Furman Center Study Reveals Warning Signs for New York City Homeowners

Data released by the Home Mortgage Disclosure Act (HMDA) this fall show that for the first time this decade the national rate of subprime lending decreased in 2006, according to an analysis by the Furman Center for Real Estate and Urban Policy, a joint initiative of NYU’s School of Law and the Robert F. Wagner Graduate School of Public Service. After several years of incremental increases, the national rate dropped five percentage points, from 17.9 percent to 12.8 percent between 2005 and 2006. During this same time period, the rate of subprime lending in New York City also dropped, but it declined less significantly, dropping only three percentage points, from 23 percent to 19.8 percent.

As a result, the rate of subprime lending in New York City remains much higher than the rest of the country, and because of the smaller decline, the disparity between subprime lending rates in NYC and the rest of the country was actually larger in 2006 than 2005.

“For better or for worse, New York City’s housing market behaves differently,” says Furman Center Director Vicki Been. “On the one hand, we’ve seen its housing market largely resist the downturn experienced around the country. On the other hand, the fact that so many of our homeowners have subprime loans raises questions about the sustainability of our housing market.”

New York City also saw a smaller decline in subprime lending than other large U.S. cities, including Boston, San Francisco, Los Angeles, or Chicago. Washington, D.C. actually saw a slight increase in the rate of subprime lending from 2005 to 2006 (10.1 percent to 12.6 percent), but New York’s overall rate remains much higher than that of the nation’s capital.

“These findings raise important questions for New York,” says Furman Center Co-Director Ingrid Gould Ellen. “Research has shown that subprime loans are much more likely than prime loans to wind up in foreclosure. When we’re seeing one in five home purchase loans still being issued by subprime lenders, we have to be concerned about the future of the homeowners who continue to take out risky loans.”

The Bronx experienced the largest decrease in subprime lending of any borough, from 34.5 percent in 2005 to 27.4 percent in 2006. It is the only borough where the 2006 rate dropped below the 2004 rate (28.2percent). Despite this significant decline, the Bronx remains the borough with the highest rate of subprime lending.

The rate of subprime lending decreased for all race/ethnic groups in the city, with Hispanics seeing the most significant decline, from 39.3 percent in 2005 to 28.6 percent in 2006. Even with this decline, Hispanic borrowers in New York are still three times more likely to have a loan issued by a subprime lender than white borrowers. Black borrowers are four times more likely to have a loan issued by a subprime lender than white borrowers.

Finally, the new data show that the neighborhood disparities seen over the past few years continue to persist. Each of the top five neighborhoods with the highest rates of subprime lending in 2005 have again landed in the top 10 for 2006. Manhattan remains essentially unaffected—less than one percent of home purchase loans were subprime in 2006.

For more information on the study, go to Furman Center’s Web site: http://www.law.nyu.edu/realestatecenter/