GEORGE MASON UNIVERSITY

SCHOOL OF PUBLIC POLICY RESEARCH PAPER NO. 2013-01

ANALYZING DETERMINANTS OF FORECLOSURE OF MIDDLE-INCOME BORROWERS OF COLOR IN THE ATLANTA, GA METROPOLITAN AREA

Katrin B. Anacker George Mason University - School of Public Policy James H. Carr Federal National Mortgage Association (Fannie Mae) Archana Pradhan National Community Reinvestment Coalition (NCRC)

July 14, 2012

Analyzing Determinants of Foreclosure of Middle-Income Borrowers of Color in the Atlanta, GA Metropolitan Area

Katrin B. Anacker kanacker@gmu.edu James H. Carr jcarr@ncrc.org Archana Pradhan apradhan@ncrc.org 1. Introduction The housing market in the Atlanta Metropolitan Statistical Area (MSA) has been characterized by rapidly growing foreclosure rates since 2005 (Rich 2010). Here, as elsewhere, foreclosures have disproportionately affected borrowers and communities of color. Nationwide, among borrowers who took out mortgages between 2005 and 2008, eight percent of both Africans and Latinos have lost their homes to foreclosures, compared to only 4.5% of non-Hispanic Whites (Bocian et al. 2010). In addition to the current loss of wealth among these households, the current and future depreciation of property values is estimated to be $194 billion in African American communities and $177 billion in Latino communities between 2009 and 2012. We believe that it will take many years, and possibly several decades, to reverse these wealth losses. The foreclosure crisis has had a negative impact at the national, regional, municipal, neighborhood, household, and individual levels. Nevertheless, there has been a lack of publicly accessible data on mortgage performance to analyze foreclosures. An example of one of the few sources that does track mortgage performance is a proprietary data set by Lender Processing Services (LPS). The LPS data set is based on information from mortgage servicing firms that collect mortgage payments for U.S. investors and lenders. We will discuss the LPS data set in the Data and Methods section below. Other examples of proprietary data sets that provide information on mortgage performance or foreclosures are RealtyTrac (Immergluck 2008a), First American Core Logic (Bocian et al. 2010) and the Mortgage Banker Associations National Delinquency Survey (NDS) (Bocian et al. 2010), respectively. The goal of our paper is to examine the likelihood of foreclosure. We utilize a logistic regression model. Our study is based on (1) publicly available Home Mortgage Disclosure Act (HMDA) data (20042007); (2) publicly available Census 2000 data from the U.S. Bureau of the Census; and (3) proprietary loan performance data from Lender Processing Services (LPS) Applied Analytics (January 2004-December 1

Electronic copy available at: http://ssrn.com/abstract=2106055

2008). We merge these three data sets based on a geographic crosswalk file as HMDA and Census data are provided at the Census tract level and as LPS data are provided at the zip code level (see also Bocian et al. 2006 and 2010; Laderman and Reid 2008). We analyze mortgages for the years 2004 through 2008 in the Atlanta, GA metropolitan area. Although there has been a virtual tsunami of studies on the foreclosure crisis at the national level (e.g., Immergluck 2009a and 2009b), at the regional level (e.g., Laderman and Reid 2008), for select metropolitan areas (for example, Chicago (e.g., Immergluck and Smith 2005)), and for small communities (Fisher et al. 2010), few academic studies have been published on foreclosures and borrowers and neighborhoods of color in the Atlanta, GA metropolitan area (see Rich 2010 as an exception). Previous national work has shown that the middle and upper income households have been disproportionately affected by the foreclosure crisis (Canner and Bhutta 2008; Kroszner 2009). The Atlanta, GA metropolitan area is characterized by a relatively large proportion of middle- and upperincome African Americans (Ding et al. 2008), and some call Atlanta a Black middle class city, like Washington DC. Although the African American middle class has been studied in the past (Benjamin 1991; Collins 1997; Davis and Watson 1982; Feagin and Sikes 1994; Frazier 1957; Kronus 1971; Lacy 2007; Landry 1987), middle-income borrowers of color have been understudied in terms of foreclosures. One might assume that middle- and high-income borrowers, regardless of color, would not be affected by foreclosure as much as low-income borrowers. Our results tell us otherwise. This calls into question whether a hypothesized upward mobility into home ownership by middle-income borrowers of color is a sustainable one. Nationally, there is evidence that a large proportion of high-cost loans have gone into foreclosure (Bocian et al. 2010; Gerardi et al. 2009). There is also evidence that a large proportion of high-cost loans went to borrowers of color (Mayer and Pence 2008). We combine these two pieces of evidence to focus on the intersection between high-cost loans, race/ethnicity, and foreclosure in our literature review below. Then, we describe our data and methods, discuss our results and their policy implications, focusing on African American middle- income borrowers, and sum up our study in the conclusion.

