Analysing Determinants of Foreclosure among High-income African-American and Hispanic Borrowers in the Washington, DC Metropolitan Area

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 African-American 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

Notes

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.

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).

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).

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).

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).

REOs are properties that are owned by lenders after an unsuccessful sale at a foreclosure auction.

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 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.