Mortgage Misery
The Harmful Concentration of
Subprime Loans in Minneapolis and St. Paul
Prepared by Minnesota ACORN and ACORN Housing Corporation
of Minnesota
November 2002
Summary of Findings
In this report, we examine the impact that predatory lending
has on Minneapolis and St. Paul neighborhoods.
Predatory lending refers to mortgage and finance companies which use fraud and deception to trap homeowners into loans with
high-interest rates, exorbitant fees, and harmful terms.
The
overwhelming majority of predatory lending takes place in what is known as the
subprime lending industry. Subprime
loans are intended for people whose credit or other circumstances prevent them
from obtaining a conventional loan at the standard bank interest rate. The loans have higher interest rates to compensate
for the potentially greater risk that these borrowers represent.
While not all
subprime lenders are predatory, the industry is a fertile breeding ground for
predatory practices, and the lack of regulation and oversight enjoyed by
subprime lenders has lead some observers to characterize the industry as
resembling the “wild west” where rates and fees reflect what the lender or
broker thinks they can get away with rather than any careful assessment of the
actual credit risk. The Chairman of
Fannie Mae, Franklin Raines, estimated that as many as half of the borrowers
who receive a high cost subprime loan could have instead qualified for a
traditional mortgage at a lower interest rate[1].
Too many subprime lenders
routinely engage in additional abusive loan practices such as:
making loans
without regard to a borrower’s ability to repay; padding loans with exorbitant
fees; requiring borrowers to purchase
unnecessary credit insurance; using high-pressure tactics to encourage repeated
refinancing by existing customers and tacking on extra fees each time, a
practice known as “flipping”; saddling borrowers in high cost loans with
onerous terms such as balloon payments and prepayment penalties; obstructing
customers from refinancing with other companies to gain better terms; and
misrepresenting the specifics of the loan.
The Coalition for
Responsible Lending in North Carolina has examined specific lending abuses and
calculated that these predatory practices cost Americans a staggering $9.1
billion a year in stripped equity and excess interest[2].
We have used the
methodology they developed to calculate both the extent and cost of predatory
lending for the whole state of Minnesota, as well as for Minneapolis
specifically. We found that predatory lending impacts over 10,000 Minnesota
families each year and exacts an economic toll of more than $83 million in
drained equity and excess interest annually. In Minneapolis, predatory lending with just refinance loans costs homeowners
almost $10 million annually.
1) While subprime loans
are found throughout the state of Minnesota, they are most heavily concentrated
in the Twin Cities metro area and in the cities of Minneapolis and St. Paul in
particular.
● More than a third (35.6%) of the
refinance loans made in Minnesota by subprime lenders in 1999 were made to
homeowners in Hennepin and Ramsey Counties[3].
● More than half (54.6%) of the
refinance loans made in Hennepin and Ramsey Counties by subprime lenders in
1999 were made in Minneapolis and St. Paul[4].
● This means that one-fifth (19.5%)
of all refinance loans made in the state of Minnesota by subprime lenders were
in Minneapolis and St. Paul.
2) Within Hennepin and
Ramsey counties and Minneapolis and St. Paul, the distribution of subprime
loans is extremely uneven, with low income and minority neighborhoods receiving
a disproportionate share of subprime loans.
● The
Near North, Camden, Phillips/ Whittier, and Powderhorn neighborhoods alone accounted
for 59% of the subprime refinances made in Minneapolis. These four
neighborhoods accounted for 28% of the subprime refinance loans made in
Hennepin County, but just 7% of the prime refinances[5].
● The Thomas-Dale,
Summit-University, North End, and Payne Phalen neighborhoods accounted for 42%
of the subprime refinances made in St. Paul.
These four neighborhoods accounted for 29% of the subprime refinance
loans made in Ramsey County, but just 11% of the subprime refinances[6].
3) Serious disparities exist in the levels of subprime
lending between different communities.
● In the Near North and Phillips/
Whittier neighborhoods in Minneapolis, subprime lenders accounted for 42% and
40% respectively of the refinance loans made in those neighborhoods. In the Thomas-Dale neighborhood in St. Paul,
subprime lenders accounted for 34% of the refinances.
● In
contrast, subprime lenders made less than 5% of the refinance loans in the
wealthy, white suburbs of Eden Prairie (4.9%), Minnetonka (4.8%), Plymouth
(4.5%), and Orono (4.6%).
4) The disparity is even more apparent when the number of
prime and subprime loans made in different communities is compared.
● The Phillips/ Whittier
neighborhoods in Minneapolis received 68 subprime refinance loans, more than
the 55 subprime refinance loans in all of Minnetonka. In contrast, though,
Phillips/ Whittier had just 104 prime refinance loans -- 10 times fewer than
the 1,086 prime refinances in Minnetonka.
●
The Near North neighborhood in Minneapolis had more subprime refinance loans,
229, as Plymouth, Minnetonka, Eden Prairie, and Edina combined, 228, although
Near North had 14 times fewer prime refinance loans than these four suburbs,
just 311 compared to 4,472.
5) The disparity appears
even more extreme when we compare individual census tracts, rather than entire
neighborhoods or cities[7]. An examination of individual census tracts
also shows a much greater density of subprime loans in Minneapolis compared
even to St. Paul.
● In
20 of the 424 census tracts in Hennepin and Ramsey counties, subprime lenders
accounted for more than 40% of the total refinance loans made in those tracts.
Of these 20 census tracts, 16 were in Minneapolis and 4 were in St. Paul.
● In
an additional 38 of the 424 census tracts in Hennepin and Ramsey counties,
subprime lenders accounted for between 25% - 40% of the total refinance loans
made in those tracts. Of these 38 census
tracts, 20 were in Minneapolis, 17 were in St. Paul, and just 1 was in any
other city.
6) Census tracts in Minneapolis, and to a lesser extent St.
Paul, predominate the Twin Cities not just in the level of subprime lending
relative to prime lending, but also in the sheer number of subprime loans made
in individual tracts.
● Subprime lenders made more than
25 refinance loans in just 10 of the 424 census tracts in Hennepin and Ramsey
County. Of these 10 tracts, 7 were in
Minneapolis, 2 were in St. Paul, and 1 was in Brooklyn Park.
