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International Journal of Housing Policy

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Analysing Determinants of Foreclosure among High-income AfricanAmerican and Hispanic Borrowers in the Washington, DC Metropolitan Area
Katrin B. Anackera; James H. Carrb a George Mason University, School of Public Policy, Arlington, VA b National Community Reinvestment Coalition, Washington, DC, USA Online publication date: 09 June 2011

To cite this Article Anacker, Katrin B. and Carr, James H.(2011) 'Analysing Determinants of Foreclosure among High-

income African-American and Hispanic Borrowers in the Washington, DC Metropolitan Area', International Journal of Housing Policy, 11: 2, 195 — 220 To link to this Article: DOI: 10.1080/14616718.2011.573208 URL: http://dx.doi.org/10.1080/14616718.2011.573208

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International Journal of Housing Policy Vol. 11, No. 2, 195–220, June 2011

Analysing Determinants of Foreclosure among High-income African-American and Hispanic Borrowers in the Washington, DC Metropolitan Area
KATRIN B. ANACKER* & JAMES H. CARR**
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*George

Mason University, School of Public Policy, Arlington, VA, **National Community Reinvestment Coalition, Washington, DC, USA

Abstract Foreclosures have disproportionately affected minority borrowers and communities. Many academic studies have focused either on the nation as a whole or on specific metropolitan areas, but few have concentrated on the nation’s capital. Using a merged dataset consisting of Home Mortgage Disclosure Act (HMDA), US Census, and Lender Processing Services (LPS) data and utilizing a logistic regression model, we analyse the likelihood of foreclosure in the Washington, DC metropolitan area. We find that high-income AfricanAmerican borrowers are 36 per cent and Hispanic borrowers 79 per cent more likely to go into foreclosure, controlling for key financial variables. Moreover, we find 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. Key Words: Foreclosure, minorities, housing equity, US, Washington, DC metropolitan area, logistic regression

Introduction While the Washington, DC housing market appeared to be relatively stable at the beginning of the national foreclosure crisis in January 2007, it has been characterised by rapidly growing foreclosure rates since the third quarter of 2007 (McClain & Fowler, 2008). Here, as elsewhere, foreclosures have disproportionately affected minority borrowers and communities. Among borrowers who took out mortgages between 2005 and 2008, 8 per cent of both Africans and Latinos have lost their homes to foreclosures, compared with 4.5 per cent of non-Hispanic whites (Bocian et al., 2010). In addition to the current loss of wealth among these families, the current and future depreciation of property values is estimated to be $194 billion
Correspondence Address: Katrin B. Anacker, Assistant Professor, George Mason University, School of Public Policy, 3351 Fairfax Drive, Arlington, VA 22201, USA. Email: kanacker@gmu.edu ISSN 1461-6718 Print/1473-3269 Online 11/020195–26 DOI: 10.1080/14616718.2011.573208
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2011 Taylor & Francis

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in African-American communities and $177 billion in Latino communities between 2009 and 2012 (Bocian et al., 2010). We believe that it will take many decades, and possibly several generations, to reverse these wealth losses, which compound historical racialised inequalities. Despite the fact that the foreclosure crisis has had a negative impact at the national, regional, municipal, neighbourhood, family and individual levels, there has been a lack of publicly accessible data on mortgage performance to analyse foreclosures. An example of one of the few sources that does track mortgage performance is a proprietary dataset by Lender Processing Services (LPS), which has been purchased by the National Community Reinvestment Coalition (NCRC) for this and other studies (NCRC, 2010). The LPS dataset is based on information from mortgage servicing firms that collect mortgage payments for US lenders and investors. We will discuss the LPS dataset further in the ‘Data and Methods’ section below. Other examples of proprietary datasets that provide information on mortgage performance or foreclosures are the Mortgage Banker Association’s National Delinquency Survey (NDS) (Bocian et al., 2010), First American Core Logic (Bocian et al., 2010), and RealtyTrac (Immergluck, 2008a), respectively. The goal of our paper is to examine the likelihood of foreclosure, utilising a logistic regression model. Our study is based on: (1) publicly available Home Mortgage Disclosure Act (HMDA) data (2004–2007); (2) publicly available Census 2000 data from the US Bureau of the Census; and (3) proprietary loan performance data from Lender Processing Services (LPS) Applied Analytics (January 2004–December 2008). We merge these three datasets with a geographic crosswalk file1 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 (see also Bocian et al., 2006, 2010; Laderman & Reid, 2008). What makes our study unique is the fact that we control for (a) race/ethnicity, (b) credit risk, and (c) (proxied) debt. We analyse mortgages for the years 2004 through 2007 in the Washington, DC metropolitan area in an approach somewhat similar to the one chosen by Laderman and Reid (2008) for mortgages originated in California. Although there has been a virtual tsunami of studies on the foreclosure crisis at the national level (e.g. Immergluck, 2009a, 2009b), at the regional level (e.g. Laderman & Reid, 2008) and for select metropolitan areas (e.g. Chicago (see, e.g., Immergluck & Smith, 2005)), few academic studies have been published on foreclosures and minorities in the Washington, DC metropolitan area. Previous national work has shown that middleand high-income households have been disproportionately affected by the foreclosure crisis (Canner & Bhutta, 2008; Kroszner, 2009). The Washington, DC metropolitan area is characterised by a relatively large proportion of middle- and high-income African Americans, but these groups have been understudied in terms of foreclosures (Lacy, 2007). Studying racial and ethnic disparities in Washington, DC also helps us to evaluate the influential claims that deregulation, economic growth and the