Electronic copy available at: http://ssrn.com/abstract=2106055

2. Literature Review Before the 1980s, mortgage applicants either qualified for mortgages or did not, based on then-current mortgage underwriting practices and standards. Mortgages could either be a conventional or an FHA or VA mortgage (Schwartz 2010). In 1980, the Depository Institutions Deregulation and Monetary Control Act gave banks flexibility to set rates and fees for mortgages, and in 1982, the Alternative Mortgage Transaction Parity Act allowed banks to make variable rate mortgages and mortgages with balloon payments (Ludwig et al. 2009). Therefore, in the mid-1980s, lenders introduced risk-based pricing, where in exchange for higher risk of predicted default, borrowers would pay higher interest and fees. These loans would only become common in the 1990s (Engel and McCoy 2008). These high-cost loans are also known as non-prime or subprime mortgages, and they were one of the contributing factors to the national foreclosure crisis (Foote et al. 2008b). We will use the terms high-cost, non-prime, and subprime interchangeably below. Until the mid-1990s, most research found no difference in interest rates among different racial and ethnic groups (King 1981; Nothaft and Perry 2002; see also Schafer and Ladd 1981 for mixed results). This insight changed in the late 1990s, when several studies analyzed differences in interest rates among these groups (Calem et al. 2004; Crawford and Rosenblatt 1999; Mayer and Pence 2007; Nothaft and Perry 2002; Scheessele 2002; Wyly et al. 2007). Whereas the literature on high-cost loans and race/ethnicity is older and vast, the literature on high-cost loans, race/ethnicity, and foreclosure is somewhat recent. We limit our discussion to the latter subfields due to space constraints. Lauria and Baxter (1999) look at residential mortgage foreclosure and racial transition in New Orleans based on 1980 and 1990 U.S. Census of Population and housing data as well as data on housing foreclosures in New Orleans collected from civil district court records (1985 to 1990). Results from a combined conditional change model and an estimated generalized least squares (EGLS) procedure show that a one percent increase in foreclosures in a block group is associated with a 1.3% larger black population in 1990 (see also Baxter and Lauria 2000). Newman and Wyly (2004) use lis pendens (pending suit) court filings in Essex County, New Jersey and Kings maximum-likelihood ecological inference techniques to look at (a) the proportion of loans between 1993 and 1998 that were made by subprime lenders and (b) the proportion of all reported loans that lapsed into pre-foreclosure during 1999. They find evidence of segmentation in

Electronic copy available at: http://ssrn.com/abstract=2106055

mortgage capital investment, showing that certain Newark and inner-ring suburban neighborhoods have high rates of both subprime lending and pre-foreclosures. Immergluck and Smith (2005) analyze foreclosure start data from 1995 and 2002 for the fivecounty metropolitan Chicago area based on local and HMDA data. Results show that foreclosures of government-guaranteed mortgages increased 105 percent and foreclosures of conventional mortgages increased 350 percent. They also show that neighborhoods with populations of color of less than ten percent in 2000 saw an increase in foreclosures of 215 percent, while neighborhoods with 90 percent or greater populations of color experienced an increase of 544 percent. Based on a multivariate analysis, the authors analyze conventional foreclosures in 2002 and find that subprime loans, among other variables, explain these high levels of foreclosure. Bocian et al. (2006) analyze 2004 HMDA data and information from a large national proprietary subprime loan dataset, focusing on subprime loan pricing. They find that African Americans were 6 to 34 percent and Latinos were 29 to 142 percent more likely to receive higher-rate home purchase and refinance loans than similarly situated non-Hispanic White borrowers, particularly for loans with prepayment penalties, depending on the type of interest rate (i.e., fixed or adjustable) and the purpose (i.e., refinance or purchase) of the loan. Gerardi et al. (2007; Gerardi & Willen 2009; Gerardi et al. 2009) use deed records from The Warren Group from January 1987 through August 2007 for the entire state of Massachusetts, finding that homeownerships that begin with a subprime purchase mortgage end up in foreclosure almost 20 percent of the time, or more than six times as often as those that begin with prime purchase mortgages. They also find that a 10 percentage point increase in the number of households of color in a neighborhood increases the probability of default by about nine percent. Increasing terminations did indeed largely offset the increased homeownership initiations among black and Hispanic residents of Massachusetts. (Gerardi & Willen 2009 p. 13). Ding et al. (2009) use a national data set of home purchase loans originated by a group of lenders under the Self-Help Ventures Funds Community Advantage Program (CAP). Here, participating lenders are able to sell mortgages not conforming to underwriting guidelines to Self-Help, which then securitizes and sells them to Fannie Mae or other investors. All loans have fixed interest rates, and almost all have a 30-year amortization rate. However, a large proportion of the loans have high LTV ratios and borrowers have relatively low credit scores and household incomes. About 39 percent of the 4

borrowers are borrowers of color. Based on a multinomial logit model, Ding et al. regress CAP loan default on the predicted value of neighborhood house price change as well as other controls of individual borrower credit risk. They conclude that the higher the level of subprime purchase and refinance lending and the more negative the house price change in a neighborhood, the higher the probability of serious delinquency and default for CAP loans. Anacker and Carr (2011) study the determinants of foreclosure among high-income Black/African and Hispanic/Latino borrowers in the Washington, DC metropolitan area. They use a merged data set consisting of Home Mortgage Disclosure Act (HMDA), U.S. Census, and Lender Processing Services (LPS) data and analyze the likelihood of foreclosure in the Washington area with a logistic regression model. They find that high-income Black/African American borrowers are 36 percent and Hispanic/Latino borrowers 79 percent more likely to go into foreclosure, controlling for key financial variables. Moreover, they found that exotic mortgage products, such as adjustable rate mortgages (ARMs), high-cost mortgages, balloon mortgages, and interest-only mortgages, have a higher likelihood of foreclosure than standard 30-year fixed-rate mortgages. In sum, the studies discussed above provide evidence that borrowers of color have a disproportionately high proportion of high-cost loans, which in turn have disproportionately high odds of foreclosure. Below we turn to the data and methods used for our study, which focuses on the Atlanta, GA metropolitan area.

