Paying More for the American Dream II

March 1, 2008

Mounting home loan defaults and foreclosures in 2007 threaten gains in homeownership in communities across the United States. Growing flexibility in mortgage lending terms was often abused by unscrupulous lenders and mortgage brokers who increasingly put borrowers into loans they were unable to afford. Increases in defaults and foreclosures of subprime mortgages affect families struggling to maintain homeownership.  Up to 2.2 million homeowners with subprime loans may lose their homes through foreclosure, resulting in a loss of $164 billion in household wealth, mainly in lost equity.

Defaults and foreclosures also directly and indirectly impact neighborhoods and cities that see mounting vacant and abandoned properties, decreased property values, and losses to their tax base and local economies. One foreclosed home can lower the property values of all neighboring homes, decreasing local property values by thousands of dollars. Decreased property values mean that neighboring homeowners may be less able to refinance their own loans or sell their homes, putting them at greater risk of foreclosure and potentially creating a vicious and repeating cycle of neighborhood decline. Foreclosure can require that local governments provide additional municipal services to the property at a cost to local government of tens of thousands of dollars.

All told, approximately $71 billion in housing wealth may be lost directly from foreclosures, $32 billion in wealth lost indirectly through resulting lower property values, and $917 million in property tax revenue lost to state and local governments that rely on such funds to provide basic services to residents.

Numerous reports have shown that high-cost subprime mortgage lending is disproportionately concentrated in lower-income neighborhoods and communities of color. Because subprime loans have a higher risk of default and foreclosure, is likely that these same communities are disproportionately impacted by the foreclosure crisis. 

This report focuses on a subset of “high-risk” subprime lenders - distressed mortgage lenders that have gone out of business as a part of the collapse of the subprime lending industry. In many cases, the failure of these lenders was tied to aggressive lending practices. Many of their loans were clearly unaffordable to the borrowers from the very beginning, an indication of the lenders’ high-risk lending practices.  Additionally, as these lenders have left the market, distressed homeowners may face increasing difficulty in finding an interested party to negotiate a loan modification or other alternative to foreclosure.

This report examines whether certain neighborhoods in Boston, Charlotte, Chicago, Cleveland, Los Angeles, New York City, and Rochester, NY are more prone to the negative impacts of lending by highrisk lenders.