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promotion of ideas about the ownership society, among other factors, would open opportunities for African Americans and Hispanics. This study helps to fill this gap. Nationally, there is evidence that a large proportion of high-cost loans have gone into foreclosure (Bocian et al., 2010), and there is also evidence that a large proportion of high-cost loans went to minorities (Mayer & 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, and sum up our study in the conclusion. 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 conventional or Federal Housing Administration (FHA)2 or Veterans Administration (VA)3 mortgages (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 payments4 (Ludwig et al., 2009). Thus, lenders introduced risk-based pricing in the mid-1980s, wher, 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 & McCoy, 2008). These high-cost loans are also known as non-prime or subprime mortgages (see Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, n.d. for a good definition of a subprime borrower), and they were one of the contributing factors to the national foreclosure crisis. We will use the terms high-cost, non-prime, and subprime interchangeably below, nevertheless pointing out the serious theoretical issues involved in defining these concepts (Engel & McCoy, 2002, 2008). Until the mid-1990s, most research found no difference in interest rates among different racial and ethnic groups (King, 1981; Nothaft & Perry, 2002; see also Schafer & Ladd, 1981 for mixed results). This insight changed in the late 1990s, when several studies analysed differences in interest rates among these groups (Calem et al., 2004; Crawford & Rosenblatt, 1999; Mayer & Pence, 2008; Nothaft & 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 rather 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 US Census of Population and housing

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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 generalised least squares (EGLS) procedure show that a 1 per cent increase in foreclosures in a block group is associated with a 1.3 per cent larger black population in 1990 (see also Baxter & Lauria, 2000). Newman and Wyly (2004) use lis pendens (‘pending suit’) court filings in Essex County, New Jersey and King’s 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 preforeclosure during 1999. They find evidence of segmentation in mortgage capital investment, showing that certain Newark and inner-ring suburban neighbourhoods have high rates of both subprime lending and pre-foreclosures. Immergluck and Smith (2005) analyse foreclosure start data from 1995 and 2002 for the five-county metropolitan Chicago area based on local and HMDA data. Results show that foreclosures of government-guaranteed mortgages increased 105 per cent and foreclosures of conventional mortgages increased 350 per cent. They also show that neighbourhoods with minority populations of less than 10 per cent in 2000 saw an increase in foreclosures of 215 per cent, while neighbourhoods with 90 per cent or greater minority populations experienced an increase of 544 per cent. Based on a multivariate analysis, the authors analyse conventional foreclosures in 2002 and find that subprime loans, among other variables, explain these high levels of foreclosure. Bocian et al. (2006) analyse 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 per cent and Latinos were 29 to 142 per cent 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 adjustable5) and the purpose (i.e. refinance or purchase) of the loan. Gerardi et al. (2007) 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 per cent 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 minority households in a neighbourhood increases the probability of default by about 9 per cent. Ding et al. (2009) use a national dataset of home purchase loans originated by a group of lenders under the Self-Help Ventures Fund’s Community Advantage Program (CAP). Here, participating lenders are able to sell mortgages not conforming to underwriting guidelines to Self-Help, which then securitises and sells them to Fannie Mae or other investors. All loans have fixed interest rates, and almost all have a 30-year amortisation rate. However, a large proportion of the loans have high LTV ratios and borrowers have relatively low credit scores and household incomes. About

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39 per cent of the borrowers are minorities. Based on a multinomial logit model, Ding et al. regress CAP loan default on the predicted value of neighbourhood 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 neighbourhood, the higher the probability of serious delinquency and default for CAP loans. In sum, the studies discussed above provide evidence that minorities have a disproportionately high proportion of high-cost loans, which in turn have disproportionately high odds of foreclosure. While African Americans and Hispanics as a group have lower household incomes, not many studies on foreclosure have focused on AfricanAmerican and Hispanic borrowers that are high income. This study fills this gap. Below we turn to the data and methods used for our study, which focuses on the Washington, DC metropolitan area.
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Data and Methods We analyse mortgages for the years 2004 through 2007 for the Washington, DC metropolitan area. As enumerated above, our study combines data from three sources: (1) publicly available Home Mortgage Disclosure Act (HMDA) data (2004–2007); (2) publicly available Census 2000 data from the US 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. In the 1960s and 1970s, fair housing concerns and community-based advocacy led to several acts that prohibited discrimination in housing and housing finance markets. Two examples are the Federal Fair Housing Act of 1968 and the Equal Credit Opportunity Act of 1974. 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 & O’Connor, 2001). About 80 per cent 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 (FFIEC). This dataset provides information about mortgages at the beginning of their lifecycle but not beyond their origination. We use 2004–2007 HMDA data for our analysis. US Census data are made publicly available without charge by the US Bureau of the Census, a government agency. Article I section II of the Constitution of the United States directs that the population be enumerated at least once every ten years. Census data not only determine the number of members from each state in the House of Representatives, but also how more than $300 billion per year in federal and state funding is allocated to communities for neighbourhood improvements, public health, education and transportation, among other public services. We use 2000 Census data for our analysis.