● In contrast, there is not one Minneapolis
or St. Paul census tract among the 20 census tracts in Hennepin and Ramsey
counties with the largest number of prime refinance loans.
7) The pervasiveness of
subprime loans in specific neighborhoods corresponds to the income level in
these neighborhoods, and the lowest income neighborhoods are in Minneapolis and
St. Paul.
●
Homeowners in low and moderate-income neighborhoods are 5 times more likely
than homeowners in upper-income neighborhoods to receive a subprime loan when
refinancing. Subprime lenders accounted for 25% of all refinances
made in low and moderate income census tracts, but just 5% of the refinance
loans made in upper-income census tracts.
●
There are 129 low and moderate income census tracts in Hennepin and Ramsey
Counties. Of these, 75 are in
Minneapolis, 45 are in St. Paul, and just 8 are in any other city.
8) The dramatic increase
in home values has exacerbated the problem of predatory lending by making more
homeowners targets for predatory lenders intent on stripping their equity. The areas which have seen the largest
increase in home prices are the lower income and minority neighborhoods which
are also the most impacted by predatory lending.
● From
1999 to 2001, the median sale price of a home in the Phillips neighborhood more
than doubled, jumping from $55,000 to $116,750, and the value of a home in Near
North Minneapolis rose from $64,900 to $102,900.
9) Home equity is the
major asset of low and moderate income families. Predatory lenders
systematically steal this equity from some of the neighborhoods which are
already the most impoverished. Predatory
lending in refinance loans exacted an economic toll of almost $10 million from
Minneapolis homeowners in 1999 alone.
· Predatory lending in refinance
loans cost the Near North neighborhood $1.7
million
that year, Camden $1.5 million a year, Powderhorn $1.4 million, and
Nokomis
$1.1 million.
FINDINGS
While subprime loans are found throughout the state of
Minnesota, they are most heavily concentrated in the Twin Cities metro area and
in the cities of Minneapolis and St. Paul in particular.
In 1999, subprime lenders made 9,658 reported refinance
loans in the state of Minnesota.
Of these, 2,386 (25%) were in Hennepin County and 1,053
(11%) were in Ramsey County.
Of the loans made in Hennepin County, 1,146 (48%) were in
Minneapolis. Of the loans made in Ramsey
County, 732 (70%) were in St. Paul.
|
Area
|
Number of refinance loans made by SUBPRIME lenders in
1999
|
|
State of Minnesota
|
9,658
|
|
Hennepin County
|
2,386
|
|
Ramsey County
|
1,053
|
|
Minneapolis
|
1,146
|
|
St. Paul
|
732
|
One out of every five (19.4%) subprime refinance loans made
in the state of Minnesota in 1999 were made in Minneapolis or St. Paul.
Within Hennepin and Ramsey counties and Minneapolis and
St. Paul, the distribution of subprime loans is extremely uneven, with low
income and minority neighborhoods receiving a disproportionate share of
subprime loans.
The Near North, Camden,
Phillips/ Whittier, and Powderhorn neighborhoods together had a massive number
of subprime refinance loans.
Just these neighborhoods
accounted for 59% of the subprime refinances made in Minneapolis.
These neighborhoods also
accounted for 28% of the subprime refinance loans made in Hennepin County, but
just 7% of the prime refinances.
|
Area
|
Number of refinance loans made by subprime lenders in
1999
|
|
Hennepin County
|
2,386
|
|
Minneapolis
|
1,146
|
|
Near North neighborhood
|
222
|
|
Camden
|
189
|
|
Powderhorn
|
185
|
|
Phillips/ Whittier
|
68
|
The Thomas-Dale,
Summit-University, North End, and Payne Phalen neighborhoods played a similar
role, accounting for 42% of the subprime refinances made in St. Paul. In addition, these neighborhoods accounted
for 29% of the subprime refinance loans made in Ramsey County, but just 11% of
the subprime refinances.
|
Area
|
Number of refinance loans made
by subprime lenders in 1999
|
|
Ramsey County
|
1,053
|
|
St. Paul
|
732
|
|
Thomas-Dale
|
56
|
|
Summit-University
|
68
|
|
North End
|
75
|
|
Payne-Phalen
|
105
|
Serious disparities exist in the levels of subprime
lending between different communities, and the areas with the lowest income and
the largest minority populations also had the greatest concentration of
subprime loans.
The areas with the lowest
incomes and the largest minority populations also had the greatest
concentration of subprime loans.
Subprime loans accounted for: 44% of all the refinance loans made in
Near North; 40% of the refinances made in Phillips/Whittier; 30% of the
refinance loans in Camden; and 24%, of the refinances made in Powderhorn.
In contrast, subprime loans represent a much smaller
percentage of the refinances made in the Southwest and Calhoun/Isles
neighborhoods, areas with higher incomes and smaller minority populations.
|
Neighborhood[8]
|
Total # of refinance loans
|
Total # of subprime
refinances
|
Subprime Refinances as %
of all refinances
|
|
Near North
|
503
|
222
|
44.1%
|
|
Phillips/ Whittier
|
172
|
68
|
39.5%
|
|
Camden
|
623
|
189
|
30.3%
|
|
Powderhorn
|
769
|
185
|
24.1%
|
|
Northeast
|
738
|
116
|
15.7%
|
|
University
|
270
|
32
|
11.9%
|
|
Nokomis
|
1181
|
141
|
11.9%
|
|
Longfellow
|
551
|
62
|
11.3%
|
|
Calhoun/ Isles
|
548
|
45
|
8.2%
|
|
Central (Downtown)
|
113
|
8
|
7.1%
|
|
Southwest
|
1034
|
68
|
6.6%
|
¨ Compared to homeowners in
Southwest Minneapolis who refinanced: ·
Near North homeowners were almost 7 times more likely to receive a
subprime loan;
·
Phillips/Whittier homeowners were 6 times more likely to receive a
subprime loan;
· Camden homeowners
were almost 5 times more likely to receive a
subprime loan;
· Powderhorn homeowners
were almost 4 times more likely to receive a
subprime loan; and
· Northeast homeowners
were 2.5 times more likely to receive a
subprime loan.
