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Predatory Lending from Philadelphia’s Streets to Wall Street

New Study Uses Philadelphia Data to Examine National Problem, Point to National Solutions

April 4, 2007

One in every 30 Philadelphia homeowners has been touched by predatory lending, and the probability of becoming a victim increases to one in seven for those who have refinanced their mortgages multiple times, according to Lost Values – A Study of Predatory Lending in Philadelphia, a new study released today by TRF.  By thoroughly analyzing 15,500 individual properties in this area, the study offers a detailed local case study that can point to national remedies, its author states.

The study’s systematic approach and scale makes it the first undertaking of its kind. It involved the collection and analysis of complete mortgage and sale histories for 15,500 properties in the city of Philadelphia from 2000 to 2003 as well as interviews with a broad range of subject experts from borrowers to securitizers and all in between.

Published in the midst of a growing national debate around the sub-prime mortgage market, the Ford Foundation-funded study grounds in stark reality the most problematic of that market’s subsets—predatory lending.  Lost Values examines the characteristics of these loans, their frequency and where they happen.

In Philadelphia, predatory lending appeared to be most common in moderate-income neighborhoods where the home was often the homeowner’s only asset. These neighborhoods also tended to be predominantly African-American or Latino. In most cases, as the dozens of interviews with borrowers revealed, these homeowners were also less likely to fully comprehend the complex mortgage lending transactions in which they took part.  As one interviewee remarked on learning that he was a victim, “Why would they do this to me? I have so little.”

The study also finds that foreclosures, one of predatory lending’s significant consequences, were also more likely to occur in modest-income neighborhoods and with sub-prime mortgage loans.

In its comprehensive study, Lost Values presents a grounded understanding of predatory lending while also pointing out the significant personal impact of an issue that at times is understood only in terms of macro-level capital markets.  

“Each incident of predatory lending represents a human being who lost something of great value to them, financially and personally,” says Ira Goldstein, author of the study and TRF Director of Public Policy and Information Services.  “Although the regulators and capital markets will eventually penalize those whose business practices are abusive, most of the people who have those loans continue to bear the cost, with some ultimately losing their homes,” Goldstein added.

Most of the information related to mortgage lending is not readily available or in any easily accessible form, and this has helped to obscure the issue, Goldstein pointed out.  It is an achievement of Lost Values that it brings the issue into the open in ways that not only shed light on the local problem but also point to national solutions. 

Among TRF’s recommendations in the report are changes to record-keeping practices to add market transparency to the lending process, so that ongoing analysis and monitoring of this industry is less arduous and resource intensive. TRF also emphasizes the need to establish suitability standards for mortgage lending that would protect consumers from entering into mortgage transactions that are not suited for their financial circumstances. 

“The study's recommendations to require higher suitability standards for lenders and that lenders provide more and better information are long overdue,” commented Mark Zandi of Moody’s Economy.com. “How can policymakers respond appropriately to the current surge in mortgage credit problems without even knowing the number of foreclosures and the demographic makeup of those who are losing their homes?”

About TRF:

The Reinvestment Fund (TRF) is a national innovator in capitalizing distressed communities and stimulating economic growth for low- and moderate-income families. TRF identifies the point of impact where capital can deliver its greatest financial and social influence. TRF’s investments in homes, schools and businesses reclaim and transform neighborhoods, driving economic growth and improving lives throughout the Mid-Atlantic region. Since its inception in 1985, TRF has made almost $600 million in community investments.

TRF is nationally recognized for its research and housing-related policy analysis. TRF’s data analysis focuses both on helping TRF identify opportunities to invest its own resources as well as providing services to public sector and private clients seeking assistance with their own strategies to preserve and rebuild vulnerable communities. TRF has quickly emerged as a highly regarded source of unbiased information for public officials and private investors in the Mid-Atlantic region. To learn more about TRF, visit www.trfund.com.