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LPS data are proprietary mortgage performance data at the borrower level. This national dataset is compiled from mortgage servicing firms that collect mortgage payments for US lenders and investors. As of December 2007, a total of 16 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. A loan stays in the LPS dataset until it is repaid, foreclosed or completes a real estate owned (REO) process.6 The LPS dataset over-represents prime and near-prime (i.e. Alt-A) loans and under-represents subprime loans, although the LPS dataset does not provide information on prime versus near-prime (Immergluck, 2008b). We used weights to account for these and other facts (discussed below), but our results should be interpreted carefully. Our LPS dataset provides information about all outstanding liens per month between 2000 and 2008. We restricted our study to first lien loans for owner-occupied residences with one to four units, as 82 per cent 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). What makes our study unique is the fact that we control for (a) race/ethnicity, (b) credit risk, and (c) (proxied) debt. As Berkovec et al. (1996a, 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 & Chan, 1995). In turn, the LPS dataset provides information on credit risk through the FICO7 score variable and on (proxied) debt through the loan-to-value ratio, but not on race/ethnicity. Thus, we match 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, 2010; Laderman & Reid, 2008; see also Coulton et al., 2008, for an alternative matching approach). Table 2 displays the number and proportion of LPS loan observations matched with HMDA loan observations by year. The loans are matched based on the year of origination, the zip code, the loan amount, the purpose of the loan (i.e. purchase or refinance) and the type of the purchaser of the loan (i.e. Fannie Mae, Freddie Mac, Ginnie Mae or none). Our match rate is 19.2 per cent, resulting in 105,279 matched observations for our study area. We create weights to increase the representativeness of our results for two reasons: first, HMDA only covers about 80 per cent of originated loans on the mortgage market (Avery et al., 2007); and, second, LPS under-represents subprime mortgages on the market. Using the HMDA data as the benchmark for weights, we weight each

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Table 1. List and description of variables from matched LPS/HMDA dataset used in study. Description 1: a loan that is in foreclosure (presale or post-sale) or is real estate owned (REO); 0: otherwise Description Borrower income FICO score <640 640< = FICO score <720 FICO score> = 720 Non-Hispanic white Hispanic or Latino Black/African American HMDA (2004–2007) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) HMDA (2004–2007) HMDA (2004–2007) HMDA (2004–2007) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) LPS (2004–2008) (Continued on next page) LPS (2004–2007) Source

Dependent variable [household level]

Foreclosure [dummy variable]

Independent variables Borrower characteristics [individual level] Borrower income Low FICO score Medium FICO score High FICO score Non-Hispanic white Hispanic African American Mortgage characteristics [mortgage level] Full documentation mortgage [dummy variable] Interest-only mortgage [dummy variable] Balloon mortgage [dummy variable] Adjustable rate mortgage [dummy variable] High cost mortgage [dummy variable] Mortgage has full documentation Mortgage is interest only Mortgage has balloon term Mortgage has adjustable rate Mortgage is high cost, i.e. rate spread is greater than 3.00 per cent Mortgage is used for refinancing Mortgage has prepayment penalty Ratio of mortgage payment to borrower’s income (PTI) Ratio of mortgage amount to house value (LTV) Mortgage purchased by Fannie Mae, Freddie Mae or Ginnie Mae Mortgage purchased by private market Mortgage in lender’s portfolio

Foreclosure among High-income African-American and Hispanic Borrowers

Refinance mortgage [dummy variable] Prepayment penalty [dummy variable] Payment-to-income ratio

Loan-to-value ratio Securitisation characteristics [mortgage level] Government sponsored enterprise (GSE) [dummy variable] Private [dummy variable] None/portfolio [dummy variable]

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Table 1. List and description of variables from matched LPS/HMDA dataset used in study. (Continued) Description Source

Dependent variable [household level]

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Neighbourhood characteristics [Census tract or zip code level] Home Price Index (HPI) [county level] House price change between previous year and three years prior to the origination to the mortgage

Capitalisation rate [Census tract level]

Metropolitan Regional Information Statistics (MRIS) (2001–2006) US Census (2000) US Census (2000) US Census (2000) US Census (2000) US Census (2000) US Census (2000) US Census (2000) US Census (2000) US Census (2000)

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

Ratio of the tract’s annualised median rent divided by the median house value 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 per cent or more; 0: otherwise Median family income less than 50 per cent of area median income Median family income more than 50 per cent but less than 80 per cent of area median income Median family income more than 80 per cent but less than 120 per cent of area median income Median family income more than 120 per cent of area median income County or independent city

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Table 2. Number and proportion of LPS loan observations matched with HMDA loan observations by year. Year of origination 2004 2005 2006 2007 All Number of LPS loan observations 149,767 172,692 130,659 96,318 549,436 Number of matched loans 25,991 30,030 26,408 22,850 105,279 Proportion matched 17.4 17.4 20.2 23.7 19.2

