A study released this week by the Center for Responsible Lending, a non-profit research and public policy group, shows that Latinos made up by far the largest group -- 48 percent -- of all those facing foreclosure in California.

The report, entitled "Dreams Deferred: Impact and Characteristics of the California Foreclosure Crisis," analyzed more than 500,000 foreclosures statewide and found 48 percent of those affected were Latino, while whites totaled 35 percent, African Americans 8 percent, and Asians 6 percent. The percentage of Latinos facing foreclosure far outstripped their representation in the population.

The report also found that Latino and African American borrowers were more likely than similarly situated whites to have been offered high-cost subprime mortgages, which had loan terms that increased their default risk. That is to say, when white and minority borrowers had the same credit and risk profiles, the minority borrowers were offered less favorable loan terms, on average.

Insolvency has also disproportionately hit minorities in the economic downturn, with a number of studies showing that African Americans and Latinos have been more likely to be laid off and less likely to find new employment during the crisis.

No "McMansions" for Most Victims of Foreclosure, Study Shows

The report also looked at whether most foreclosures were caused by people buying homes that they couldn't afford. It has been widely believed that the availability of no-downpayment loans and adjustable-rate mortgages (ARMs) with cheap initial loan terms encouraged many to buy homes that were outside of their realistic price range. Conventional wisdom held that borrowers either didn't understand that their payments would become unaffordable with the ARMs adjusted, or that people planned to sell the homes at a profit before the higher payments came due.

The Center for Responsible Lending's analysis reveals that 75 percent of the nearly half a million foreclosed homes studied were actually quite modest. This indicates that homebuyers were not gaming the system or foolishly buying homes they could never hope to afford in the long term.

Did Gains in Latino Homeownership During the Past Decade Backfire?

A 2009 study on Latino homeownership by the Wall Street Journal found that, between 2000 and 2007, homeownership among Latinos grew by 47 percent. During the same period, however, general homeownership grew by only 8 percent.

The Federal Financial Institutions Examination Council reported that mortgages written to Latinos jumped by 29 percent in 2005 alone -- with the incidence of expensive subprime mortgages written to Latinos soaring by 169 percent.

The Wall Street Journal's investigation reported that there had been a "a push by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos" in the period between 2000 and 2007 and suggests that this push may have backfired.

The Center for Responsible Lending recommends several solutions, including giving bankruptcy judges cramdown powers so they can modify mortgages on principal residences. It also recommends increased funding for organizations that offer pre-purchase and insolvency-related housing counseling or legal help for distressed homeowners.

Related Resource:

"Revealing the racial makeup of California's foreclosures" (Crosscurrents, KALW Public Radio News, August 19, 2010)