Latinos and the Mortgage Crisis: Implications for Asset Building

Carolina Reid, Ph.D. and Vivian PachecoFederal Reserve Bank of San Francisco

September 4, 2008

Analysis of First American LoanPerformance data provided by the Federal Reserve Board of Governors. Do not cite or reproduce without permission. The views expressed in this presentation are my own and not necessarily those of the

Federal Reserve Bank of San Francisco or the Federal Reserve System.

A rosy start to the decade

Between 2002 and 2006, most indicators pointed to increasingly prosperous conditions for low-income families Low unemployment rate Increased uptake of Earned Income Tax Credit Increased homeownership

Homeownership rate among Latinos rose from 46.3 to nearly 50 percent between 2000 and 2006, an addition of more than 1.6 million Latino homeowners

CFED: nationwide, between 2002 and 2004 median net worth jumped 25.8 percent, to $65,150

Unstable foundation

These wealth gains, however, were built on a shaky foundation Irresponsible mortgage lending products

Predatory, and certainly unaffordable

Distribution of High Cost Lending: Los Angeles

Source: Home Mortgage Disclosure Act

HMDA 2004

Source: Home Mortgage Disclosure Act

Distribution of High Cost Lending: Los AngelesHMDA 2005

Source: Home Mortgage Disclosure Act

Distribution of High Cost Lending: Los AngelesHMDA 2006

Latinos and subprime lending

Black and Hispanic borrowers are more likely to obtain higher priced—i.e. subprime—loans than are non-Hispanic white borrowers In 2006, 46.6 percent of loans made to white Hispanic

borrowers were higher priced, compared to 17.7 percent for white, non-Hispanics

While some of these differences may be due to different borrower profiles, a study by CRL found that these disparities remained true even after controlling for a variety of factors

Percent of Hispanic Population

Source: Census 2000

Census 2000

Unstable foundation

These wealth gains, however, were built on a shaky foundation Irresponsible mortgage lending products

Predatory, and certainly unaffordable Unsustainable growth in house values

According to Case-Shiller index, US house prices have dropped 18.8 percent since their peak in July 2006

U.S. house valuesS&P/Case-Shiller Home Price Index: Composite 20

NSA, Jan-00=100

0807060504030201

Source: S&P/Case Shiller /Haver Analytics 09/03/08

220

200

180

160

140

120

100

220

200

180

160

140

120

100

Case Shiller Index (2000=100)

Unstable foundation

These wealth gains, however, were built on a shaky foundation Irresponsible mortgage lending products

Predatory, and certainly unaffordable Unsustainable growth in house values

According to Case-Shiller index, US house prices have dropped 18.8 percent since their peak in July 2006

Over-reliance on credit 40 percent of families carry credit card balance Savings rate is a mere .04 percent Cash-out refinances: loss of equity

Rising foreclosures threaten to undermine homeownership gains

Source: Mortgage Bankers Association, National Delinquency Survey, 1st Quarter 2008

Foreclosures concentrated in subprime ARM market

Percent of Mortgage Loans in Foreclosure or REO (by zip code)

Source: McDash Analytics, LLC and FRBSF calculations

April 2008

Percent of Mortgage Loans in Foreclosure or REO (by zip code)

Source: McDash Analytics, LLC and FRBSF calculations

September 2007

Percent of Mortgage Loans in Foreclosure or REO (by zip code)

Source: McDash Analytics, LLC and FRBSF calculations

April 2008

Who is affected?

Key question, but no easy quantifiable answer Oakland “drill down”

More than 50 percent have Hispanic surnames Interview results

Preliminary analysis of California data Using census data at the zip code level significantly

underestimates the proportion of families that are Latino SF Fed trying to develop better measures of who is

affected, early results show disproportionate impact on Latinos and some Asian groups

Key challenges

Housing market instability Negative spillover effects on the neighborhood

Labor force vulnerability While Latinos comprise about 14 percent of the U.S. labor

force, they represent 33 percent of workers who involuntarily shifted to part-time work

Because more than half of Latino workers are immigrants and are more likely to be young and less skilled, they are more susceptible to economic cycles

State budget crisis 29 States face significant budget shortfalls, and propose to

cut programs such as public health, education, and programs for the elderly and disabled

Implications for asset building Expand current asset building programs: critical to remember that

families who went through nonprofits have not seen widespread defaults

Bridge the divide between the poverty/income support and asset building fields Many low-income families will need access to critical income supports, a

broad based coalition could help to create a policy framework that supports both financial stability and asset building

Innovate in how we broker access to financial services and knowledge

Develop and market other asset building products that don’t rely on access to credit Is there a way for us to close the wealth gap that takes into account

current demographic, social, and economic realities?

For more information, www.frbsf.org/community