The Behavior and Regulation of Predatory Mortgage Lending

Author: Kristen B. Crossney

Dissertation School: Rutgers, The State University of New Jersey

Abstract:

For most households in the United States, the majority of their wealth or assets exist within the equity of their home. As of the early 1990s, approximately 45 percent of the net worth of the average homeowner was in the form of equity in their home, although there are substantial differences between race, age, and overall household wealth. Many organizations, from federal agencies to local community development corporations, have supported homeownership because of its perceived ability to improve financial stability and increase asset accumulation. The Bush Administration is supporting an increase in the homeownership rate for minorities, setting a goal of increasing the number of minority homeowners by 5.5 million over the next 10 years.

In the past decade, predatory lending has arisen as a danger to homeowners by increasing the threat of foreclosure and bankruptcy, and decreasing the equity accumulated in a housing unit. In effect, the ongoing work of organizations supporting homeownership is being countered by the ability of predatory lending to strip equity and encourage foreclosure.

The main research question of this manuscript aims to better understand predatory lending through an analysis of home mortgages, borrowers, and the actors in the mortgage market. To that end, the research explores mortgage markets in Philadelphia in order to better understand predatory lending and to articulate the following:

• The at-risk population.
• The extent to which the abusive lending practices have pervaded local mortgage markets.
• The process and circumstances surrounding predatory mortgages.
• The policy framework governing home mortgage transactions.

The main objective is to use the understanding of these aforementioned issues to formulate a coherent strategy to mitigate the consequences of predatory lending and prevent future incidences.

This research employs a multi-stage methodology. The first stage involves a statistical analysis of a large sample of publicly recorded information on mortgages to estimate the incidence of predatory lending. Second, mortgage data will be integrated with information from the 2000 Census in order to identify the type of demographic areas and housing markets at risk of predatory activity. Next, case studies of predatory lending victims and their finance history will allow for a characterization of the processes and circumstances surrounding abusive lending practices, which is essential to any effort seeking to prevent this type of activity. Interviews with professionals in the real estate and finance industry will support the case studies of victims and provide insight into the operation of real estate and mortgage markets. These interviews will focus on the persistence and consequences of asymmetric information and imperfect competition in mortgage markets. Lastly, current laws and regulations will be analyzed using an improved understanding of predatory lending gained from the earlier phases of this research project. This policy analysis will identify areas for increased enforcement and reform to prevent future abusive incidences, thereby protecting homeownership and the financial stability of owner occupants.

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