Sub-Prime Lending, Women, and the Foreclosure Crisis
Sharon L. Secor
October 26, 2007
The sub-prime lending crisis has affected a broad range of consumers, with nearly every demographic represented within today's rising foreclosure statistics. However, as the foreclosure crisis deepens, increased scrutiny into the workings of the lending industry has exposed some interesting details about the general business practices involved with mortgage approval. Among the details that have come to light recently is a pattern of discrimination throughout the home loan industry.
While the mortgage industry states that customers are approved or not strictly on the merits of credit rating and financial standing, statistics show that this is very often not the case. Women make up a disproportionately large portion of the sub-prime borrower pool, denied access to prime lending products more often than men of comparable credit ratings and income levels. This trend leaves women more vulnerable to the financial troubles that are currently sweeping through the sub-prime mortgage industry.
In 2004, the Federal Reserve began to require detailed data from the sub-prime mortgage industry on their loans. This new reporting requirement has shown a disturbing disparity in the loan products for which women were able to be approved as opposed to loans obtained by similarly situated men. Single women are a larger percentage of home buyers than ever before, purchasing nearly one in five homes sold in 2003. Among these women, African American and Latino are more active participants in the home purchase loan market. Women are the borrowers in 46.7 percent of the home loans granted to African Americans and 31.4 percent of loans made to Latinos, while women represent 28.4 percent of loans made to whites. Despite the fact that the average woman tends to have better credit scores than men of comparable financial circumstances, they are not treated equally when shopping for home mortgage products.
A significantly higher proportion of women are steered into the sub-prime loan market. This market provides loans to consumers who are unable to meet the approval standards of the prime lenders, often charging higher rates and fees to compensate for the higher risk they assume when making these loans. However, large numbers of women who were well qualified for prime level lending, according to data on credit scores and financial history, were sold more expensive sub-prime products instead. This disparity is common to all home loans, whether for home purchase, refinancing, or home improvements.
This disparity rose with income levels, with many women in higher income brackets refused loans that were granted to men with similar credit ratings and spending habits. For home purchase loans, women who have income levels that are twice the median income are 46.4 percent more likely to be pushed off to the sub-prime market than men with similar earnings. 30 percent of mortgage borrowers are women in the current market, yet they are 38.8 percent of the sub-prime mortgage consumers, a figure that shows a 29.1 percent over-representation, according to a December 2006 report released by the Consumer Federation of America, with the disparity more pronounced in the statistics regarding African American and Latino women at the highest income levels.
The marked gender disparity cannot be written off to poor credit ratings or lower income, as Freddie Mac found that one in five sub-prime borrowers were qualified for prime level loans. According to Federal Reserve analysis and a study done by the Center for Responsible Lending, sub-prime lending prices are not just a reflection of risk. Discrimination, predatory lending practices, and inexperienced loan consumers factor into the differences in pricing, with broad discretion allowed on the part of often opportunistic mortgage brokers and loan officers.
Homeownership is often the key to wealth building for consumers, as the largest investment most will make in their lifetimes. In many cases, high cost lending can be an impediment to that process, slowing the growth of equity value of the property. More expensive home loans can affect overall financial security, stretching the budget to make accumulating saving for the future difficult. A substantial portion of the sub-prime loans issued are adjustable rate mortgages, resetting to much higher rates after an initial low interest period, causing financial stress for homeowners who are already struggling to make ends meet.
Many inexperienced mortgage consumers have been caught off guard by such increases, having signed the contract without a complete understanding of the details. For many of these consumers, unprepared for the steep increase in monthly payments, becoming caught up in the current wave of foreclosures can be a real threat. Delinquencies are on the rise for these sub-prime adjustable rate mortgages, suggesting that many borrowers fall into this category of uninformed mortgage consumers, agreeing to loans with terms and payments that are not affordable over the long term. As in the sub-prime market as a whole, women are disproportionately represented in the recent unprecedented rate of delinquencies and foreclosures.