In St. Paul, as in Minneapolis, the
areas that have the lowest incomes and the largest minority populations also
have the greatest concentration of subprime loans. Subprime loans accounted for: 34% of all the
refinance loans made in the Thomas-Dale neighborhood; 27% of the refinance loans
made in Summit-University; and 25% of the refinance loans made in the North
End.
In contrast, subprime loans represent
a much smaller percentage of the refinances made in the Summit Hill, Highland
Park, Macalester-Groveland, and Merriam Park neighborhoods, areas with higher
incomes and smaller minority populations.
|
Neighborhood
|
Total # of Refinance loans
|
Total # of Subprime
refinance loans
|
Subprime Refinances as
Percentage of all refinances
|
|
Thomas Dale
|
164
|
56
|
34.2%
|
|
Summit-University
|
257
|
68
|
26.5%
|
|
North End
|
224
|
75
|
25.1%
|
|
Payne-Phalen
|
439
|
105
|
23.9%
|
|
W. 7th St.
|
222
|
51
|
23.0%
|
|
Dayton’s Bluff
|
216
|
44
|
20.4%
|
|
East Side
|
378
|
71
|
18.8%
|
|
Hamline-Midway
|
238
|
40
|
16.8%
|
|
West Side
|
265
|
43
|
16.2%
|
|
St. Anthony
|
82
|
11
|
13.4%
|
|
Battle Creek
|
264
|
31
|
11.7%
|
|
Como
|
249
|
19
|
7.6%
|
|
Downtown
|
27
|
2
|
7.4%
|
|
Highland Park/
Mac-Groveland/ Merriam
Park[9]
|
1115
|
81
|
7.3%
|
|
Summit Hill
|
145
|
7
|
4.8%
|
¨ Compared to homeowners in
Summit Hill who refinanced:
· Thomas-Dale homeowners were over 7 times
more likely to receive a
subprime loan;
· Summit-University homeowners were 5.5 times
more likely to receive
a subprime loan;
· North End and Payne-Phalen homeowners were
5 times more likely to
receive a
subprime loan;
· Dayton’s Bluff and West 7th
Street homeowners were over 4 times
more likely to receive a subprime loan;
and
· East Side, West Side, and Hamline-Midway
homeowners were each
over 3 times more likely to receive a
subprime loan.
Of all the cities in Hennepin County, Minneapolis had the
largest percentage of refinance loans made from subprime lenders.
Five cities in Hennepin County had more than 12% of their
total refinances from subprime lenders: Minneapolis, Brooklyn Center,
Robbinsdale, Hopkins, and Crystal.
|
City
|
Total # of refinances
|
Total # of subprime refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
Minneapolis
|
6529
|
1146
|
17.6%
|
|
Brooklyn
Center
|
578
|
94
|
16.3%
|
|
Robbinsdale
|
296
|
43
|
14.6%
|
|
Hopkins
|
234
|
33
|
14.1%
|
|
Crystal
|
511
|
68
|
13.3%
|
One of the commonalities
between these cities is that in addition to Minneapolis and St. Paul, they are
the inner ring suburbs, and as a whole have a lower median income.
Minneapolis has a median
income below 80% of the median income for the Twin Cities Metropolitan
Statistical Area (MSA). Brooklyn Center,
Crystal, Robbinsdale, and Hopkins all have a median income below 100% of the
area median income.
In contrast, four cities in Hennepin County had less than 5%
of their refinances from subprime lenders: Eden Prairie, Minnetonka, Orono, and
Plymouth.
|
City
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
Eden
Prairie
|
1183
|
58
|
4.9%
|
|
Minnetonka
|
1141
|
55
|
4.8%
|
|
Orono
|
196
|
9
|
4.6%
|
|
Plymouth
|
1436
|
65
|
4.5%
|
These four suburbs are
considered upper-income areas, with a median income well above 120% of the area
median income. In addition, they are primarily the newer, developing, and
wealthier suburbs.
Of all the cities in Ramsey County, St. Paul had the
largest percentage of refinance loans made from subprime lenders.
Three cities in Ramsey County had more than 10% of their
total refinances from subprime lenders: St. Paul, North St. Paul, and Little
Canada..
|
City
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
St.
Paul
|
4478
|
732
|
16.4%
|
|
North
St. Paul
|
241
|
31
|
12.9%
|
|
Little
Canada
|
134
|
13
|
11.3%
|
As in Hennepin County, there were several suburbs in Ramsey
County with very minimal levels of subprime lending. Three cities had less than 6% of their
refinances from subprime lenders: Falcon
Heights, Vadnais Heights, and Arden Hills:
|
City
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
Falcon
Heights
|
77
|
4
|
5.2%
|
|
Vadnais
Heights
|
311
|
16
|
5.1%
|
|
Arden
Hills
|
141
|
5
|
3.6%
|
The disparity is even more apparent when the number of
prime and subprime loans made in different communities is compared.
● The Phillips/ Whittier
neighborhoods in Minneapolis received 68 subprime refinance loans, more than
the 55 subprime refinance loans in all of Minnetonka. In contrast, though,
Phillips/ Whittier had just 104 prime refinance loans -- 10 times fewer than the
1,086 prime refinances in Minnetonka.