3. Data and Methods We analyze mortgages for the years 2004 through 2008 for the Atlanta, GA metropolitan area. Our study combines data from three sources, as mentioned above: (1) publicly available Home Mortgage Disclosure Act (HMDA) data (2004-2007); (2) publicly available Census 2000 data from the U.S. Bureau of the Census; and (3) proprietary loan performance data from Lender Processing Services (LPS) Applied Analytics (January 2004-December 2008). We will discuss each data set below. HMDA was passed in 1975, and it requires most lenders to publicly report the number, type, purpose, and amount of loans in metropolitan areas by census tract each year (Squires and OConnor 2001). About 80 percent of originated mortgages are reported to HMDA (Avery et al. 2007). HMDA data are made publicly available without charge by the Federal Financial Institutions Examination Council 5

(FFIEC). This data set provides information about mortgages at the beginning of their lifecycle but not beyond their origination. We use 2004-2007 HMDA data for our analysis. Also, we use publicly available data by the U.S. Bureau of the Census for our study. LPS data are proprietary mortgage performance data at the borrower level. This national data set is compiled from mortgage servicing firms that collect mortgage payments for U.S. lenders and investors. As of December 2008, a total of sixteen firms, including nine of the top ten servicers, provided monthly updated data on more than 100 million loans to LPS, including over 30 million loans that are currently active.1 A loan stays in the LPS data set until it is repaid, foreclosed, or completes a real estate owned (REO) process. (REOs are properties that are owned by lenders after an unsuccessful sale at a foreclosure auction.) The LPS data set over-represents prime and near-prime (i.e., Alt-A) loans and under-represents subprime loans, although the LPS data set does not provide information on prime versus near-prime (Immergluck 2008b). Although we used weights to account for these and other facts (discussed below), our results should be interpreted carefully. Our LPS data set provides information about all outstanding liens per month between 2000 and 2008. The most ideal data set would provide the cumulative debt-to-income (i.e., payment to income) or loan-to-value ratios. Unfortunately this data set does not seem to exist. We restricted our study to first lien loans for owner-occupied residences with one to four units, as 82 percent of foreclosures have been on primary residences, not investment properties (Bocian et al. 2010). We use the LPS data for our analysis (i.e., loans that were originated between January 2004 and December 2007). Table 1 List and Description of Variables from Merged LPS/HMDA Data Set Used in Study Dependent variable [household level] Foreclosure [dummy variable] Description 1: a loan that is in foreclosure (presale or post-sale) or is real estate owned (REO) 0: otherwise Description Source LPS (2004 2008)

Independent variables Borrower characteristics [individual level] Borrower income Low FICO score Medium FICO score High FICO score
1

Borrower income FICO score <640 640<=FICO score<720 FICO score>=720

HMDA (2004 2007) LPS (2004 2008) LPS (2004 2008) LPS (2004 2008)

Although LPS indicates that sixteen firms, including nine of the ten top servicers, provided information, we were not given the names of these firms.

Non-Hispanic White Hispanic African American Mortgage characteristics [mortgage level] Interest-only mortgage [dummy variable] Balloon mortgage [dummy variable] Adjustable rate mortgage [dummy variable] Refinance mortgage [dummy variable] Prepayment penalty [dummy variable] Payment-to-income ratio Loan-to-value ratio Securitization characteristics [mortgage level] Government sponsored enterprise (GSE) [dummy variable] Private [dummy variable] None/Portfolio [dummy variable] Neighborhood characteristics [Census tract or zip code level] Home Price Index (HPI) [county level]

Non-Hispanic White Hispanic or Latino Black/African American

HMDA (2004 2007) HMDA (2004 2007) HMDA (2004 2007)

Mortgage is interest only Mortgage has balloon term Mortgage has adjustable rate Mortgage is used for refinancing Mortgage has prepayment penalty Ratio of mortgage payment to borrowers income (PTI) Ratio of mortgage amount to house value (LTV)

LPS (2004 2008) LPS (2004 2008) LPS (2004 2008) LPS (2004 2008) LPS (2004 2008) LPS (2004 2008) LPS (2004 2008)

Mortgage purchased by Fannie Mae, Freddie Mae, or Ginnie Mae Mortgage purchased by private market Mortgage in lenders portfolio

LPS (2004 2008) LPS (2004 2008) LPS (2004 2008)

Median year built [Census tract level] Proportion owner occupied [Census tract level] Minority neighborhood [zip code level; dummy variable] Low income neighborhood [zip code level; dummy variable] Moderate income neighborhood [zip code level; dummy variable] Middle income neighborhood [zip code level; dummy variable]

House price change between previous year and three years prior to the origination to the mortgage Median year housing units built Proportion of housing units occupied by home owner 1: a zip code that has a proportion of minority of 50 percent or more; 0: otherwise Median family income less than 50 percent of area median income Median family income more than 50 percent but less than 80 percent of area median income Median family income more than 80 percent but less than 120 percent of area median income 7

The Atlanta JournalConstitution (Atlanta Home Sales Report) U.S. Census (2000) U.S. Census (2000) U.S. Census (2000)

U.S. Census (2000) U.S. Census (2000)

U.S. Census (2000)

Upper income neighborhood [zip code level; dummy variable] County [dummy variable]

Median family income more than 120 percent of area median income County or independent city

U.S. Census (2000)

U.S. Census (2000)

What makes our study unique is the fact that we control for (1) race/ethnicity, (2) credit risk, i.e., the FICO score, and (3) (proxied) debt, i.e., the loan-to-value (LTV) ratio. As Berkovec et al. (1996a and 1996b) point out, explaining foreclosure rates without accounting for race/ethnicity, credit risk, and debt is problematic. If any of these variables is not included yet correlated with the error term of the regression model, the omitted variables will cause regression coefficients and standard errors to be biased and t and F tests to be invalid (Hamilton 1992). Many have pointed out that publicly accessible HMDA data provide information on race and ethnicity, among many other factors, but not on credit risk and debt (Myers and Chan 1995). In turn, the LPS data set provides information on credit risk through the FICO score variable and on (proxied) debt through the loan-to-value ratio, but not on race/ethnicity. Thus, we merge HMDA and LPS data through a geographic crosswalk file both to control for the variables discussed above and to account for the fact that HMDA and Census data are provided at the Census tract level and that LPS data are provided at the zip code level (Bocian et al. 2006 and 2010; Coulton et al. 2008; Laderman and Reid 2008. The LPS data set does not capture all loans in the market, i.e., it over-represents prime and nearprime loans, while it under-represents subprime loans (Immergluck 2008b). Thus, to increase the datas representation of the universe of loans, weights were created. Using HMDA data as the benchmark for weights, each loan in the merged data file is weighted based on its zip code, the race and ethnicity of the borrower, and its reported rate spread. We create weights to increase the representativeness of our results for two reasons: first, HMDA only covers about 80 percent of originated loans on the mortgage market (Avery et al., 2007); and second, LPS under-represents subprime mortgages on the market (Immergluck 2008b). Using the HMDA data as the benchmark for weights, we weight each loan in the merged data file. The geography of our study is the Atlanta, GA metropolitan statistical area (MSA). The Office of Management and Budget (OMB) includes the following counties and independent cities as part of the Atlanta, GA MSA: Barrow, Bartow, Butts, Carroll, Cherokee, Clayton, Cobb, Coweta, DeKalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton, Paulding, Rockdale, Spalding, and Walton. 8

