Homeownership is part of the American dream, but individuals -- primarily African Americans -- who purchased homes with high-cost subprime loans have seen that dream turn into a financial nightmare.
High-cost subprime lending is emerging as a primary predictor contributing to fourfold increase in foreclosures in Cuyahoga County in recent years, according to a new study from the Center on Urban Poverty and Community Development at the Mandel School of Applied Social Sciences at Case Western Reserve University.
"Homes purchased with subprime loans had an 816 percent higher chance of going into foreclosure than prime-rate loans and accounted for 84 percent of all foreclosures on home purchases and refinance loans in the study's time period," reported Claudia Coulton, co-director of the poverty center.
Coulton along with Tsui Chan, Michael Schramm and Kristen Mikelbank did the research for the study, "Pathways to Foreclosure: A Longitudinal Study of Mortgage Loans, Cleveland and Cuyahoga County, 2005-2008." The full study can be viewed online.
The study's data was collected from information from the Home Mortgage Disclosure Act.
National mortgage companies, instead of local banks, dominate the list of subprime lenders.
According to Coulton, these mortgage companies are suspected of targeting African American communities. African Americans are up to three times more likely to receive subprime loans. These subprime loans and foreclosure rates for African Americans crossed all income groups from the lowest to highest, which surprised the study's authors.
Coulton said this raises questions about changes from redlining which prevented African Americans from getting loans to subprime lending, which is providing loans that many times are in trouble within months and by 36 months are in the foreclosure process. Also people are not using local banks, whose loans have a much lower level of foreclosure than the mortgage companies.
She also noted that once the foreclosure proceedings begin, many walk away from their homes without answering the foreclosure filings or help to avoid the foreclosure.
Implications of the study are that financial literacy is needed to educate the consumer about selecting the right loans and other financials choices.
The poverty center released the report today. The study continues the center's in-depth research on the connection between foreclosures and the circumstances that contribute to foreclosure filings.
This study is part of a series of reports on the foreclosure and lending crisis made possible with support from The Cleveland Foundation and The George Gund Foundation.
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