● The Near North neighborhood in
Minneapolis had more subprime refinance loans, 229, as Plymouth, Minnetonka,
Eden Prairie, and Edina combined, 228, although Near North had 14 times fewer
prime refinance loans than these four suburbs, just 311 compared to 4,472
All Cities in Hennepin and Ramsey Counties
|
City
|
Total # of refinances
|
# of subprime
refinances
|
Percentage subprime
|
|
Minneapolis
|
6529
|
1146
|
17.6%
|
|
St. Paul
|
4478
|
732
|
16.4%
|
|
Brooklyn Center
|
578
|
94
|
16.3%
|
|
Robbinsdale
|
296
|
43
|
14.6%
|
|
Hopkins
|
234
|
33
|
14.1%
|
|
Crystal
|
511
|
68
|
13.3%
|
|
North St. Paul
|
241
|
31
|
12.9%
|
|
Richfield
|
644
|
76
|
11.8%
|
|
Wayzata
|
88
|
10
|
11.4%
|
|
Brooklyn Park
|
1482
|
167
|
11.3%
|
|
Little Canada
|
134
|
13
|
11.3%
|
|
Maplewood
|
668
|
64
|
9.6%
|
|
Moundsview
|
214
|
19
|
8.9%
|
|
St. Louis Park
|
899
|
77
|
8.6%
|
|
New Hope
|
357
|
30
|
8.5%
|
|
White Bear Lake
|
576
|
48
|
8.3%
|
|
Lauderdale
|
26
|
2
|
7.7%
|
|
Bloomington
|
1675
|
128
|
7.6%
|
|
Champlin
|
908
|
69
|
7.6%
|
|
New Brighton
|
409
|
30
|
7.3%
|
|
Corcoran
|
151
|
11
|
7.3%
|
|
Roseville
|
533
|
35
|
6.6%
|
|
Long Lake
|
46
|
3
|
6.5%
|
|
North Oaks
|
96
|
6
|
6.3%
|
|
Golden Valley
|
468
|
28
|
6.0%
|
|
Shoreview
|
588
|
35
|
6.0%
|
|
Maple Grove
|
1549
|
88
|
5.7%
|
|
Independence
|
217
|
12
|
5.5%
|
|
Edina
|
940
|
50
|
5.3%
|
|
Falcon Heights
|
77
|
4
|
5.2%
|
|
Vadnais Heights
|
311
|
16
|
5.1%
|
|
Eden Prairie
|
1183
|
58
|
4.9%
|
|
Minnetonka
|
1141
|
55
|
4.8%
|
|
Orono
|
196
|
9
|
4.6%
|
|
Plymouth
|
1436
|
65
|
4.5%
|
|
Dayton
|
285
|
11
|
3.9%
|
|
Arden Hills
|
141
|
5
|
3.6%
|
|
Medina
|
101
|
1
|
1.0%
|
To view the above statistics as a whole for each city, or
even in the case of Minneapolis and St. Paul for each neighborhood, does not
capture the complete picture of the impact of subprime and predatory lending on
specific pockets both in Minneapolis and St. Paul. An examination of individual census tracts
also shows a much greater density of subprime loans in Minneapolis compared
even to St. Paul.
As shown above, both the
Near North and Phillips/Whittier neighborhoods in Minneapolis clearly have high
concentrations of subprime loans, with subprime lenders accounting for 44% and
40% of all the refinance loans made in these areas, respectively. However, there is additional cause for
concern when we realize that individual census tracts within these
neighborhoods have even higher levels of subprime lending. In seven census
tracts in these Minneapolis neighborhoods, half or more of the refinance loans
were made by subprime lenders.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
78
(Phillips)
|
21
|
15
|
71%
|
|
28
(Near North)
|
35
|
23
|
66%
|
|
14
(Near North)
|
49
|
26
|
53%
|
|
20
(Near North)
|
47
|
24
|
51%
|
|
32
(Near North)
|
49
|
25
|
51%
|
|
72
(Phillips)
|
24
|
12
|
50%
|
There were also an
additional 9 census tracts in Minneapolis in which subprime lenders accounted
for more than 40% of the total refinance loans made in those tracts, and another 20 census tracts in Minneapolis in which
subprime lenders accounted for more than 25% of the refinances made in those
tracts.
In contrast, there was
just 1 census tract in Hennepin County outside Minneapolis in which subprime
lenders accounted for more than 25% of the total refinances in that census
tract.
In contrast, in
Minneapolis, whereas subprime lenders made between 50% to 75% of all refinance
loans in the certain census tracts, there were three census tracts, all in the
Calhoun-Isles area, in which subprime lenders made less than 3% of the
refinance loans.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
55 (Calhoun-Isles)
|
61
|
1
|
1.6%
|
|
92 (Calhoun-Isles)
|
51
|
1
|
2.0%
|
|
67 (Calhoun –Isles)
|
39
|
1
|
2.6%
|
ST. PAUL
A similar pattern exists
in St. Paul. While subprime lenders
accounted for 34% of the refinance loans in Thomas-Dale, 26% of the refinances
in Summit-University, and 24% of the refinance loans in Payne-Phalen, there are
three census tracts in these neighborhoods in which more than 40% of the
refinance loans were made by subprime lenders.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
335
(Summit- University)
|
47
|
22
|
47%
|
|
325
(Thomas-Dale)
|
51
|
23
|
45%
|
|
315
(Payne-Phalen)
|
29
|
12
|
41%
|
In contrast, there were three census tracts in St. Paul in
which subprime lenders accounted for 2% or less of all the refinance loans.
|
Census Tract/ Neighborhood
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
356
(Summit Hill)
|
28
|
0
|
0%
|
|
375
(Highland/ Mac-Grove/ Merriam)
|
109
|
2
|
1.8%
|
|
349
(Highland/ Mac-Grove/ Merriam)
|
50
|
1
|
2%
|
SUBURBS
There are some suburban census tracts which had a much
greater concentration of subprime lending than the individual suburb as a
whole. In particular, there were six
suburban census tracts in which subprime lenders accounted for more than 20% of
the refinance loans made in these tracts.
|
Census Tract (City)
|
Total # of refinances
|
Total # of subprime
refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
248.02
(Richfield)
|
37
|
8
|
21.6%
|
|
254.01
(Bloomington)
|
78
|
17
|
21.8%
|
|
203.02
(Brooklyn Center)
|
40
|
9
|
22.5%
|
|
249.01
(Richfield)
|
30
|
7
|
23.3%
|
|
210.02
(Crystal)
|
33
|
8
|
24.2%
|
|
205.00 (Brooklyn Center)
|
89
|
23
|
25.8%
|
In contrast, there were three suburban census tracts with at
least 20 refinance loans which had no subprime refinance loans.
|
Census Tract/ City
|
Total # of refinances
|
Total # of subprime refinances
|
Subprime Refinances as
Percentage of all refinances
|
|
251 (Bloomington)
|
20
|
0
|
0%
|
|
218 (Golden Valley)
|
55
|
0
|
0%
|
|
410.02 (Moundsview)
|
42
|
0
|
0%
|
Census tracts in Minneapolis, and to a lesser extent St.