Our method is a logistic regression analysis. A regression is [a]ny of several statistical techniques concerned with predicting or explaining the value of one or more variables using information about the values of other variables (Vogt, 2005 p. 268). The basic form of our logistic regression is as follows: binary outcome of foreclosure (yes/no) = f (borrower characteristics, mortgage characteristics, securitization characteristics, neighborhood characteristics) In our case, the dependent variable shows a discrete outcome variable where 0 depicted the absence of foreclosure and 1 indicated that the mortgage was in the foreclosure process (either presale or post-sale or a real estate owned (REO) property). The independent variables are enumerated and described in Table 1 above and discussed below. The exponentiated coefficients give the effect of a one-unit change in the independent variable on the odds of the dependent variable taking on 1 (versus 0). The HMDA data set has information on race/ethnicity (i.e., whether the borrower is nonHispanic White, Black, or Hispanic). According to the literature, non-Hispanic Whites face odds of foreclosure that are lower than 1 and African American and Hispanic borrowers face odds of foreclosure that are higher than 1 (Gerardi et al. 2007; Immergluck and Smith 2005; Laderman and Reid 2009; Lauria and Baxter 1999). We expect our results to be consistent with the literature. The Census data set provides information about several housing and socioeconomic neighborhood characteristics, such as the median year the housing unit was built; the proportion of homes that were owner-occupied; whether the neighborhood had a proportion of 50 percent or more minorities; and whether the neighborhood had an income that was low (i.e., median family income less than 50 percent of area median income (AMI)), moderate (i.e., median family income more than 50 percent but less than 80 percent of area median income), middle (i.e., median family income more than 80 percent but less than 120 percent of area median income), or upper income (i.e., median family income more than 120 percent of area median income).2 We expect higher odds for variables Median Year Built, Minority Neighborhood, Low Income Neighborhood, and Middle Income Neighborhood (see Laderman and Reid 2009). We are unsure about the odds for the variable Proportion Owner Occupied, although more owner-occupied homes than investment properties seem to go into foreclosure. The

The AMI thresholds chosen for our study are common in the housing policy field (see Schwartz 2010).

foreclosure crisis seems to have affected neighborhoods with high ownership rates more (Laderman and Reid 2009). The LPS data set has information about select (1) borrower characteristics, (2) mortgage characteristics, and (3) securitization characteristics, which we will discuss in turn below (also see Table 1 above). In terms of borrower characteristics, we have information about borrowers incomes and FICO scores. We expect that the variable Borrowers Income will have odds lower than 1. We also expect that the variable Low FICO Score (i.e., a FICO score below 640 points) will have higher odds of foreclosure and that the variable High FICO Score (i.e., a FICO score above 720 points) will have lower odds of foreclosure (Laderman and Reid 2009). We are not sure about the odds of the variable Medium FICO Score (i.e., a FICO score between 640 and 720 points). With respect to mortgage characteristics, LPS provides information on select aspects of the mortgage terms, for example (a) whether or not the mortgage is an interest-only mortgage (dummy variable); (b) whether or not the mortgage is a balloon mortgage (dummy variable); (c) whether or not the mortgage is an adjustable-rate mortgage (dummy variable); (d) whether or not the mortgage is a refinance mortgage (dummy variable); (e) whether or not the mortgage has a prepayment penalty (dummy variable); (f) the payment-to-income ratio; and (g) the loan-to-value ratio. Based on the literature, we expect that these variables will have odds higher than 1, based on the literature (Ding et al. 2009; Gruenstein and Herbert 2000; Scheessele 2002; Schloemer et al. 2006). With regard to securitization characteristics, we have information on (a) whether the mortgage was purchased on the secondary mortgage market by a government sponsored enterprise (GSE; i.e., Fannie Mae, Freddie Mac, or Ginnie Mae), (b) whether the mortgage was purchased by an actor on the private market, or (c) whether the mortgage remained in the lenders portfolio. We expect that the odds of the GSE variable will be lower than 1, confirming the literature (Immergluck and Smith 2005). We also expect that the odds of the Private Securitization variable will be higher than 1, corroborated by the literature, which points out that [p]rivate-label securitization played an increasingly important role in fueling high-risk lending (Immergluck, 2009a p. 408). We are unsure about the odds of variable No Securitization/Portfolioobtaining odds higher than 1 could indicate a bad credit risk (i.e., that the lender was unable to sell this mortgage on the secondary mortgage market), while obtaining odds lower than 1 could indicate a good credit risk (i.e., that the lender preferred to keep a particular mortgage in its portfolio).