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loan in the matched data file based on zip code, the reported yield rate spread and race/ethnicity. The geography of our study is the Washington, DC metropolitan statistical area (MSA), home of 5,476,241 residents as of 1 July 2009 (US Bureau of the Census, n.d.). The Office of Management and Budget (OMB) includes the following counties and independent cities as part of the Washington, DC MSA: District of Columbia; Calvert, Charles, Frederick, Montgomery and Prince George’s counties on the Maryland side; Arlington, Clarke, Culpeper, Fairfax, Fauquier, King George, Loudoun, Prince William, Spotsylvania, Stafford and Warren counties, as well as the cities of Alexandria, Fairfax, Falls Church, Fredericksburg, Manassas and Manassas Park on the Virginia side; and Berkeley and Jefferson counties in West Virginia. The maps in Figure 1 show our study area and the proportion of both non-Hispanic African Americans and Hispanics. 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: probability of foreclosure = f (borrower characteristics, mortgage characteristics, securitisation characteristics, neighbourhood characteristics) In our case, the dependent variable was the probability of foreclosure, a discrete outcome variable where 0 depicted the absence of foreclosure and 1 indicated that the mortgage was in the foreclosure process (either ‘pre-sale’ or ‘post-sale’ or a real estate owned (REO) property). The independent variables are enumerated and described in Table 1 and discussed below. The HMDA dataset has information on race/ethnicity (i.e. whether the borrower is non-Hispanic 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.,

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Figure 1. Our study areas.

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2007; Immergluck & Smith, 2005; Laderman & Reid, 2009; Lauria & Baxter, 1999). We expect our results to be consistent with the literature. The Census dataset provides information about several housing and socioeconomic neighbourhood characteristics, such as the median year the housing unit was built; the proportion of homes that were owner-occupied; whether the neighbourhood had a proportion of 50 per cent or more minorities; and whether the neighbourhood had an income that was low (i.e. median family income less than 50 per cent of area median income), moderate (i.e. median family income more than 50 per cent but less than 80 per cent of area median income), middle (i.e. median family income more than 80 per cent but less than 120 per cent of area median income) or high income (i.e. median family income more than 120 per cent of area median income). We expect higher odds for variables Median Year Built, Minority Neighbourhood, Low Income Neighbourhood, and Middle Income Neighbourhood (see Laderman & 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 foreclosure crisis appears to have affected neighbourhoods with high ownership rates more (Laderman & Reid, 2009). The LPS dataset has information about select (1) borrower characteristics, (2) mortgage characteristics and (3) securitisation8 characteristics, which we will discuss below (also see Table 1). In terms of borrower characteristics, we have information about borrowers’ incomes and FICO scores. We expect that the variable Borrower’s 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 & 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 a full documentation mortgage (dummy variable); (b) whether or not the mortgage is an interest-only mortgage9 (dummy variable); (c) whether or not the mortgage is a balloon mortgage (dummy variable); (d) whether or not the mortgage is an adjustable-rate mortgage (dummy variable); (e) whether or not the mortgage is a high-cost mortgage (dummy variable); (f) whether or not the mortgage is a refinance mortgage (dummy variable); (g) whether or not the mortgage has a prepayment penalty (dummy variable); (h) the payment-to-income ratio; and (i) the loan-to-value ratio. Based on the literature, we expect that these variables will have odds higher than 1 (Ding et al., 2009; Gruenstein & Herbert, 2000; Scheessele, 2002; Schloemer et al., 2006). With regard to securitisation characteristics, we have information on: (1) whether the mortgage was purchased on the secondary mortgage market by a government sponsored enterprise (GSE; Fannie Mae, Freddie Mac or Ginnie Mae); (2) whether the mortgage was purchased by an actor on the private market; or (3) whether the mortgage remained in the lender’s portfolio. We expect that the odds of the GSE

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variable will be lower, confirming the literature (Immergluck & Smith, 2005). We also expect that the odds of the Private Securitisation 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 Securitisation/Portfolio – odds higher than 1 could indicate a bad credit risk (e.g. that the lender was unable to sell this mortgage on the secondary mortgage market), while odds lower than 1 could indicate a good credit risk (e.g. that the lender preferred to keep a particular mortgage in its portfolio). In addition to the variables based on the HMDA, the 2000 Census, and the LPS datasets, we created the variable Home Price Index (HPI), which is based on the change in median home sales prices in each county provided by Metropolitan Regional Information Statistics (MRIS). 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 refinancing10 their resetting mortgages, 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 argue 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 Immergluck’s insight: ‘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 & Reid, 2009). We also calculated the capitalisation rate (i.e. the ratio of the tract’s annualised median rent divided by the median house value (see Laderman & Reid, 2008)). Results Descriptive Statistics Our descriptive statistics are provided in Tables 3 and 4.11 The tables do not control for other factors, but the regression analysis discussed below does. In Table 3 we differentiate between loans not in foreclosure and loans in foreclosure, displaying both the number and the proportion for each category. In Table 4 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 a higher proportion of borrowers with a low FICO score (4.19 per cent) is affected by foreclosures than borrowers with a medium FICO score (3.59 per cent) or a high FICO score (0.87 per cent) (see Table 3). Our results also show that 3.57 per cent of African Americans and 7.11 per cent of Hispanics are affected by foreclosures, which is consistent with the literature (see Table 3) (Bocian et al., 2010; Gerardi et al., 2007; Immergluck & Smith, 2005; Lauria & Baxter, 1999).

