrimination

Only time will tell whether distress in the low end mortgage market will spread to the rest of the housing industry, and weaken the economy. Meanwhile, high interest rate “subprime” mortgages are increasingly portrayed as a bad deal for borrowers—many of them immigrants.

This from the Washington Post:

“Homeownership rates among immigrants surged in the first half of the decade, making their prosperity an economic success story. Now it is becoming apparent that many people managed to buy homes in an inflated real estate market by turning to unusual new mortgages only now receiving scrutiny from regulators and legislators. Many of these loans start with attractive low `teaser` rates but feature payments that can increase suddenly.

“Unfamiliar with the U.S. mortgage market, unable to speak or read English well and vulnerable to the blandishments of real estate professionals who told them property values always rise, many immigrants are struggling to deal with high mortgage payments as their homes sag in value, making it harder to escape the loans by selling.”  [Wave sinking immigrants first By Kirstin Downey, The Washington Post, March 30, 2007]

No documents? No problem. The most predatory of the lenders issue high interest rate loans to illegals who have neither valid social security numbers nor credit histories.

Just put your X on the dotted line….(and sign your life away.)

Immigrants are not stupid. Subprime mortgages offer them a rational alternative to the exorbitant rents they would otherwise pay to landlords. Housing costs of low-income renters are growing dramatically. A recent Harvard study finds that 70 percent of the poorest fifth of renters  (annual earnings below $10,600) pay more than half of their incomes for housing, and another 12 percent pay 30 to 50 percent.

Why the squeeze on low-income renters?

  • On the supply side, a significant decline in the stock of low-end rentals. Between 1993 and 2003 the number of units renting for $400 or less fell by 13 percent—a loss of more than 1.2 million units—according to a Harvard study. Among possible explanations: low end rentals converted to condos, while new multi-family construction is increasingly tilted to the high-end condo market.

 

  • On the demand side, steady, albeit modest, growth in the number of renters, an outcome that is—surprise, surprise—entirely the result of immigration:

“Immigration has had an especially important impact on renter rates among the so-called baby-bust generation (born between 1965 and 1974). When birth rates among the native-born population fell sharply after the baby boom, many feared that rental demand would drop off precipitously. But thanks to the strength of immigration, the number of renter households remained steady through the 1990s and early 2000s as foreign-born households supplemented the rental demand of native-born households…The arrival of young foreign-born households thus tempered the decline in renters aged 25–34 from 20 percent to 12 percent, and in renters aged 35–44 from 18 percent to 7 percent over the 1994–2004 period. Indeed, without these immigrants, the total number of renters would have fallen by more than 2 million (5 percent), rather than rising modestly by 100,000.” [The Joint Center for Housing Studies, America`s Rental Housing: Homes for a Diverse Nation, Harvard University. Renter Demographics. PDF ]

Needless to say, the victimization industry doesn`t want to hear that immigration is squeezing immigrants and the poor. Instead, it insists that blacks and Latinos, often immigrants, are more likely than whites to be victims of predatory lending. And more likely to be steered into high risk, high interest mortgages. We are especially struck by claims made by a group called the Center for Responsible Lending (CRL):

“Our findings show that, for most types of subprime home loans, African-American and Latino borrowers are at greater risk of receiving higher-rate loans than white borrowers, even after controlling for legitimate risk factors. The disparities we find are large and statistically significant: For many types of loans, borrowers of color in our database were more than 30 percent more likely to receive a higher-rate loan than white borrowers, even after accounting for differences in risk.” [Debbie Gruenstein Bocian, et al., "Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages," The Center for Responsible Lending, May 31, 2006. PDF ]

If minority borrowers are subject to more stringent credit standards than whites, they should default at lower rates. But this is not the case, as shown by figures in another CRL report:

Subprime Loan Issuance and

Foreclosure Rates by Race/ethnicity

(Based on 2005 data submitted by Lenders under  the Home Mortgage Disclosure Act)

 

% of  All Mortgage Borrowers in Group

Projected Foreclosure Rate (%)

African American

52%

19.4%

Latino

40%

19.4%

White, non Hispanic

19%

19.4%

Ellen Schloemer, et al., “Losing Ground: Foreclosures in the Subprime Market and their Cost to Homeowners,” Center for Responsible Lending, December 2006. Table 12. PDF

Average foreclosure rates on minority and white subprime mortgages are expected to be the same—19.4 percent. This indicates that Latinos and blacks are screened on the basis of credit-worthiness and are not victims of discrimination.

Peter Brimelow and Leslie Spencer actually made this point in Forbes Magazine more than fourteen years ago:   

“…..So the fact that white and minority default rates finished up equal meant mortgage lenders knew what they were doing.

“The market, in short, worked. The mortgage lenders somehow weeded out the extra credit risks among minorities, down to the, point where white and minority defaults were at an equal, apparently acceptable, rate.”  [Peter Brimelow and Leslie Spencer, The Hidden Clue, Forbes, January 4, 1993]

Unfortunately, facts are no match for anecdotes. The odds of a Federal bailout increase with every subprime horror story.

To a significant extent, it will be yet another subsidy from American taxpayers to immigrants.

Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.