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In addition to the variables based on the HMDA, the 2000 Census, and the LPS data sets, we created the variable Home Price Index (HPI), which is based on the change in median home sales prices in each county based on the Atlanta Home Sales Report provided by The Atlanta Journal-Constitution. The literature on subprime lending and foreclosure points out that the national house price crash in the summer of 2006 prevented borrowers of subprime mortgages from refinancing their resetting mortgages shortly thereafter, thus triggering the national foreclosure crisis. For example, the HPI of 2004 was calculated as the home sales price in 2003 divided by the home sales price in 2001. We hypothesize that the HPI controls for any systematic variation in the foreclosure rate by year and county of origination and expect that the odds will be lower than 1, based on Immerglucks expertise: As of 2003, metropolitan areas with high levels of housing appreciation, including many in California, the Northeast, the Atlantic coast, and Florida, had not suffered the spike in foreclosures that many other places had (Immergluck, 2008a p. 66; Schloemer et al. 2006; contrary to Laderman and Reid 2009). We also calculated the capitalization rate which is the ratio of the tracts annualized median rent divided by the median house value (see Laderman and Reid 2008).

4. Results 4.1 Descriptive Statistics Our descriptive statistics are provided in Tables 2 and 3 below. These statistics do not control for other factors, although the regression analysis, provided in Table 4, does. In Table 2 we differentiate between loans not in foreclosure and loans in foreclosure, showing both the number and the proportion for each category. In Table 3 we provide mean characteristics for continuous variables, differentiating between loans not in foreclosure and loans in foreclosure. With regard to borrower characteristics, results based on our descriptive statistics show that borrowers who had loans that had not gone into foreclosure by December 2008 had a mean income of $116,564, whereas borrowers that had experienced a foreclosed loan had a mean income of $110,896 (see Table 3). Not surprisingly, a higher proportion of borrowers with a low FICO score (4.53%) is affected by foreclosures than borrowers with a medium FICO score (3.83%) and a high FICO score (0.61%) (see Table 2). Table 3 shows that the mean FICO score of a borrower not in foreclosure was 701.99, whereas the mean FICO score of a borrower in foreclosure was only 648.54. If a medium FICO score, defined as a score larger than 640 but smaller than 720 points, is indicative of middle incomes, 11

then these findings corroborate findings by Canner and Bhutta (2008) and Kroszner (2009), who conclude that middle income borrowers have been disproportionately affected by the foreclosure crisis. Our results, provided in Table 2, also show that a large proportion of minorities, 5.82% of African Americans and 4.65% of Hispanics, are affected by foreclosures, which is consistent with the literature (Bocian et al. 2010; Gerardi et al. 2007; Immergluck and Smith 2005; Lauria and Baxter 1999). In terms of mortgage characteristics, we conclude that a high proportion disproportionately of mortgages with exotic features go into foreclosure (12.55% of balloon mortgages, 7.86% of mortgages that have a prepayment penalty, and 3.57% of interest-only mortgages), confirming Laderman and Reid (2009) on prepayment penalties (see Table 2). We also conclude that foreclosed loans are characterized by a high loan-to-value (LTV) ratio (102.86 versus 79.46), a high payment-to-income (PTI) ratio (0.28 versus 0.23), and a high capitalization rate (0.77 versus 0.69) (see Table 3). With regard to securitization characteristics, our results show that 4.80 percent of mortgages sold on the private market went into foreclosure, followed by loans that remained in the lenders portfolio (5.99%), and loans sold to government-sponsored enterprises (1.09%). Our findings in terms of the GSEs are confirmed by Immergluck and Smith (2005). In terms of neighborhood characteristics, we find, not controlling for everything else, that low(10.31%), moderate- (4.14%), and middle-income (3.32%) neighborhoods are disproportionately affected by foreclosures, trailed by upper-income (1.82%) neighborhoods, showing that the foreclosure crisis affects not only low-income but also moderate- and middle-income borrowers (Canner and Bhutta 2008; Kroszner 2009; see also Laderman and Reid 2009 for alternative findings) (see Table 2). Table 3 also shows that foreclosed loans are characterized by a slightly lower Home Price Index (HPI) (106.8 versus 107.9), a slightly older year the house was built (1982 versus 1983), and a lower proportion of owner occupants (67.69% versus 69.65%). These differences although they are small somewhat contradict that rapidly appreciating neighborhoods had a high proportion of loans that went into foreclosure.

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Table 2 Descriptive Statistics for Number and Proportion of Loans in Foreclosure versus not in Foreclosure (n = 478,506) Variable Number/Proportion Borrower characteristics [individual level] Income Low FICO score Medium FICO score High FICO score Non-Hispanic White Hispanic African American Mortgage characteristics [mortgage level] Interest-only mortgage (dummy) Balloon mortgage (dummy) Adjustable rate mortgage (dummy) Refinance mortgage (dummy) Prepayment penalty (dummy) Payment-to-income ratio Loan-to-value ratio Origination in 2004 (dummy) Origination in 2005 (dummy) Origination in 2006 (dummy) Origination in 2007 (dummy) Number not in foreclosure Proportion not in foreclosure Number in foreclosure Proportion in foreclosure Total weighted

[continuous variable] 174,057 128,369 161,722 322,244 8,109 133,795

[continuous variable] 95.47% 96.17% 99.39% 98.26% 95.35% 94.18%

[continuous [continuous variable] variable] 8,255 4.53% 5,118 3.83% 985 0.61% 5,692 1.74% 395 4.65% 8,271 5.82%

[continuous variable] 182,312 133,487 162,707 327,936 8,504 142,066

105,713 4,580 283,330 234,628 32,689 [continuous variable] [continuous variable] 127,223 128,977 115,257 92,691

96.43% 87.45% 98.08% 97.51% 92.14% [continuous variable] [continuous variable] 97.88% 96.78% 95.98% 97.39%

3,917 657 5,532 5,980 2,787

3.57% 12.55% 1.92% 2.49% 7.86%

109,630 5,237 288,862 240,608 35,476 [continuous variable] [continuous variable] 129,974 133,266 120,088 95,179

