In most parts of the country, foreclosure rates have been highest for low-income borrowers, and lowest for higher-income borrowers. But the exact opposite is true in “boom-market metropolitan areas located in California, Nevada and Arizona.
This is one of the most surprising finding of a report released a couple of weeks ago by the Center for Responsible Lending (CRL) called Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. In my last blog I wrote about this report, focusing on its main headline story that 5 years into the foreclosure disaster, we’re not even halfway through it. But this conclusion that higher income homeowners are more prone to foreclosure in certain parts of the country is a real eye-opener.
This very thorough study of mortgages divided the borrowers into four categories:
Low-income: at 50% or lower than the area median income
Moderate income: at 50-80% of the area median income
Middle-income: at 80-120% of the area median income
Higher-income: at more than 120% of the area median income
Regional housing markets were also divided into four categories, based on appreciation in home prices between 2000 and 2005:
Weak-Market States: Indiana, Iowa, Kansas, Kentucky, Michigan, Mississippi, Nebraska, North Carolina, Ohio, Oklahoma, Tennessee, Texas
Stable-Market States: Alabama, Arkansas, Colorado, Georgia, Illinois, Louisiana, Missouri, North Dakota, South Carolina, South Dakota, Utah, West Virginia, Wisconsin
Moderate-Market States: Alaska, Connecticut, Idaho, Maine, Minnesota, Montana, New Mexico, New York, Oregon, Pennsylvania, Vermont, Washington, Wyoming
Boom-Market States: Arizona, California, Delaware, Distr. of Columbia, Florida, Hawaii, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, Rhode Island, Virginia
For the weak-, stable-, and moderate-market states, the rates of foreclosure were highest among low-income borrowers, lower among moderate-income borrowers, lower still among middle-income borrowers, and the lowest among higher-income borrowers. But in the boom-market states, the foreclosure rates are completely opposite: highest among higher-income borrowers, lower among middle-income borrowers, lower still among moderate-income borrowers, and the lowest among low-income borrowers.
While it seems intuitive that the lower income borrowers would be less able to weather the storms of a harsh recession, why are the results topsy-turvy in the boom-market states?
Start by remembering that by the report’s definition most “higher-income borrowers” were not that wealthy:
While these borrowers may have had higher incomes (with a median of $61,000 for middle-income borrowers and $108,000 for higher-income borrowers), the extremely high cost of housing in these boom markets, even for modest homes suggests that the majority of these borrowers were not the very wealthy buying mansions, but rather working families aspiring to homeownership and the middle class.
But then the report made a fascinating discovery in looking at the incidence of high-risk features within mortgages, such as hybrid or option ARMs, prepayment penalties, or higher interest rates:
While in weak market areas, low-income and moderate-income families have the highest incidence of mortgages with at least one high-risk feature, the pattern is reversed in boom markets.
I suspect that because housing was so expensive in these boom-markets, even home purchases made by those in the higher-income categories used higher risk mortgages because a) they needed to stretch their housing dollar to afford what they were buying, b) property values were climbing so fast that everybody figured they could refinance later into a better loan, and c) sales were happening so quickly that the entire process got sloppy.
The end result is that mortgages with “high-risk factors” are resulting in more foreclosures, even if they belong to higher-income borrowers. There could be many explanations for this–for example, homes in those regions’ may be deeper “underwater,” or the unemployment rate may be higher there, either of which could push up the foreclosure rate. But overall the results seems to imply that a borrower’s good payment history is better predicted from the existence or absence of “high-risk factors” in the mortgage than from the borrower’s amount of income.