by Jeremy Rutherfurd

Created on: November 18, 2008   Last Updated: April 09, 2009

A common misperception regarding the housing bubble and credit crisis is that they were caused by "the poor." Low-income people bought homes they couldn't afford, the explanation goes, using "zero-down," negative-amortization or similar subprime mortgages. Once the monthly payments were reset, these homeowners couldn't afford them and went into foreclosure, thus precipitating the nationwide collapse in housing prices, the plummeting value of mortgage-related securities and the resulting credit crunch.

Truth is, it's not just low-income homeowners that have been defaulting on their mortgages; foreclosures have been occurring across all income levels. The poorest state in the United States, Mississippi, for example, is not experiencing a larger number of foreclosures than wealthier states such as California.

This is because the rate of delinquency tends to be tied to the type of mortgage products sold, rather than the financial resources of the borrower, according to recent loan performance data analyzed by Local Initiatives Support Corporation (LISC), which helps community-based organizations revitalize underserved neighborhoods.

Studying data supplied by McDash Analytics, an independent firm, LISC found that from March 2007 to March 2008 default rates for all loan types rose sharply, with subprime-mortgage foreclosures vastly outpacing prime-rate mortgage defaults. Subprime borrowers in wealthier communities defaulted at nearly the same rate as those in poor areas.

"Delinquency and foreclosure rates for subprime borrowers were comparable across communities of all income levels," Michael Rubinger, LISC president and CEO, said in a statement. "This reinforces what years of experience have already told us: Low-income residents are not, by definition, poor credit risks. Unsuitable mortgage products are," he said.

David M. Abromowitz, a senior fellow at the Center for American Progress, agrees. Recent claims that the current foreclosure crisis was caused by policies to expand homeownership lending to low- and moderate-income families are "specious," he wrote in a Nov. 18 editorial for the Baltimore Sun.

"Community land trusts in more than 100 working-class neighborhoods all over the country report a less than 1 percent foreclosure rate on low- and moderate-income mortgages," Abromowitz wrote. In some lower-income areas in Massachusetts and North Carolina default rates have actually been lower than in more affluent neighborhoods.

Neighborhood Housing Services, a national intermediary organization which packages loans to borrowers whose income averages only two-thirds of the national median, has reported delinquency rates only a fraction of the reported subprime default rate, the editorial said.

All these borrowers have several things in common. They were educated on the types of loans they were considering and were told that they had to plan for financial setbacks. They also tended to choose fixed-rate mortgages.

Sources:

www.poweropt.com

"Foreclosure Rates Comparable Across Incomes," Oct. 29 2008:http://www.baltimoresun.com/news/opinion/oped/bal-op .mortgages17nov17,0,4637330.story

"Homeownership Done Right," Nov. 17, 2008, by David M. Abromowitz: http://www.lisc.org/content/article/detail/7710

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