[continuous [continuous variable] variable] [continuous [continuous variable] variable] 2,751 2.12% 4,289 4,831 2,488 3.22% 4.02% 2.06%

13

Securitization characteristics [mortgage level] Government sponsored enterprise (GSE) Private None/Portfolio Neighborhood characteristics [Census tract or zip code level] Home Price Index (HPI) Median year built [Census tract level] Proportion owneroccupied [Census tract level] Minority neighborhood [zip code level] Low income neighborhood [zip code level] Moderate income neighborhood [zip code level] Middle income neighborhood [zip code level] Upper income neighborhood [zip code level] County (dummies)

243,527

98.91%

2,689

1.09%

246,216

165,891 48,202

95.20% 94.01%

8,366 3,072

4.80% 5.99%

174,257 51,274

[continuous variable] [continuous variable] [continuous variable] 97,613

[continuous variable] [continuous variable] [continuous variable] 94.60%

[continuous [continuous variable] variable] [continuous [continuous variable] variable] [continuous [continuous variable] variable] 5,573 5.40%

[continuous variable] [continuous variable] [continuous variable] 103,186

9,615

89.69%

1,105

10.31%

10,721

56,087

95.86%

2,424

4.14%

58,511

218,339

96.68%

7,489

3.32%

225,828

180,106

98.18%

3,340

1.82%

183,446

N/A

N/A

N/A

N/A

N/A

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Table 3 Mean Characteristics of Loans in Foreclosure (n = 478,506) Variable Borrower characteristics [individual level]
Income FICO score Mortgage characteristics [mortgage level] Loan-to-value (LTV) ratio Payment-to-income (PTI) ratio Capitalization rate Neighborhood characteristics [Census tract or zip code level] Home Price Index (HPI) Year built Percent owner-occupied Total weighted

Not In Foreclosure

In Foreclosure

$116,564 701.99

$110,896 648.54

79.46 0.23 0.69

102.86 0.28 0.77

107.9 1983 69.65 464,148

106.8 1982 67.69 14,358

4.2 Logistic Regression Analysis Logistic regression analyses are undertaken when the dependent variable is dichotomous (i.e., coded 0 or 1) and when an outcome that something will either happen or not happen is predicted (Vogt, 2005). Results of a logistic regression are expressed as odds ratios i.e., the odds of a borrower or a group facing foreclosure divided by the odds of a reference group. Odds ratios include magnitude and significance, with the magnitude as the value of the ratio. An odds ratio of 1.0 indicates that there is no disparity, a value above 1.0 indicates higher odds, and a value below 1.0 indicates lower odds. For example, if the odds ratio between African American borrowers and non-Hispanic White borrowers is 1.3 (0.7), it means that the odds of foreclosure are 30 percent greater (lower) for African American than for non-Hispanic White borrowers (Bocian et al. 2006). The significance shows whether the observed characteristics have occurred by chance or sampling error. According to Vogt, If the observed characteristics in the samples are unlikely to have been due to chance, the characteristics are deemed statistically significant and can be used to make inferences about population (2005 p. 295).

15

We built seven models, gradually increasing the number of independent variables that are included in each and adding two interaction terms in Model 7. Specifically, we have the following models: Model 1: select borrower characteristics (borrower income and race/ethnicity); Model 2: all borrower characteristics; Model 3: all borrower characteristics and select mortgage characteristics (interest-only mortgage, balloon mortgage, adjustable rate mortgage, refinance mortgage, prepayment penalty, payment-to-income ratio, loan-to-value ratio); Model 4: all borrower characteristics, all mortgage characteristics, and county dummies; Model 5: all borrower characteristics, all mortgage characteristics, all neighborhood characteristics, and county dummies; Model 6: all borrower characteristics, all mortgage characteristics, all neighborhood characteristics, and all securitization characteristics, along with county dummies; and Model 7: all borrower, mortgage, neighborhood, and securitization characteristics, county dummies, and two interaction terms.

The vast majority of our odds ratio estimates were statistically significant at the .1% level. Below we will discuss the odds ratio estimates of Model 7 (see Table 4 for the odds ratio estimates in Models 1 through 7).

16

Table 4 Odds Ratio Estimates of Logistic Regression Models Model 1 Independent variables Borrower characteristics Income Low FICO score Medium FICO score3 Hispanic African American Mortgage characteristics Interest-only mortgage (dummy) Balloon mortgage (dummy) High-cost Full documentation Adjustable rate mortgage (dummy) Refinance mortgage (dummy) Prepayment penalty (dummy) Payment-toincome ratio Loan-to-value ratio Origination in 2005 (vs. 2004) (dummy) Origination in 2006 (vs. 2004) (dummy) Origination in 2007 (vs. 2004) (dummy)
3

Model 2

Model 3

Model 4

Model 5

Model 6

Model 7

1.030*** ----3.050*** 3.499***

1.043*** 7.270*** 6.457*** 2.576*** 2.757***

1.046*** 5.381*** 5.570*** 2.427*** 1.813***

1.044*** 5.511*** 5.729*** 2.269*** 1.775***

1.054*** 5.256*** 5.527*** 2.106*** 1.595***

1.024** 4.619*** 5.206*** 2.111*** 1.603***

1.024** 4.617*** 5.218*** 2.592*** 1.521***

---

--1.000 1.003 1.584*** 1.369*** 0.935** 1.035 1.664*** 1.303*** 0.931*** 0.973 1.398*** 1.243*** 0.909*** 0.975 1.401*** 1.237*** 0.892***

---------

--------1.950*** 2.052*** 2.055*** 1.430*** 1.435*** 1.725*** 1.415*** 0.924***

---

--0.929*** 0.924*** 1.325*** 1.044*** 1.876*** 0.940** 1.324*** 1.043*** 1.868*** 0.890*** 1.085** 1.038*** 1.808*** 0.891*** 1.078** 1.037*** 1.814***

