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We next explore what types of neighborhoods had the most subprime originations in 2005 by running cross-sectional regressions on Zip-code level data. We have several key results. First, subprime mortgages are concentrated in locations with high proportions of black and Hispanic residents, even controlling for the income and credit scores of these Zip codes. Areas with black and Hispanic shares fifty percent higher than the mean are associated with 8 and 7 percent, respectively, larger
proportions of subprime loans. However, heavily minority Zip codes appear to have a much higher concentration of these originations. The 90th percentile Zip code, ranked by the share of black residents, appears to have 42 percent more subprime loans than the corresponding median Zip code, and the 90th percentile Zip code ranked by the share of Hispanic residents appears to have 33 percent more subprime originations than
the median. These results remain relatively consistent whether we compare Zip codes across cities or within a given city.
The subprime market is intended to provide home loans for
people with impaired or limited credit histories. In addition to
lower incomes and blemished credit, borrowers who get subprime
loans may have unstable income, savings, or employment, and a
high level of debt relative to their income.4 However, there is evidence that many families who receive subprime mortgages could qualify for prime loans, but are instead “steered” into accepting higher-cost subprime loans.5
As shown in Figure 1 below, in a short period of time subprime mortgages have grown from a small niche market to a major component of home financing. From 1994 to 2005, the subprime home loan market grew from $35 billion to $665 billion, and is on pace to match 2005’s record level in 2006. From 1998 to 2006, the subprime share of total mortgage originations climbed from 10 percent to 23 percent.6 Over most of this period, the majority of subprime loans have been refinances rather than purchase mortgages to buy homes.7 Subprime loans are also characterized by higher interest rates and fees than prime loans, and are more likely to include prepayment penalties and broker kickbacks.
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