Paul, predominate the Twin Cities not just in the level of subprime lending
relative to prime lending, but also in the sheer number of subprime loans made
in individual tracts.
Subprime lenders made more than 25 refinance loans in just
10 of the 424 census tracts in Hennepin and Ramsey County. Of these 10 tracts, 7 were in Minneapolis, 2
were in St. Paul, and 1 was in Brooklyn Park.
|
Census Tract (Neighborhood)
|
Number of Subprime refinances
|
|
9 (Camden)
|
37
|
|
109 (Nokomis)
|
29
|
|
8 (Camden)
|
29
|
|
317 (Payne-Phalen)
|
28
|
|
2 (Camden)
|
28
|
|
1.01 (Camden)
|
27
|
|
14 (Near North)
|
26
|
|
268.98 (Brooklyn Park)
|
26
|
|
32 (Near North)
|
25
|
|
308 (North End)
|
25
|
In contrast, there is not one Minneapolis or St. Paul census
tract among the 20 census tracts in Hennepin and Ramsey counties with the
largest number of prime refinance loans.
The pervasiveness of subprime loans in specific
neighborhoods corresponds to the income level in these neighborhoods, and the
lowest income neighborhoods and neighborhoods are in Minneapolis and St. Paul.
Homeowners in low and
moderate-income neighborhoods are 5 times more likely than homeowners in
upper-income neighborhoods to receive a subprime loan when refinancing. Subprime
lenders accounted for 25% of all refinances made in low and moderate income
census tracts, but just 5% of the refinance loans made in upper-income census
tracts.
There are 129 low and moderate income census tracts in
Hennepin and Ramsey Counties. Of these,
75 are in Minneapolis, 45 are in St. Paul, and just 8 are in any other city.
Homeowners in low-income Minneapolis and St. Paul neighborhoods experienced
large appreciations in home values, making them more attractive targets for
predatory lenders intent on stripping their equity.
As shown in the chart
below, the neighborhoods most impacted by predatory lending were also those
which saw the largest gains in home value.
|
Neighborhood
|
1999 median sale price
|
2000 median sale price
|
2001 median sale price
|
1999-2001 % increase
|
|
Phillips
|
$55,000
|
$83,073
|
$116,750
|
112%
|
|
North
|
$64,900
|
$80,000
|
$102,900
|
59%
|
|
Powderhorn
|
$91,000
|
$112,500
|
$137,000
|
51%
|
|
Camden
|
$80,000
|
$96,162
|
$116,950
|
46%
|
|
Neighborhood
|
1999 median sale price
|
2000 median sale price
|
2001 median sale price
|
1999-2001 % increase
|
|
W. 7th
|
$85,000
|
$114,000
|
$129,000
|
52%
|
|
Thomas Dale
|
$72,125
|
$90,000
|
$108,000
|
50%
|
|
Phalen
|
$89,900
|
$107,000
|
$126,500
|
41%
|
|
Dayton’s Bluff
|
$94,900
|
$113,150
|
$129,900
|
37%
|
Homeownership and home equity are the major source of
wealth in low income and minority communities.
The damage that predatory
lending does in our communities cannot be overestimated. Home equity accounts for two-thirds of the
net wealth of families with annual incomes below $20,000 and half of the net
wealth of families with annual incomes between $20,000 and $50,000[10].
The net wealth for
low-income families who rent is just $5,000, but for low-income families who
own their homes, their net wealth is $57,000.
Even though these same families may have the exact same annual income,
the family that owns their home is over ten times wealthier because of the
equity in their house.
Home equity can give a
family economic security or help them get ahead. It can be used to make home improvements,
which will increase the value of the home even more. It can be used to start a
small business or send one’s children to college. It can also be a safety net if someone loses
their job or suffers from an illness or injury.
In addition, as housing prices in the Twin Cities have skyrocketed, it
can be used to help one’s children buy a house of their own.
Rather than strengthening
neighborhoods by providing needed credit based on this accumulated wealth,
predatory lenders have contributed to the further deterioration of
neighborhoods by stripping homeowners of their equity and overcharging those
who can least afford it, leading to foreclosures and vacant houses.
The
Cost of Predatory Lending
The Coalition for
Responsible Lending in North Carolina has examined specific lending abuses and
calculated that these predatory practices cost Americans a staggering $9.1
billion a year in stripped equity and excess interest[11].
We have used the
methodology they developed to calculate both the extent and cost of predatory
lending in the state of Minnesota. We found that predatory lending impacts over
10,000 Minnesota families each year and exacts an economic toll of more than
$83 million in drained equity and excess interest annually.
We also found that
specifically in Minneapolis, predatory lending in refinance loans alone affects
over 1,000 homeowners every year and costs Minneapolis homeowners almost $10
million annually.
SPECIFIC PREDATORY PRACTICES
In 1999 in Minneapolis, subprime lenders made 1,146
refinance mortgages, totaling almost $107 million ($106,735,000).
Prepayment Penalties:
Pre-payment penalties are an extremely common feature of
subprime loans and can have a damaging impact on borrowers. The penalties come due when a borrower pays
off their loan early, typically through refinancing or a sale of the house. The
penalties remain in effect for as long as the first five years of the loan and
are often as much as six months interest on the loan. For a $100,000 loan at
11% interest, this would be over $5,000.
When a borrower with a prepayment penalty refinances, the
amount of the penalty ends up being financed into the new loan. In effect, for borrowers who refinance or
sell their houses during the period covered by the prepayment penalty, the
penalty functions as an additional and expensive fee on the loan, further
robbing them of their equity.
While just 2% of conventional prime loans have prepayment
penalties, 80% of subprime loans have these penalties[12]. This means that of the 1,146 refinance
mortgages that subprime lenders made in Minneapolis in 1999, prepayment
penalties covered approximately 917 of these loans, totaling $85,388,000.
Using conservative estimates, about 44% of the subprime borrowers whose
loans contain a prepayment penalty either choose or are forced to prepay their
loans and thus pay the prepayment penalty[13]. This amounts to 403 mortgages, totaling $37,570,000, made by subprime lenders in
Minnesota in 1999.