---------

--1.351*** --1.044*** ----1.869*** ---

1.208*** ------1.325*** ------1.440***

1.301***

1.364***

1.359***

1.350***

1.399***

1.403***

1.328***

1.422***

1.443***

base case: high FICO score

17

Securitization characteristics Private None/ Portfolio4 Neighborhood characteristics Home Price Index (HPI) Capitalization rate Median year built [Census tract level] Proportion owneroccupied [Census tract level] Minority neighborhood [zip code level] Low income neighborhood [zip code level] Moderate income neighborhood [zip code level] Middle income neighborhood [zip code level]5 Interaction Terms Black borrower (dummy)* middle income borrower (dummy) Hispanic borrower (dummy)* high income borrower(dummy) County (dummies)

-----

-----

-----

-----

-----

2.753*** 3.300***

2.76*** 3.324***

-------

-------

-------

------1.177*** 1.110*** 1.231*** 1.106*** 1.223*** 1.096***

1.022*** --------0.956** --------0.811*** --------4.174*** --------1.751*** --------1.234*** -----------

1.021***

1.021***

0.957*

0.96*

0.802***

0.82***

4.176***

4.124***

1.769***

1.737***

1.261*** ---

1.268*** 1.345***

---

---

---

---

---

---

available available upon upon request request Note: * = p<.05; ** = p<.01; ***p<.001
4

available upon request

available upon request

available upon request

available upon request

0.169*** available upon request

base case: government sponsored enterprise (GSE) base case: upper-income neighborhood

18

Note: the following continuous variables were standardized (with mean=0 and standard deviation=1): Income Loan-to-value ratio Payment-to-income ratio Proportion owner-occupied Home Price Index (HPI) 6. Capitalization rate Model 7 has 25 variables that are statistically significant at the .1 percent level, two variables that are significant at the 5 percent level (borrower income and the prepayment penalty dummy), one variable that is significant at the 10 percent level (proportion owner-occupied in the neighborhood) and one variable (interest-only mortgage) that was not significant. Model 7 confirms most of our assumptions with regard to the odds ratios discussed above. With regard to borrower characteristics, borrowers with a low or medium FICO score and minority borrowers face higher odds of foreclosure than others, consistent with the literature (Gerardi et al. 2007; Gerardi & Willen, 2009; Immergluck and Smith 2005; Lauria and Baxter 1999). In terms of mortgage characteristics, exotic mortgage features (with the exceptions of the variables Interest-only Mortgage and Refinance Mortgage (discussed below)) translate into higher odds of foreclosure than others (Foote et al. 2008a; Foote et al. 2008b; Laderman and Reid 2009). The odds ratio estimates of the origination variables are striking: borrowers who took out a mortgage in 2007, one year after the national house price bubble had peaked (Shiller 2008), were 44.3 percent more likely to face foreclosure than borrowers who had taken out a mortgage in another year, followed by 40.3 percent in 2006 and 35.9 percent in 2005. This discrepancy illustrates the ease of obtaining a mortgage during and even post peak of the bubble. With regard to securitization characteristics, private or no securitization means higher odds of foreclosure than a securitization by a GSE, which is consistent with the literature (Immergluck 2009b; Immergluck and Smith 2005; see Piskorski et al. for an exception). In terms of neighborhood characteristics, the odds ratio estimates are higher for neighborhoods that have a higher appreciation rate, a higher capitalization rate, have a higher median year built (i.e., neighborhoods that are older), and are low-, moderate, and middle-income neighborhoods than others. The odds ratio estimates are significant and slightly lower than 1 for owneroccupied neighborhoods and significant and (somewhat surprisingly) lower for minority neighborhoods (the latter finding contradicts the literature) than others. However, there is a discrepancy between our assumptions and our results in terms of (1) borrower income (assumed lower odds; our odds are 1.024 and significant), (2) interest-only mortgage 19 1. 2. 3. 4. 5.

(assumed higher odds; our odds here are 0.975 but not significant), (3) refinance mortgage (assumed higher odds; the odds are actually 0.891), and (4) minority neighborhood (assumed higher odds; our odds are 0.82 and significant). The discrepancies in terms of borrower and neighborhood income show that the foreclosure crisis disproportionately affected middle income borrowers, confirming Canner and Bhatta (2008), Duda and Apgar (2005), and Kroszner (2009) but contradicting Laderman and Reid (2009). Interestingly, our interaction term Black Borrower * Middle Income Borrower shows that these borrowers are 34.5 percent more likely to be affected by foreclosure than others, although our interaction term Hispanic Borrower * Middle Income Borrower shows that these borrowers are less likely to be affected by foreclosure (and the term is significant at the 1% level) than others. Nevertheless, the variable Borrower Income had an odds ratio estimate of 1.024 (and is significant at the 5% level), indicating higher odds of foreclosure than others. Also, somewhat surprisingly, we find that interest-only and refinance mortgages face lower odds of foreclosure than others, contrary to the literature (Gruenstein and Herbert 2000). Most refinance mortgages taken out during the time of the national house price bubble (2000 2006) were subprime, which in turn face higher odds of foreclosure than prime mortgages than others (National Community Reinvestment Coalition 2010). Further analyses are needed to better understand these results.

