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Home Ownership, Subprime Loans, and Poverty

Find out how poor communities across the United States have been affected by subprime lending: See our state fact sheets.

All high-poverty counties and their corresponding subprime rates are included in this Microsoft Excel spreadsheet. 

To this day Ms. Levy does not understand what she and her husband of more than half a century had agreed to. The terms might have been written in Sanskrit.

But she kept trying to meet her obligation. She exhausted her savings. She lost her car. She stopped buying clothes and cut back on food. But there was no way to keep up the payments.

"I had to go to the state and tell them I was hungry," she said.

— Bob Herbert, "Lost in a Flood of Debt"
    New York Times, 11/24/07

It is a story that has become all too familiar. Many people who purchased or refinanced a home with a subprime loan had little notion of what they were getting into. Low-income families proved to be especially vulnerable. Lenders targeted low-income and minority communities. A study found that African Americans were 450 percent more likely to receive a subprime loan than whites, even when they qualified for a loan at lower, prime rates. ¹ In Hispanic communities it is common for all communications between lenders and borrowers to take place in Spanish, until the loan agreement is presented for signature.

These are the first class of subprime victims, the families who were duped by predatory lenders. Adjustable rate mortgages, the Sanskrit that befuddled the Levys, are why so many borrowers will lose their homes in the subprime meltdown that is occurring across the nation. Ninety percent of subprime loans since 2004 include an adjustable rates mortgage.² The teaser rate expires after a few years and then mortgage payments reset at a higher rate. Borrowers who were having trouble making their payment before the new rates reset may become overwhelmed. It was hard to pay on time at $1,200 per month—see how it feels at $1,600. Families get behind on their mortgage payments. Defaulting on their loans and foreclosure are the end of the line, but first families cut back on spending to make their mortgage payments, as the Levys did, including spending on food.

Not all borrowers entered these loans unknowingly. Similarly, not all subprime lenders are predators. The subprime market can be a legitimate way for families with a blemished credit history to purchase a home. Establishing a good credit rating is harder if you have been living paycheck to paycheck for much of your life. Checks bounce and you are not always able to pay bills on time. These are families who understand they have no choice but to pay higher (i.e. subprime) interest rates when buying a first home or refinancing, and they are not to be confused with investors who use the subprime market to "flip" houses for a quick profit. That families accept the higher interest rates that come with a subprime loan conveys the importance they put on homeownership in spite of the diminished equity they accrue.

Subprime lending grew rapidly starting in the early 1990s. By 2005, one-in-four home loans were subprime. In the best of times, foreclosures are more common among those who use the subprime market because borrowers generally experience more financial instability in their lives than those who receive a loan at the prime rate. Stagnant wages for low-income workers have been coupled with rising costs of home heating, gasoline, food, child care and health care, adding to a family's difficulties in making its mortgage payments.

As long as the housing market was strong, borrowers who got behind on their payments had a couple of options. They could try to refinance their loans. If that didn't work, they could put the house up for sale and hope for a buyer to take it off their hands, possibly using another subprime loan. But then the housing market tanked. Can't sell, can't refinance. By the end of 2008, it is predicted that more than two million subprime loans could enter foreclosure. Many families will be forced out onto the street. For those lucky enough to maintain a roof over their heads, it hardly means they have escaped financial ruin. Unless policymakers act to avert this crisis, it will surely result in alarming spikes of poverty, homelessness and hunger.

What can be done? In the short term, emergency food assistance must increase to meet rising demand, including expanding eligibility to the Food Stamp Program, as occurred in the aftermath of Hurricane Katrina. Lenders must renegotiate loans, and if they do not government must intervene to compel them to renegotiate.

To address the long-term issues, government must do a more forceful job of regulating lending practices. The absence of regulation is what allowed so many lenders to run amuck. The Mortgage Reform and Anti-Predatory Lending Act of 2007, passed in the House of Representative, had real regulatory teeth until it was defanged under pressure from banking industry lobbyists.³

Government should also strengthen nonprofit lending institutions that provide loans to low-income homebuyers at affordable interest rates. Nonprofit groups emphasize financial education. No one can take the responsibility for poor financial decision making off of borrowers, but a better educated homebuyer is apt to make more thoughtful decisions. Far fewer borrowers default on loans that are financed by nonprofit lenders.

Finally, affordable housing programs need to be available to many more families, including programs to help those who want to become homeowners. Presently, only one in four households that are eligible for rental assistance receives it and there is virtually no federal support for homeownership.⁴ Greater support for homeownership must not come at the expense of rental assistance. The lack of affordable rental housing factors in to why families get lured into the subprime market. If rent eats up most of their paycheck anyway, then why not buy a home? At least one can build some equity, so the thinking goes. Affordable rental housing is one way to make it easier for families to save for their down payment and to pay closing costs.

Find out how poor communities across the United States have been affected by subprime lending. See our state fact sheets.

1. Elizabeth Warren (2004), The Two-Income Trap: Why Middle-Class Mothers and Fathers are Going Broke, Basic Books.
2. John Atlas (December 18, 2007), "Everything you ever wanted to know about the mortgage meltdown but were afraid to ask," The American Prospect. 
3. Ibid.
4. The State of the Nation's Housing (2007) , Joint Center for Housing Studies of Harvard University.