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Table 3. Descriptive statistics for number and proportion of loans in foreclosure versus those not in foreclosure.
Number not in foreclosure Total Proportion not in foreclosure Number in foreclosure Proportion in foreclosure

Variable Number/proportion

[continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] 227,239 95.81% 9,935 4.19% 237,173 221,472 96.41% 8,254 3.59% 229,726 264,737 99.13% 2,335 0.87% 267,072 410,926 98.64% 5,648 1.36% 416,574 92,614 92.89% 7,094 7.11% 99,708 209,908 96.43% 7,782 3.57% 217,690 286,331 97.95% 5,985 3.58% 116,296

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Borrower characteristics [individual level] Income Low FICO score Medium FICO score High FICO score Non-Hispanic white Hispanic African American Mortgage characteristics [mortgage level] Full documentation mortgage [dummy] Interest-only mortgage [dummy] Balloon mortgage [dummy] Adjustable rate mortgage [dummy] High-cost 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]

154,336 95.64% 7,031 4.36% 161,366 8,168 81.13% 1,899 18.87% 10,067 295,698 95.06% 15,360 4.94% 311,058 105,834 91.00% 10,462 9.00% 116,296 408,604 98.18% 7,583 1.82% 416,187 66,240 93.30% 4,760 6.70% 71,000 [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] 211,602 99.46% 1,142 0.54% 212,744 221,209 97.23% 6,300 2.77% 227,509 165,080 93.94% 10,656 6.06% 175,736 115,557 97.94% 2,426 2.06% 117,983

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398,357 186,018 109,489 93.73% 95.99% 12,452 4,573 6.27% 4.01%

99.18%

3,299

0.82%

401,656 198,470 114,062

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[continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] [continuous variable] 302,366 15,358 139,485 355,631 202,954 98.14% 96.80% 96.81% 98.03% 308 4,590 11,771 3,856 available from authors upon request 95.31% 14,876 4.69% 1.96% 3.19% 3.20% 1.86% 317,242 15,666 144,075 367,402 206,810

Securitiwation characteristics [mortgage level] Government sponsored enterprise (GSE) Private None/Portfolio Neighbourhood characteristics [Census tract or zip code level] Home Price Index (HPI) Capitalisation rate [Census tract level] Median year built [Census tract level] Proportion owner-occupied [Census tract level] Minority neighbourhood [zip code level] Low-income neighbourhood [zip code level] Moderate-income neighborhood [zip code level] Middle-income neighbourhood [zip code level] High-income neighbourhood [zip code level] County [dummies]

Foreclosure among High-income African-American and Hispanic Borrowers
Table 4. Mean characteristics of loans in foreclosure. Variable Borrower characteristics [individual level] Income FICO score Mortgage characteristics [mortgage level] Loan-to-value (LTV) ratio Payment-to-income (PTI) ratio Neighbourhood characteristics [Census tract or zip code level] Home Price Index (HPI) Capitalisation rate Median year built Per cent owner-occupied Total Not in foreclosure

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In foreclosure

$104,149 701.82 74.56 0.26 140.9 0.64 1975 66.98 713,448

$107,791 655.82 101.96 0.32 148.42 0.68 1976 67.08 20,524

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Borrowers who had loans that had not gone into foreclosure by December 2008 had a mean income of $104,149, whereas borrowers that had experienced a foreclosed loan had a mean income of $107,791 (see Table 4). Table 4 shows that the mean FICO score of a borrower not in foreclosure was 701.82, whereas the mean FICO score of a borrower in foreclosure was only 655.82. If a medium FICO score is indicative of middle incomes, 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. In terms of mortgage characteristics, we conclude that a disproportionately high proportion of mortgages with exotic features go into foreclosure (60.17 per cent without full documentation, 4.36 per cent of interest-only mortgages, 18.87 per cent of balloon mortgages, 4.94 per cent of adjustable rate mortgages, 15.84 per cent of high-cost mortgages and 6.70 per cent of mortgages that have a prepayment penalty), confirming Laderman & Reid (2009) on prepayment penalties (see Table 3). We also conclude that foreclosed loans are characterised by a high loan-to-value (LTV) ratio (101.96 versus 74.56), a high payment-to-income (PTI) ratio (0.32 versus 0.26), and a high capitalisation rate (0.68 versus 0.64) (see Table 4). With regard to securitisation characteristics, our results show that 6.27 per cent of mortgages sold on the private market went into foreclosure, followed by loans that remained in the lender’s portfolio (4.01 per cent) and loans sold to governmentsponsored enterprises (0.82 per cent). Our findings in terms of the GSEs and private label securitisation are confirmed by Immergluck & Smith (2005) and Immergluck (2009b), among others. In terms of neighbourhood characteristics, we find that moderate- (3.19 per cent) and middle-income (3.20 per cent) neighbourhoods are disproportionately affected

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by foreclosures, followed by low- (1.96 per cent) and high-income (1.86 per cent) neighbourhoods, again showing that the foreclosure crisis disproportionately affects middle-income borrowers (Canner & Bhutta, 2008; Kroszner, 2009; see also Laderman & Reid, 2009 for alternative findings) (see Table 3). Table 4 also shows that foreclosed loans are characterised by a higher Home Price Index (HPI) (148.42 versus 140.9), a younger year the house was built (1976 versus 1975), and a slightly higher proportion of owner occupants (67.08 per cent versus 66.98 percent). These findings might suggest that rapidly appreciating neighbourhoods had a high proportion of loans that went into foreclosure, which is consistent with many media reports. One could speculate that in the Washington, DC Metropolitan area, rising home prices might have been more closely tied to the riskiest forms of lending, while in the nation rising home prices masked foreclosures because borrowers could be forced into distressed short sales. Future research efforts will address these highly speculative thoughts.

