Who Are Those Pesky Subprime Borrowers?

They are poorer than prime borrowers, have lower credit scores, and a higher percentage of debt to income.

They are also more likely to be black or hispanic.

And this article claims they are bearing the brunt of the mortgage mess:

As an African American professional woman, Glover fit the profile of a subprime borrower to a T. According to the Consumer Federation of America (CFA), women have, on average, higher credit scores than men, yet they are much more likely to receive subprime loans. A CFA study released at the end of 2006 found that lower income women were 8 percent more likely to receive subprime loans than men. And as income increases, the disparity widens even further: Women earning higher incomes are 50 percent more likely to receive a subprime loan than a man at the same income level.

Race plays a significant role. The same study found that women of color have the highest incidence of subprime mortgages of any demographic group. Higher-income African American women are almost five times as likely and higher-income Latina women are four times as likely as higher-income white men to receive a subprime mortgage.

According to Julie Gugin, executive director of the Minnesota Home Ownership Center, which links homeowners who are having trouble making payments with nonprofit agencies, "Those who have subprime mortgages are significantly more likely to face foreclosure." Undesirable characteristics of subprime mortgages include higher closing costs, higher monthly payments, balloon payments (the entire mortgage becomes due, requiring the homeowner to refinance), adjustable rates (at the end of a relatively short time, commonly two years, the interest rate of the mortgage "adjusts" upward, increasing the monthly payment), and severe penalties for refinancing prior to the interest rate's initial upward adjustment.

Why would a woman take out a subprime mortgage? According to Acorn Housing Corp. Midwest Regional Director Alexa Milton, "These brokers and lenders prey on people who don't know a lot about mortgages and finances. Some of the borrowers would have qualified for a prime rate mortgage." According to a 2006 report by the Wall Street Journal, 61 percent of borrowers who received subprime mortgages had credit scores high enough to qualify them for prime loans. And some borrowers may look at a subprime mortgage as a temporary solution, hoping to refinance at a later date.

Even those who shy away from brokers and fly-by-night mortgage companies aren't immune to predatory lending. Countrywide Financial, the nation's largest mortgage lender, has become notorious for its involvement in subprime lending. Countrywide recently admitted that at the end of 2007, one in three of its subprime clients were delinquent on their mortgages. And Minnesota-based Wells Fargo Bank has made news recently when a number of large cities, including Baltimore and Cleveland, sued the lender, claiming it engaged in predatory lending practices. According to the Baltimore lawsuit, Wells Fargo gave subprime mortgages to 65 percent of its black customers and just 15 percent of its white customers.

What causes default?
"In most cases, a crisis beyond [the homeowner's] control causes [them to get in trouble on their mortgage]," Gugin said. "It's often a loss of income caused by job loss; divorce, death or a break up; a health crisis, even an adult child who was helping with the mortgage moving out. Beyond that, it's the people who have mortgages that were never appropriate for them and that were likely, though not always, sold to them under cloudy circumstances."

"You see people who didn't have the ability to repay the loan," Milton said. "But that is not most of it. It's mostly people who have had a crisis, whose loan adjusted upward, or who were taken advantage of and put into mortgages at a higher interest rate when they didn't need to be."

'I never thought I was dumb'
The Minnesota Women's Press talked to Melissa Jordan (name changed for privacy reasons) said she walked into a subprime mortgage with her eyes wide open-and lived to regret it. Jordan explained, "I was self-employed and my husband was unemployed. We were moving to the Twin Cities so I could take a job, and we knew my husband would find work too. We had a decent credit record but couldn't show sufficient income. When our Wisconsin house sold at a loss after being on the market for a year and a half, we didn't have much to put down on the new house. So we decided to take the subprime loan the broker offered, figuring we could make the large payments for maybe a year and then refinance."

After closing, Jordan learned that there was a substantial penalty for refinancing within the first two years of the mortgage. After her husband got a job, the couple decided to bite the bullet and refinance anyway-only to learn that, in the year since they had closed, plummeting property values put them in a "negative equity" situation-they owned more on the home than it was worth. Their mortgage company refused to negotiate.

"We are stuck with a high mortgage payment," Jordan said. "My husband's job pays less than we expected, and in order to pay the mortgage, we've have to let other bills slide. As a result, our credit rating has suffered. If we lose the house, I wonder if a decent landlord will even rent to us. They all do credit checks now."

Jordan's adjustable mortgage rate adjusts upward this summer. "I don't know what will happen then," she said. "I feel like this is my own fault. I've been a homeowner for many years, and I thought I knew what I was doing."

Jordan said that along with worrying about losing the home, she feels "so ashamed and embarrassed. This is not the kind of thing you talk to people about. You hear them talk about why someone would be dumb enough to take out a subprime mortgage. I never thought I was dumb."