Given these statistics showing a clear disparity in the treatment of women in the mortgage industry, it is essential for women to prepare themselves with knowledge before beginning the application process. Knowing ones credit score and responsible lending standards can enable a potential borrower to research options effectively, making them much less likely to fall victim to unscrupulous lenders. Knowing the right questions to ask before signing on the dotted line can save significantly on the cost of the loan, helping to ensure that payments will fit comfortably into the budget throughout the term of the loan.
While the mortgage industry states that customers are approved or not strictly on the merits of credit rating and financial standing, statistics show that this is very often not the case. Women make up a disproportionately large portion of the sub-prime borrower pool, denied access to prime lending products more often than men of comparable credit ratings and income levels. This trend leaves women more vulnerable to the financial troubles that are currently sweeping through the sub-prime mortgage industry.
In 2004, the Federal Reserve began to require detailed data from the sub-prime mortgage industry on their loans. This new reporting requirement has shown a disturbing disparity in the loan products for which women were able to be approved as opposed to loans obtained by similarly situated men. Single women are a larger percentage of home buyers than ever before, purchasing nearly one in five homes sold in 2003. Among these women, African American and Latino are more active participants in the home purchase loan market. Women are the borrowers in 46.7 percent of the home loans granted to African Americans and 31.4 percent of loans made to Latinos, while women represent 28.4 percent of loans made to whites. Despite the fact that the average woman tends to have better credit scores than men of comparable financial circumstances, they are not treated equally when shopping for home mortgage products.
A significantly higher proportion of women are steered into the sub-prime loan market. This market provides loans to consumers who are unable to meet the approval standards of the prime lenders, often charging higher rates and fees to compensate for the higher risk they assume when making these loans. However, large numbers of women who were well qualified for prime level lending, according to data on credit scores and financial history, were sold more expensive sub-prime products instead. This disparity is common to all home loans, whether for home purchase, refinancing, or home improvements.
This disparity rose with income levels, with many women in higher income brackets refused loans that were granted to men with similar credit ratings and spending habits. For home purchase loans, women who have income levels that are twice the median income are 46.4 percent more likely to be pushed off to the sub-prime market than men with similar earnings. 30 percent of mortgage borrowers are women in the current market, yet they are 38.8 percent of the sub-prime mortgage consumers, a figure that shows a 29.1 percent over-representation, according to a December 2006 report released by the Consumer Federation of America, with the disparity more pronounced in the statistics regarding African American and Latino women at the highest income levels.
The marked gender disparity cannot be written off to poor credit ratings or lower income, as Freddie Mac found that one in five sub-prime borrowers were qualified for prime level loans. According to Federal Reserve analysis and a study done by the Center for Responsible Lending, sub-prime lending prices are not just a reflection of risk. Discrimination, predatory lending practices, and inexperienced loan consumers factor into the differences in pricing, with broad discretion allowed on the part of often opportunistic mortgage brokers and loan officers.
Homeownership is often the key to wealth building for consumers, as the largest investment most will make in their lifetimes. In many cases, high cost lending can be an impediment to that process, slowing the growth of equity value of the property. More expensive home loans can affect overall financial security, stretching the budget to make accumulating saving for the future difficult. A substantial portion of the sub-prime loans issued are adjustable rate mortgages, resetting to much higher rates after an initial low interest period, causing financial stress for homeowners who are already struggling to make ends meet.
Many inexperienced mortgage consumers have been caught off guard by such increases, having signed the contract without a complete understanding of the details. For many of these consumers, unprepared for the steep increase in monthly payments, becoming caught up in the current wave of foreclosures can be a real threat. Delinquencies are on the rise for these sub-prime adjustable rate mortgages, suggesting that many borrowers fall into this category of uninformed mortgage consumers, agreeing to loans with terms and payments that are not affordable over the long term. As in the sub-prime market as a whole, women are disproportionately represented in the recent unprecedented rate of delinquencies and foreclosures.
Given these statistics showing a clear disparity in the treatment of women in the mortgage industry, it is essential for women to prepare themselves with knowledge before beginning the application process. Knowing ones credit score and responsible lending standards can enable a potential borrower to research options effectively, making them much less likely to fall victim to unscrupulous lenders. Knowing the right questions to ask before signing on the dotted line can save significantly on the cost of the loan, helping to ensure that payments will fit comfortably into the budget throughout the term of the loan.