Logistic Regression Analysis Logistic regression analyses are undertaken when the dependent variable is dichotomous (i.e. scored 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 per cent 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 populations’ (2005, p. 295). We built seven models, as presented in Table 5 gradually increasing the number of independent variables that are included in each and adding two interaction terms in Model 7. By using several models, we attempt to address alternative explanations and correct for possible methodological shortcomings. Specifically, we have the following models: • Model 1: select borrower characteristics (borrower income and race/ethnicity). • Model 2: all borrower characteristics;.

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Table 5. Odds ratio estimates of logistic regression models. Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

1.080∗∗∗ — — 5.813∗∗∗ 2.821∗∗∗ — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 0.757∗∗∗ 1.390∗∗∗ 1.960∗∗∗ 1.790∗∗∗ 1.955∗∗∗ NS 1.233∗∗∗ 1.316∗∗∗ 2.572∗∗∗ — — — 0.819∗∗∗ 1.181∗∗∗ 1.456∗∗∗ 1.916∗∗∗ 1.574∗∗∗ 0.890∗∗∗ 1.154∗∗∗ 1.277∗∗∗ 2.446∗∗∗ 2.973∗∗∗ 5.765∗∗∗ 3.317∗∗∗ 0.824∗∗∗ 1.182∗∗∗ 1.456∗∗∗ 1.911∗∗∗ 1.567∗∗∗ 0.883∗∗∗ 1.158∗∗∗ 1.277∗∗∗ 2.440∗∗∗ 3.034∗∗∗ 6.082∗∗∗ 3.305∗∗∗ — —

1.086∗∗∗ 4.469∗∗∗ 3.545∗∗∗ 5.045∗∗∗ 2.191∗∗∗

1.070∗∗∗ 2.851∗∗∗ 2.454∗∗∗ 2.100∗∗∗ 1.260∗∗∗

1.061∗∗∗ 2.815∗∗∗ 2.428∗∗∗ 1.998∗∗∗ 1.260∗∗∗

1.063∗∗∗ 2.819∗∗∗ 2.426∗∗∗ 1.978∗∗∗ 1.202∗∗∗

1.042∗∗∗ 2.615∗∗∗ 2.360∗∗∗ 1.932∗∗∗ 1.182∗∗∗ 0.776∗∗∗ 1.143∗∗∗ 1.340∗∗∗ 1.627∗∗∗ 1.359∗∗∗ 0.857∗∗∗ NS 1.279∗∗∗ 2.343∗∗∗ 2.809∗∗∗ 5.786∗∗∗ 3.244∗∗∗

1.035∗∗∗ 2.623∗∗∗ 2.364∗∗∗ 1.795∗∗ 0.911∗ 0.781∗∗∗ 1.140∗∗∗ 1.340∗∗∗ 1.627∗∗∗ 1.355∗∗∗ 0.858∗∗∗ NS 1.296∗∗∗ 2.327∗∗∗ 2.793∗∗∗ 5.734∗∗∗ 3.192∗∗∗ 2.094∗∗∗ 2.077∗∗∗ 2.194∗∗∗ 2.185∗∗∗ (Continued on next page)

Foreclosure among High-income African-American and Hispanic Borrowers

Independent variables Borrower characteristics [individual level] Income [standardised] Low FICO score Medium FICO scorea Hispanic African American Mortgage characteristics [mortgage level] Full documentation mortgage [dummy] Interest-only mortgage [dummy] Balloon mortgage [dummy] Adjustable rate mortgage [dummy] High-cost mortgage [dummy] Refinance mortgage [dummy] Prepayment penalty [dummy] Payment-to-income ratio [standardised] Loan-to-value ratio [standardised] Origination in 2005 (vs. 2004) [dummy] Origination in 2006 (vs. 2004) [dummy] Origination in 2007 (vs. 2004) [dummy] Securitisation characteristics [mortgage level] Private None/Portfoliob

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Table 5. Odds ratio estimates of logistic regression models. (Continued) Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7

— — — — — — — — — available upon request available upon request — — available upon request — available upon request — — — — — — — — — — — — — — — — — — 1.004∗∗∗ 1.053∗∗∗ 1.263∗∗∗ 0.759∗∗∗ NS 1.066∗∗ — available upon request

— —

— —

— —

NS NS

NS NS 1.005∗∗∗ 1.046∗∗ 1.269∗∗∗ 0.789∗∗ 1.094∗∗ 1.122∗∗∗ — available upon request

0.961∗ NS 1.005∗∗∗ 1.037∗∗ 1.254∗∗∗ 0.822∗∗ 1.124∗∗∗ 1.127∗∗∗ 1.366∗∗∗ NS available upon request

K. B. Anacker & J. H. Carr

Neighbourhood characteristics [Census tract or zip code level] Home Price Index (HPI) [standardised] Capitalisation rate [Census tract level] [standardised] Median year built [Census tract level] Proportion owner-occupied [Census tract level] [standardised] Minority neighbourhood [zip code level] Low-income neighbourhood [zip code level] Moderate income neighbourhood [zip code level] Middle-income neighbourhood [zip code level]c Interaction terms African-American borrower ∗ high-income borrower Hispanic borrower ∗ high-income borrower County [dummies]

Notes: ∗ = p < .05; ∗∗ = p < .01; ∗∗∗ p < .001. aBase case: high FICO score. bBase case: government sponsored enterprise (GSE). cBase case: high-income neighbourhood.