5. Conclusions and Policy Implications Based on the results of our logistic regression analyses, we conclude that African American middle-income borrowers in the Atlanta, GA metropolitan area are disproportionately affected by foreclosures as compared to non-Hispanic White borrowers, even after controlling for borrower, loan, and neighborhood characteristics. These findings, however, do not apply to Hispanic middle-income borrowers in this area. Our models neither conceptualize nor operationalize discrimination (Arrow 1973; Becker 1971; Galster 1992; Page 1995; Yinger 1986 and 1998), but they do control for credit risk (through the FICO score) and (proxied) debt (through the LTV ratio). Nevertheless, further research is needed to assess why foreclosure rates are higher for minorities. Our results should be interpreted with care, as they only apply to a select number of years (2004-2008) in a select area (Atlanta, GA). More analyses for years beyond 2008 and for different areas need to be undertaken. Also, it remains to be seen what will happen in the near and distant when the

20

last wave of adjustable rate mortgages will have finished resetting in late 2012 and 2013 and whether the housing markets will experience a double dip (Christie 2011). The Making Home Affordable Program (MHA) was created by the Financial Stability Act of 2009. The program is intended to encourage loan servicers and investors to modify eligible first-lien mortgages so that the monthly payments of homeowners who are currently in default or at imminent risk of default will be reduced to affordable and sustainable levels. The MHA Program ($29.9 billion allocated) is intended to help bring relief to responsible homeowners struggling to make their mortgage payments, while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure, such as lower housing prices, increased crime, and higher taxes (U.S. Department of the Treasury, 2009, n. p.). The MHA program was announced in February 2009 and implemented in March 2009. It was designed to assist three to four million borrowers with sustained permanent modifications by 2012. The Treasury obligated $45.6 billion to the Trouble Asset Relief Program (TARP) (Office of the Special Inspector General for the Troubled Asset Relief Program, 2011). As of April 30, 2011, 135,940 active trial and 608,615 active permanent modifications have been completed, for a total of 744,555 modifications (U.S. Department of the Treasury, 2011b). Slightly more than 18,000 permanent modifications per month were undertaken in the fourth quarter of 2010, down 35 percent from the quarter before that, and a far cry from the 20,000 to 25,000 trial modifications per week Treasury officials once predicted (Barofsky, 2011, p. 5; emphasis in original). The weaknesses of the HAMP program have been documented extensively by academics, research centers, and consumer organizations. Due to many challenges, it is unlikely that the program will reach the original intended goal of helping three to four million homeowners. Carr and Lucas-Smith (2011) concluded that the HAMP program is insufficient to arrest the foreclosure crisis. Private sector financial institutions are starting albeit on a modest trial basis to develop programs to better address the realities of the foreclosure crisis. Bank of America, for example, introduced a new Earned Principal Forgiveness program for borrowers with some subprime and option ARM mortgages, in which homeowners who qualify for the HAMP program, are underwater by at least 20 percent, and are at least 60 days delinquent can qualify for a gradual principal write-down. The bank will set aside up to 30 percent of the borrowers loan, interest-free, and forgive that amount over the span of five years if the borrower remains current with payments. This program, which was announced in March 2010 and launched in May of that year, was estimated to help an initial 45,000 borrowers. However, confirmation of the status of that program had not been received as of this writing. This 21

program would have begun to address the growing problem of negative equity, and it would have encouraged homeowners to continue paying their mortgages rather than strategically default. As Quercia and Ding (2009) have stated, Borrowers inability to meet mortgage payments is the core of the foreclosure problem, and a modification of the terms of mortgages has been regarded as a means to reduce the payment burden (p. 172). A payment reduction, especially when accompanied by a principal reduction, makes loans not only more affordable for borrowers, it also reduces the likelihood of re-default. Reducing the payment burden can be accomplished through loan modification and bankruptcy reform. More specifically, Linero (2011) has pointed out that the most successful loan modification seems to be a step loan modification, which starts with a low interest rate that gradually increases over time. Recently, the National Association of Consumer Bankruptcy Attorneys (2011) proposed a principal paydown plan for under-secured mortgages where at least one borrower must be a debtor in a pending Chapter 13 bankruptcy case. This proposal discusses a restructuring of certain underwater mortgages to enable homeowners to eliminate negative equity and acquire modest equity, and then re-amortize the mortgage into a market rate loan (p. 1) by reducing the interest rate to zero percent so that all payments made by the homeowner are applied to pay down the principal. In return for this benefit, the homeowner agrees to a general settlement of claims against the servicer trustee and investor. Qualifying criteria for real properties and mortgages are: (a) the real property must be a principal residence; (b) the home value on the date of value determination may not exceed 95 percent of the total value of all encumbrances on the property; (c) the first mortgage principal (the lower of the original principal amount or the unpaid principal of an already modified first mortgage) may not be higher than 125 percent of the Federal Housing Finance Agency (FHFA) Conforming Loan limits for the applicable area; (d) first mortgages, junior mortgages, and any bridge or other loans secured by the property would be subject to the plan, if not otherwise avoided; and (e) a fully secured loan is except from treatment under this plan. Borrower qualifications are: (a) at least one borrower must be a debtor in a pending Chapter 13 case; (b) currently monthly housing costs (i.e., all mortgages, real property taxes, insurance, homeowner association dues, etc.) are no less than 31 percent of the borrowers gross income (or the borrowers household income is not more than 80 percent of the applicable HUD median income and the housing costs are not less than 25 percent of the borrowers gross income); (c) mortgage payments used in the calculation of current monthly housing costs are calculated based upon the highest monthly payment amount anticipated or likely to be due under the mortgage within five 22

years. In June 2011, the National Association of Consumer Bankruptcy Attorneys presented this proposal to policymakers and it remains to be seen what will happen. Since 2007, more than 10.5 million foreclosure notices have been filed. While this reality has taken a damaging toll on the homeownership market generally, a disproportionate damage has occurred in financially vulnerable communities of color. As of this writing, no enhanced or new national programs are in place or planned to stem the continuing foreclosure damage and to address the lasting damage to families and communities. No national efforts are contemplated to rebuild the housing market in ways that will ensure a robust homeownership market for people of color. However, very recently state and federal officials have been discussing a plan that would help some underwater borrowers obtain some refinancing assistance although the outcome of these discussions is yet unclear as of this writing (Simon et al. 2011).

23

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