Residential Foreclosures in the City of Buffalo, 1990-2000 - Federal ...

Table 13 also demonstrates a socioeconomic component of subprime foreclosures.
The three communities in which subprime foreclosures were most prevalent were
predominately minority and low income. This finding is consistent with research
revealing that subprime lending is more common among minorities. 12 However, in our
study, the highest income minority community— North East— showed the lowest rate of
subprime foreclosure overall. The only lower income minority community with a
substantial Hispanic population— West Side-Central--had a relatively low rate as well.
Moreover, South Buffalo-River— a higher income white community— had a relatively
high percentage of foreclosures on refinance loans made by subprime lenders, while
Riverside— a low-income white community— had a small share of subprime
foreclosures. Thus, the association between subprime foreclosure and the socioeconomic
characteristics of Buffalo’s communities is not clear cut.
Finally, there appears to be little relationship between overall foreclosure rates
and subprime foreclosures, as the two communities with high foreclosure rates did not
show high shares of foreclosures on subprime loans. As noted, subprime foreclosures
were least prevalent in the North East community and were only slightly above average
in East Delavan.
Interest Rate Proxy for Subprime Lending
We now examine the effect of subprime lending on foreclosures by looking at the interest
rates on foreclosed loans. Although subprime loans may have several features that
distinguish them from prime loans, the most important difference is their higher interest
rates. Research suggests that the added risk inherent in subprime loans justifies the
charging of an additional 1.5 percent to 4 percent by lenders for providing credit. 13 Using
this standard, we calculate the number of percentage points by which the interest rate
exceeded the average interest rate at the time of the loan. 14 We divide foreclosures in
2000 into three categories based on this difference: very high cost (greater than 4
percent), high cost (2 percent to 4 percent), and average cost (less than 2 percent).
12 Even when controlling for such factors as income and credit history, studies consistently find that black
borrowers have a higher probability of using the subprime market. See, for example, Nichols, Pennington-
Cross, and Yezer, 2000.
13 Goldstein, 1999, p. 9.
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