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• Model 3: all borrower characteristics and select mortgage characteristics (interestonly 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 neighbourhood characteristics and county dummies. • Model 6: all borrower characteristics, all mortgage characteristics, all neighbourhood characteristics, and all securitisation characteristics, along with county dummies. • Model 7: all borrower, mortgage, neighbourhood, and securitisation characteristics, county dummies and two interaction terms. The vast majority of our odds ratio estimates were statistically significant at the .1 per cent level. Below we will discuss the odds ratio estimates of Model 7 (see Table 5 for the odds ratio estimates in Models 1 through 6). Model 7 has 23 variables that are statistically significant at the .1 per cent level, two variables that are significant at the 5 per cent level (African American), and three variables (prepayment penalty, capitalisation rate and interaction term Hispanic borrower ∗ high-income borrower) that were not significant. The latter finding for the interaction term is perhaps surprising, as one might assume similar issues among all high-income minorities, although the Washington, DC Metropolitan area does not have a large proportion of high-income Hispanics. The results of Model 7 with all controls added available to us are consistent with nearly all of the findings from the emerging body of research in the literature devoted to assessing the subprime lending boom and its subsequent collapse. With regard to borrower characteristics, borrowers with a low or medium FICO score and minority borrowers face higher odds of foreclosure, which is consistent with the literature (Gerardi et al., 2007; Immergluck & Smith, 2005; Lauria & Baxter, 1999). However, in Model 7, variable African-American Borrower had odds lower than 1 (0.911), while variable African American Borrower ∗ High Income Borrower had odds higher than 1 (1.366). This is an inconsistent finding that might hint at the fact that some independent variables may have been racialised yet are difficult to control for in terms of the racialised component. Future research efforts will focus on this discrepancy. In terms of mortgage characteristics, ‘exotic’ mortgage features translate into higher odds of foreclosure (Laderman & Reid, 2009). The odds ratio estimates of the origination variables are striking: borrowers who took out a mortgage in 2006, the year the national house price bubble peaked (Shiller, 2008), were 473 per cent more likely to face foreclosure, followed by 219 per cent in 2007 and 179 per cent in 2005. This discrepancy illustrates the ease of obtaining a mortgage during the peak of the bubble. With regard to securitisation characteristics, private or no securitisation means higher odds of foreclosure, which is consistent with the literature (Immergluck,
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2009b; Immergluck & Smith, 2005). In terms of neighbourhood characteristics, the odds ratio estimates are higher for older, owner-occupied, minority, and moderateand middle-income neighbourhoods, but lower for neighbourhoods appreciating in price and (somewhat surprisingly) low-income neighbourhoods (see Laderman & Reid, 2009). However, there is a discrepancy between our assumptions and our results in terms of (1) borrower income (assumed lower odds; our odds are 1.035), (2) refinance mortgage (assumed higher odds; the odds are actually 0.858), and (3) low-income neighbourhood (assumed higher odds; our odds are 0.822). The discrepancies in terms of borrower and neighbourhood income show that the foreclosure crisis disproportionately affected middle-income borrowers, confirming Canner and Bhutta (2008) and Kroszner (2009), but contradicting Laderman and Reid (2009). Our high odds ratio estimates for high-income African-American and Hispanic borrowers indicate that some minority borrowers may have been disproportionately affected by the foreclosure crisis. More specifically, our interaction term African American Borrower ∗ High Income Borrower shows that these borrowers are 36 per cent more likely to be affected by foreclosure, although our interaction term Hispanic Borrower ∗ High Income Borrower remains insignificant. Interestingly, the variable Borrower Income had an odds ratio estimate of 1.035, indicating higher odds of foreclosure. Also, somewhat surprisingly, we find that refinance mortgages face lower odds of foreclosure, contrary to the literature (Gruenstein & 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 (National Community Reinvestment Coalition, 2010). Further analyses are needed to better understand these results. Policy Implications Our results should be interpreted with care, as they only apply to a select number of years (2004–2008) in a select area (Washington, DC). More analyses for years beyond 2008 and for different areas need to be undertaken. Nevertheless, based on our analyses, we conclude that ‘exotic’ mortgage features that had become increasingly common by the late 1990s, such as balloon payments, adjustable rate and high-cost mortgages, and prepayment penalties, along with high payment-to-income ratios and high loan-to-value ratios, translated into higher odds of foreclosure. We also conclude that the strong link between high-cost mortgage products and foreclosure means that those products should be carefully regulated and that many features of those loans should be limited or eliminated from the market. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111–203, H.R. 4173) is a step in this direction. The act was signed into law by President Barack Obama on 21 July 2010. The goals of the Dodd-Frank Act are: (a) to promote the financial stability of the United States by improving accountability