Prepayment penalties cost an average rate of 4% of the loan amount[14], which
means that these 403 borrowers who received loans in Minneapolis in 1999 will
pay $1,502,000 in prepayment penalties.
Of the 1,146 refinance
loans made by subprime lenders in Minneapolis in 1999, 403 will result in
prepayment penalties costing Minneapolis homeowners $1,502,000 in stripped
equity.
Inflated Interest
Rates
Borrowers with Subprime Loans Who Could Have
Qualified for a Prime Loan
While the higher interest rates charged by subprime lenders
are intended to compensate lenders for taking a greater credit risk, too many
borrowers are unnecessarily paying higher interest rates. Borrowers with perfect credit are regularly
charged interest rates 3 to 6 points higher than the market rates, and with
some subprime lenders there simply is no lower rate, no matter how good one’s
credit is. According to a rate sheet used
in the spring of 2000 by the Associates (now owned by Citigroup), their lowest
rate for a borrower with excellent credit and a low loan-to-value was over
10%.
Fannie Mae has estimated that as many as half of all
subprime borrowers could have qualified for a lower cost prime mortgage; Freddie
Mac has suggested a somewhat lower, but still extremely large figure -- that as
many as 35 percent of borrowers who obtained mortgages in the subprime market
could have qualified for a prime loan[15].
Using a conservative figure that 40% of the 1,146 borrowers
who received subprime loans in Minneapolis in 1999 could have qualified for a
prime loan would amount to 458 loans, totaling $42,694,000, that should have
been at the lower prime rate.
Industry representatives often argue that the typical
subprime loan has an interest rate 2% higher than a prime loan; their own data
suggest that the average is 3% more or even higher[16].
Using an intermediary figure of 2.5% higher means that the 458 Minneapolis
mortgagors who could have qualified for a prime loan, but instead were given a
subprime loan in 1999, are paying $1,067,350 in excess interest.
Borrowers with Credit
Problems Who Are Being Overcharged in Subprime Loans
While 40% of the subprime
borrowers could have qualified for a prime loan, the remaining 60%, 688
borrowers, totaling $64,041,000, had
credit problems or other issues that would have prevented them from receiving a
prime loan. However, a significant
number of these borrowers are also routinely overcharged in the subprime
market, with rates and fees which reflect what a lender or broker thought they
could get away with, rather than any careful assessment of the actual credit
risk.
Using a conservative
assumption that 1/6 of these borrowers are paying 2% more than they should be[17]
would mean that of these 688 subprime borrowers who received loans in
Minneapolis in 1999, 115 borrowers with loans totaling $10,673,457, are paying $213,469 in excess
interest.
Viewing these two categories together shows that 573 Minneapolis homeowners who received
subprime loans in 1999 are paying $1,280,819 in excess interest.
Excessive Up-Front
Fees:
Borrowers
who are charged 7% of the loan in fees
In addition to charging
higher interest rates than a borrower’s credit warrants, predatory lenders often
saddle the same borrowers with thousands of dollars in unnecessary fees listed
as a variety of things: loan discount points; loan origination fee; processing
fee; underwriting fee; document preparation fee, etc. Often these fees have no relation to any real
purpose. For instance, the loan discount
points do not lower the borrower’s interest rate. These fees are financed into the loan, for
which the borrower is paying a high interest rate, and represent thousands of
dollars in lost equity.
About 1/4 of
subprime loans contain fees of 7% of the total loan amount[18], which means that of the subprime loans made
in Minneapolis in 1999, 287 of these loans, totaling $2,668,375, charged 7% of
the loan in fees. Based on the
extremely modest proposition that upfront fees of up to 5% of the loan amount
may be justifiable, the additional 2% is calculated as an exorbitant charge,
which means that these 287 borrowers who received a loan in Minneapolis in
1999 paid $533,675 in unnecessary fees.
Borrowers
whose loans are refinanced with no economic benefit to them
Loan flipping is a practice in which
a lender, often through high-pressure or deceptive
sales tactics, encourages repeated refinancing by existing
customers and tacks on thousands of dollars in additional fees each time. Some
lenders will intentionally start borrowers with a loan at a higher interest
rate, so that the lender can then refinance the loan to a slightly lower rate
and charge additional fees to the borrower.
This kind of multiple refinancing is never beneficial to the borrower
and results in the further loss of equity.
Flipping can also take place when competing lenders refinance the same
borrowers repeatedly, promising benefits each time which are not delivered or
which are outweighed by the additional costs of the loans.
Of the 1,146 refinance mortgages, totaling $106,735,000,
which were made in Minneapolis, at least 1/5 of them, 229 loans totaling
$21,347,000, served no economic benefit
to the borrower[19].
If we assume that these transactions included 4% of the loan in fees, then
these 229 borrowers paid $853,880
in excessive up-front fees.
Viewing these two categories together shows that 516
borrowers who received subprime loans in Minneapolis in 1999 paid $1,387,555 in
excessive up-front fees.
Credit Insurance
Credit insurance is
insurance linked to a specific debt or loan and which will pay off that
particular debt if the borrower loses the ability to pay either because of
sickness (credit health insurance), death (credit life insurance), or losing
their job (credit unemployment insurance). The nation’s two largest subprime
lenders, Associates/ Citifinancial and Household reported that half or more of
their mortgages included credit insurance.
This is in stark contrast to the less than 6% of prime loans which
included credit insurance[20].
With “single premium” policies, instead of making regular
monthly, quarterly, or annual payments as people do with other insurance
policies, the credit insurance is paid in one lump sum payment, which may be as
high or even higher than $10,000, especially if borrowers are sold multiple
forms of credit insurance, as is frequently the case. This premium is then financed into the loan,
increasing the loan amount (and since the loan amount is higher, the lender’s
origination fees also increase), and the borrower must then pay monthly
interest on the amount of the insurance premium. While the coverage on a single premium policy
usually lasts for only 5 years, the borrower pays for it, and pays interest on
it, over the 30 years of the home loan.
Typically, single premium credit insurance policies cost four to five
times as much as monthly-paid credit insurance and over ten times as much as
term life insurance policies, and of course the cost of these alternative
products are not staked against the borrower’s home.
