Ethnic data on Subprime Loans
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October 01, 2008, 03:30 PM
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One of the problems we`ve all had in discussing the racial angle of the mortgage meltdown is the lack of good data.

Since writing that fairly comprehensive article on Saturday, I`ve also found some seemingly trustworthy statistics on recent subprime loans by ethnicity. (Unfortunately, nobody seems to have calculated defaults by ethnicity. Perhaps nobody wants to know?)

We do know that defaults are closely tied to subprime loans. The most toxic of all, adjustable rate mortgage (ARM) subprime loans, accounted in early 2008 for only six percent of all loans outstanding but 39 percent of foreclosures started. Fixed and adjustable subprimes account for only 12 percent of loans outstanding, but half of current foreclosures. The subprime share of new lending roughly doubled from 2003 to 2004 and increased again in 2005. So far, that`s where most of the "unexpected" defaults have come from, although the default contagion will likely spread to lower interest rate adjustable rate mortgages in the near future.

Compliance Tech, a firm that helps lenders "Manage Diverse Lending Markets," estimates that in 2004-2006, minorities accounted for 44 percent of all subprime loans, with Hispanics slightly outnumbering blacks.

The numbers we really want, though, are defaults, dollar value of defaults, and incremental dollar values of defaults over expected levels.

Minorities with subprime loans probably have higher default rates than whites with subprime loans. For example, default rates on college loans are about five times higher for blacks, and more than two times higher for Hispanics, than they are for whites. (Asians are best of all at paying back college loans.) Normally, college loans are handed out more willy-nilly than mortgages, so the ethnic default rate gaps likely aren`t as big in mortgages, but willy-nilly pretty much describes 2004-2006 mortgage lending in some markets.

On the other hand, they likely tend to have lower value mortgages. On the other other hand, many Hispanics are found in expensive states, especially California, epicenter of the crisis. The largest defaults in America as measured in dollar losses (number of defaults times size) appear to have come out of California`s exurban fringe: the Inland Empire, Antelope Valley, and the Central Valley. All these areas tend to have mixed white and Hispanic populations