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and transparency in the financial system; (b) to end ‘too big to fail; (c) to protect the American taxpayer by ending bailouts; and (d) to protect consumers from abusive financial services practices, among other purposes (US Government Printing Office, 2010). More specifically, Title XIV of the Dodd-Frank Act is the Mortgage Reform and Anti-Predatory Act. Subtitle A is about residential mortgage loan organisation standards, subtitle B deals with minimum standards for mortgages, subtitle C focuses on high-cost mortgages, subtitle D describes the newly created Office of Housing Counseling within the US Department of Housing and Urban Development (HUD), subtitle E discusses mortgage servicing, subtitle F lays out appraisal activities, subtitle G elaborates mortgage resolution and modification, and subtitle H enumerates miscellaneous provisions. As specified in subtitle C, borrowers of high-cost mortgages must now obtain pre-loan counselling from a certified counsellor. The Act also disallows balloon payments and prepayment penalties for existing residential mortgages and bans the practice of encouraging default on an existing loan in the case of refinancing (US Government Printing Office, 2010). The Dodd-Frank Act addresses balloon payments and prepayment penalties, but it does not address interest-only and adjustable rate mortgages or the high ratios in terms of the payment-to-income and the loan-to-value ratio. Future public policies will be needed to address features that will contain potential future foreclosure crises with a magnitude similar to the current one. Conclusions Based on the results of our logistic regression analyses, we conclude that high-income African-American and Hispanic borrowers in Washington, DC are disproportionately affected by foreclosures as compared to non-Hispanic white borrowers, even after controlling for borrower, loan and neighbourhood characteristics. Analyses with interaction terms show that African-American high-income borrowers are also disproportionately affected by foreclosures, although Hispanic high-income borrowers are not. Our models neither conceptualise nor operationalise discrimination (Arrow, 1973; Becker, 1971; Galster, 1992; Page, 1995; Yinger, 1986, 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 show that interest-only, balloon payment, adjustable rate high-cost and prepayment penalty mortgages as well as mortgages with a high payment-toincome and a high loan-to-value ratio increase the odds of foreclosure. While the Dodd-Frank Act explicitly addresses balloon payments and prepayment penalties, it only implicitly addresses issues that African-American and Hispanic borrowers face. The Fair Housing Act (1968) and the Fair Housing Amendments Act (1988) provide protection in terms of exclusion, steering, harassment, blockbusting, exploitation and service quality (Galster, 1998). The Equal Credit Opportunity Act (1974) prohibits

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discrimination in housing finance markets. However, these acts do not seem to help African-American and Hispanic borrowers who might face foreclosure. They are landmark acts that were passed after extensive discussions. It remains to be seen when we will see other landmark acts that address interest-only and adjustable rate mortgages as well as issues that African-American and Hispanic borrowers often face in the context of the foreclosure crisis. Acknowledgements Valuable research assistance was provided by Tamara Jayasundera, Chao Tien, Denitza Mantcheva and Archana Pradhan. Constructive and patient comments were provided by Carolina Reid, Amy Crews Cutts, Kristopher Rengert and Zhong Yi Tong. The authors appreciate constructive suggestions by Editor Suzanne Fitzpatrick and two anonymous reviewers. Notes
1. Geographic crosswalk files show the relationship between a wide variety of geographic coverage. In this study, the files show the relationship between the Census tract level and the zip code level. 2. The Federal Housing Administration (FHA), created by the Housing Act of 1934, provides mortgage insurance, typically for homebuyers with down payment of less than 20 per cent. The homebuyer pays an insurance premium to protect the mortgage lender. In case of a default, the FHA pays the lender and takes possession of the house. The borrower is not protected in any way (Morrow-Jones, 1998). 3. The Veterans Administration (VA) was created in 1930. Its greatest impact on US housing occurred in the years following World War II, when the federal government had become increasingly active in the housing market. In 1944, Congress passed the Servicemen’s Readjustment Act (also called the GI Bill of Rights), which included a loan guarantee programme that was a direct government subsidy, unlike the FHA mortgage insurance, which was financed by an insurance premium (Sidney, 1998). 4. Balloon mortgages are characterised by a series of interest-only payments and then a large payment, often the final payments that are due on a mortgage note (Jaffe, 1998b). 5. In the US, the standard residential mortgage instrument used since the early 1930s was the fixed rate mortgage (FRM). During some high-interest periods in the 1960s and 1970s, the fixed rate mortgage was not considered as the primary mortgage instrument in the US financial system. Thus, variable rate mortgages (VRMs) and then adjustable rate mortgages (ARMs) were created in the late 1970s. In the case of VRMs and ARMs, the borrower bears the risk associated with future interest rate changes when an ARM is used (Jaffe, 1998a). 6. REOs are properties that are owned by lenders after an unsuccessful sale at a foreclosure auction. 7. A FICO (Fair Isaac Corporation, 2010) score is a number that is formulated based on a consumer’s credit history, helping lenders to evaluate the consumer’s credit risk. The

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8.

9.

10.
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11.

FICO score is used to determine credit offers and interest rates (http://www.myfico.com/ Default.aspx). Securitisation, established in the 1970s, transforms assets and liabilities that are illiquid and costly into capital market instruments that can be sold. One of the major forms of securitisation is the use of mortgage-backed securities (MBSs). These instruments are supported by the Government Sponsored Enterprises (GSEs) (i.e. the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae)). The GSEs buy, bundle and (a) insure and resell on the capital market or (b) keep the MBSs in their portfolios (Anacker & Carr, 2009). In the case of a fixed rate mortgage (FRM), each debt service payment is divided into two portions: (a) the interest payment (i.e. the payment on the mortgage balance); and (b) the principal payment (i.e. the payment of the mortgage balance). In the case of an interest only mortgage, only interest payments are made (Jaffe, 1998c). Refinancing pertains to originating a new mortgage on a property prior to the maturity of an existing mortgage (Garr, 1998). Both tables contain weighted results according to the sampling weights discussed above.

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