In
recognition of the widespread opposition to this predatory product, several
large lenders, including Citigroup, have recently agreed to stop selling it.
Household announced that as of January 2002 it would not longer sell single
premium insurance on its mortgages, but only in states where they had
permission to sell a specific alternate product.
In Minnesota in
1999, there was $51,261,000 in credit life insurance policies issued and $35,152,000
in credit disability insurance policies, for a total of $86,413,000[21]. According to state insurance regulators, half
of all credit insurance purchased is typically for mortgages, while the other
half is for consumer debt[22]. This would mean that $43,206,000 of the
credit insurance in Minnesota was for mortgages.
We estimate that
$5,126,742 of this credit insurance was on loans in Minneapolis.
A conservative
estimate is that 90% of the credit insurance on mortgages is single premium
credit insurance[23],
which would mean that Minneapolis
residents lose $4,601,467 in equity annually to unnecessary single-premium
credit insurance.
|
Amount Lost to
Prepayment Penalties
|
Amount Lost to
Inflated Interest Rates
|
Amount Lost to
Excess Upfront Fees
|
Amount Lost to Single
Premium Credit Insurance
|
Total Drained
Equity and Excess Interest
|
|
$1,502,000
|
$1,290,819
|
$1,387,555
|
$4,601,647
|
$8,782,021
|
The cost of Predatory lending in particular
neighborhoods.
There are four Minneapolis neighborhoods in which predatory
lending costs homeowners over $1 million a year: Near North, Camden, Powderhorn, and Nokomis.
|
Neighborhood[24]
|
Total # of
subprime refinances
|
Total Drained
Equity and Excess Interest
|
|
Near North
|
222
|
$1,701,186
|
|
Camden
|
189
|
$1,448,307
|
|
Powderhorn
|
185
|
$1,417,655
|
|
Nokomis
|
141
|
$1,080,483
|
|
Northeast
|
116
|
$888,908
|
|
Soutwest
|
68
|
$521,084
|
|
Phillips/ Whittier
|
68
|
$521,084
|
|
Longfellow
|
62
|
$475,106
|
|
Calhoun/ Isles
|
45
|
$344,835
|
|
University
|
32
|
$245,216
|
|
Central (Downtown)
|
8
|
$61,304
|
|
TOTAL
|
1146
|
$8,782,021
|
Methodology
This
study analyzes data released by the Federal Financial Institutions Examination
Council (FFIEC) about the lending activity of more than 7,800 institutions
covered by the Home Mortgage Disclosure Act (HMDA). HMDA requires
depository institutions with more than $30 million in assets as well as
mortgage companies which make substantial numbers of home loans to report data
annually to one of the member
agencies of the FFIEC--the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of the Currency, and the Office
of Thrift Supervision--and to the Department of Housing and Urban Development
(HUD). The reporting includes the number and type of loans correlated by
the race, gender, income, and census tract of the applicants, and the
disposition of those applications, in each Metropolitan Statistical Area (MSA)
where loans are originated.
HMDA data does not specifically include information on
subprime lending. In order to analyze
data on the subprime market, we utilized the annual list developed by HUD of
subprime lenders and then grouped the data together for these lenders. In 1999,
HUD identified 251 mortgage and finance companies as subprime lenders because a
majority of the loans they originated were subprime loans. While this is the best method available for
analyzing the data, it does provide an underestimation of the actual level of subprime
lending for two main reasons: 1) Not all lenders report HMDA data. For instance, according to the American
Banker, Household Finance was the largest subprime residential mortgage
originator in 2000 with over $15 million in loans--none reported under HMDA;
and 2) there is still no way to identify subprime loans made by prime lenders,
lenders who are not included on the HUD list.
For instance, Wells Fargo and Countrywide are two of the nation’s
largest mortgage lenders and make a substantial number of subprime loans.
However, because a majority of their loans are considered prime loans, they are
not included on HUD’s list and therefore their subprime loans are not included
in the study.
Prepayment Penalties:
To calculate the loss in equity caused by prepayment
penalties, it was assumed that 80% of subprime loans include prepayment
penalties. Using conservative estimates,
this fee affects about 44% of borrowers who either choose or are forced to
prepay their loans at an average rate of 4% of the total loan amount.[1]
Assumptions: 80% of subprime loans have prepayment
penalties, 44% of borrowers pay these penalties at a rate of 4% of the total
loan balance.
· $1,218,520,000
(Total $ amount of loans) x .8 x .44 x .04 =
$17,156,761 (total $ amount of prepayment penalties)
Inflated Interest
Rates:
Inflated interest rates cause a loss of equity to the
estimated 30 to 50% of subprime borrowers that could qualify for a prime
loan. Industry representatives often
argue that the typical subprime loan has an interest rate 2% higher than a
prime loan; their own data suggest that the average is more like 3%
higher. For this calculation, the
intermediary figure of 2.5% was applied to 40% of borrowers. There are also those borrowers who don’t
qualify for a prime loan, who are in the remaining 60%. Here, calculations are based upon the
extremely conservative assumption that 1/6 of these borrowers are paying 2%
more than they should be.
Assumptions- 40% of subprime borrowers could qualify for a
prime loan at 2.5% less interest
· $1,218,520,000 (total $ amount of loans) x .4 x .025 =
$12,185,200 (total $ amount of inflated interest rates for those who are in
subprime but qualify for prime loans)
Assumptions- Of the remaining 60% that could not qualify for
a prime loan, at least 1/6 are paying 2% more than they should be.
· $1,218,520,000 (total
$ amount of loans) x .6 x (1/6) x .02 = $2,436,942 (total $ amount of inflated interest rates for those who are
paying excessive interest rates in subprime loans)
Up-Front Fees:
Exorbitant fees were calculated based on the methodology of
the Coalition for Responsible Lending’s study.
First, fees at an average of 7% of the total loan amount are charged on
about a fourth of subprime loans. Based
on the extremely modest proposition that upfront fees of up to 5% of the loan
amount may be justifiable, the additional 2% is calculated as an exorbitant
charge. In addition, of the subprime
loans that are refinance loans, at least 1/5 serve no economic benefit to the
borrower. If we assume that these
transactions include 4% in fees, they may be included as part of excessive
up-front fees.
Assumptions- 25% of subprime loans charge 7% in up front
fees (2% more than necessary),
· $1,218,520,000 (total
$ amount of loans) x .25 x .02 =
$6,092,600 (total $ amount of unnecessary fees.
Assumptions- Of the refinance loans, 20% do not benefit from
this loan flipping and are charged 4% in fees
· $899,519,000 (total $ amount of refinance loans) x .2 x .04 = $7,196,152 (total $ amount of up-front fees)
Credit Insurance:
The amount of equity lost to single premium credit insurance
was calculated based on information provided by the National Association of
Insurance Commissioners and the Consumer Credit Insurance Association. Half
of all credit insurance purchased is typically for mortgages, while the other
half is for consumer debt.
A conservative
estimate is that 90% of the credit insurance on mortgages is single premium
credit insurance.
Assumptions – 50% of credit insurance is for mortgages and
90% of this is single premium insurance
· $86,413,000 (total amount of credit insurance
policies sold in Minnesota in 1999) x .5 x .9 = $ 38,885,850 (amount lost to single-premium credit
insurance policies sold in Minnesota in 1999)
March 2, 2000.
[2] Coalition
for Responsible Lending, “Quantifying the Economic Toll of Predatory Lending,”
July 25, 2001 (Revised October 30, 2001).
See www.responsiblelending.org.
[3] Subprime
lenders made 9,658 refinance loans in the state and 3,439 in Hennepin and
Ramsey counties.
[4] Subprime
lenders made 1,878 refinance loan in Minneapolis and St. Paul.
[5] Subprime
lenders made 2,386 refinance loans in Hennepin County in 1999. 1,146 of these
were in the city of Minneapolis, and 671 were in these four neighborhoods.
Prime lenders made 20,376 refinance loans in Hennepin County in 1999, 5,383 of
these were in the city of Minneapolis, and 1,433 were in these four
neighborhoods.
[6] Subprime
lenders made 1,053 refinance loans in Ramsey County in 1999. 732 of these were in the city of St. Paul,
and 304 of these were in these four neighborhoods. Prime lenders made 7,388 refinance loans in
Ramsey County in 1999. 3,746 of these
were in the city of St. Paul, and 780 were in these four neighborhoods.
[7] This examines
only those census tracts with at least 10 total reported refinances.
[8] The
following neighborhood groupings were used:
Near North (includes Harrison, Near North, Willard Hay,
Hawthorne, and Jordan neighborhoods); Camden (includes McKinley,
Folwell, Cleveland, Camden-Webber, Victory, Lind-Bohannon, and Shingle Creek
neighborhoods); Powderhorn (includes Bancroft, Standish, Corcoran,
Powderhorn Park, Central, Bryant, and Lyndale neighborhoods); Northeast
(includes Marshall Terrace, Columbia, Waite Park, Bottineau, Sheridan, Holland,
Logan Park, Audubon Park, Windom Park, Northeast Park, St. Anthony West and St.
Anthony East; University (includes Como, Prospect Park, Cedar-Riverside,
West Bank, University of Minnesota, Marcy-Holmes, and Nicolett Island neighborhoods);
Nokomis (includes Diamond Lake, Wenonah, Morris Park, Minnehaha,
Keewaydin, Hale, Page, Field, Northrup, and Ericsson neighborhoods); Longfellow
(includes Hiawatha, Howe, Cooper, Longfellow, and Seward neighborhoods); Calhoun-Isles
(includes West Calhoun, ECCO, Carag, Lowry Hill East, East Isles, Cedar
Isles-Dean, Bryn Mawr, Kenwood, and Lowry Hill); Central/Downtown
(includes Stevens Square, Loring Heights, Loring Park, Elliot Park, Downtown
East, Downtown West, and North Loop neighborhoods); Southwest (includes
Kenny, Windom, Armatage, Tangletown, Lynnhurst, Fulton, Linden Hills, East
Harriet, and Kingfield).
[9] Due to the overlap of census tracts, the
Highland Park, Macalester-Groveland, and Merriam Park neighborhoods are grouped
together for the purposes of this study.
[10] Harvard
University Joint Center for Housing Studies, “The State of the Nation’s
Housing: 2000.”
[11] See
Footnote 6.
[12]
“Curbing Predatory Home Mortgage Lending: A Joint Report,” June 2000, U.S.
Department of Treasury and U.S. Department of Housing and Development. Mortgage
Marketplace (May 24, 1999); Joshua Brockman, “Fannie revamps
prepayment-penalty bonds,” American
Banker (July 20, 1999). Standard
& Poor’s, “NIMS Analysis: Valuing Prepayment Penalty Fee Income” (Jan. 3,
2001).
[13] Lehman
Brothers’ publication, “Asset-Backed Securities” p1 (July 17, 2000).
[14] Ibid.
[15]
“Financial Services in Distressed Communities,” Fannie Mae Foundation, August
2001. “Automated Underwriting,” Freddie
Mac, September 1996.
[16] “Widow
paying a price for high-cost loan” Kate Berry, Orange County Register, April 16, 2000. Coalition for Responsible Lending,
“Quantifying the Economic Toll of Predatory Lending,” July 25, 2001 (Revised
October 30, 2001).
[17] Ibid.
[18] Charles W.
Calomiris & Joseph R. Mason, “Higher Loan-to-Value Mortgage Lending:
Problem or Cure?” at p12 (citing unpublished reports that HLTV loans averaged
fees of 7 percent of the loan value, American Enterprise Institute 1999).
[19] See
Footnote 1.
[20] Ibid.
[21] 1999
Credit Life and Accident and Health Experience Reports, National
Association of Insurance Commissioners.
[22] Coalition
for Responsible Lending, “Quantifying the Economic Toll of Predatory Lending,”
July 25, 2001 (Revised October 30, 2001).
See www.responsiblelending.org.
[23] William F.
Burfeind, Executive Vice President Consumer Credit Insurance Association,
stated that 95% of credit insurance is financed single-premium credit
insurance.
[24] See
Footnote 6.
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