Subprime woes have heavy impact on minorities

WASHINGTON — A house. A yard. A fence. It’s supposed to be the American dream.

But for some black and Hispanic homeowners, the dream has been cut short with the rude awakening that can come with costly subprime loans.
Mortgage lenders were more likely to sell subprime loans to blacks and Hispanics than to whites during the recent housing boom. Consequently, minorities are at a greater risk than whites of losing their homes as the real-estate downturn deepens.
Advocates for low-income borrowers say that the racial disparity has added a new element to an old, unsettled debate over discriminatory lending practices, though banking industry officials say the picture is far more complicated.

Terri Martin is one of thousands caught in the middle of the debate.
Martin nearly lost her $71,300 home in Winston-Salem, N.C., two years ago after the interest rate on her subprime mortgage jumped to 11 percent, leaving her with monthly payments of more than $800. A lawyer helped her renegotiate the terms to avoid foreclosure and remain in her home.
“If I did not have God on my side, I probably would have committed suicide,” said Martin, a school-bus driver and mental health worker. “I was fighting to keep my house, and all my income that I did have coming in was going to pay my mortgage and to keep my other bills here going, so, yeah, it was rough.”

Houses purchased with costlier, subprime mortgages like Martin’s are eight times as likely to be
foreclosed on as cheaper, prime
mortgages, industry statistics show.

Though the growing wave of subprime foreclosures is more pronounced in certain high-cost real
estate markets, the issue is gaining attention in nearly every part of the country.

A Media General News Service analysis of mortgage data collected by the federal government showed that in the Southeast in 2006 — the most recent data available — the percentage of mortgages taken out by blacks that were subprime was double that of whites.
The analysis showed a similar, though slightly smaller, gap between Latinos and non-Latinos.
In Virginia, one in five residential mortgages to whites in 2006 was subprime, but for blacks the ratio rose to just under one in two. For Latinos, 45 percent were subprime, compared with 25 percent for non-Latinos.
In some poorer counties elsewhere in the Southeast, the analysis showed, the proportion of subprime loans to minority borrowers was even higher. In dozens of minority-heavy counties in Mississippi, Alabama, South Carolina and Florida, more than seven in 10 loans to blacks were subprime.

Explaining the gap
Fair-lending advocates and civil rights groups see historical parallels in the current subprime gap to racially tinged historical lending patterns.
In past decades, blacks and Latinos had difficulty obtaining mortgages, in part because some banks were reluctant to build branches or loan money in minority neighborhoods, especially poorer ones. The practice is known as “redlining.”
It had become easier for minorities to obtain a mortgage during the recent housing boom, but they were far more likely than whites to borrow at higher, subprime rates.

Generally, a loan is considered subprime if the interest rate is 3 percentage points or more above the rate for certain Treasury securities that help determine mortgage rates.
Over the life of a loan, the higher interest rate can add tens of thousands of dollars to the total home price and make monthly payments higher.
Someone who buys a $100,000 home with no money down at 5 percent interest would pay $536.82 a month for 30 years, spending a total of $93,255 in interest. That same home at 8 percent interest would cost $733.76 a month over 30 years, with $164,153.60 in interest.
Mortgage industry officials say that economics — not racism — explains the subprime gap. On average, minorities have lower credit scores, smaller incomes and fewer assets than whites, making them riskier customers in the eyes of the industry.

“Race is not a factor,” said Jay Brinkmann, vice president for research and economics of the Mortgage Bankers Association, the leading industry group. “I’ve often wondered how you’d ever get an entire industry to collude on a discriminatory practice.”
The federal government collects information on every mortgage applied for or issued under the Home Mortgage Disclosure Act. It does not gather credit scores, assets or income of borrowers. That makes it difficult to test the industry’s explanation by comparing loans issued to whites and minorities with similar credit scores and income.

Fair-lending advocates have pushed the government to require disclosure of borrower credit scores and income. Still, the advocates find evidence in the current data that they say undercuts the industry’s “riskier borrower” argument.
The data includes information on the median income in a borrower’s neighborhood, though not on an individual borrowers.
“It is hard to empirically prove why the disparity exists. But it cannot simply be explained away by the industry’s standard line that there’s a different risk profile for African Americans and Latinos generally,” said Debbie Bocian of the Center for Responsible Lending, a non-profit group based in Durham, N.C.
Bocian and others concerned about the gap believe it stems from redlining. Even today, banks are less prevalent in minority neighborhoods.

In the absence of neighborhood banks, a network of independent brokers stepped in to sell loans in minority neighborhoods, according to fair-lending advocates and a congressional investigation into subprime lending practices. The brokers acted as middlemen between homebuyers and large mortgage providers.
Many large mortgage providers gave brokers more of an incentive to sell subprime loans.

“A lot of these subprime loans, we got paid more on them,” said Joy Jamison, president of the National Association of Black Mortgage Brokers. For some blacks and Hispanics with bad credit living in poorer communities, she said, subprime loans provided the only path to home ownership.
But critics say there’s more to the story. Many borrowers with good enough credit to secure a prime loan were pushed into a subprime loan by independent brokers, according a recent report by Congress’ Joint Economic Committee.
The brokers got higher commissions for selling people with good credit subprime loans instead of prime loans. The industry calls the extra payment the “yield spread premium.”

Fannie Mae and Freddie Mac, the mortgage giants, estimated in 2005 that up to half all subprime borrowers would have qualified for prime mortgages.
Impact on minorities
The concentration of subprime loans in minority communities has also increased the risk of foreclosure in those neighborhoods, researchers say. Another feature of subprime loans — prepayment penalties for selling the home or refinancing — makes it hard for homeowners who fall behind on payments to avoid foreclosure.

Four out of five subprime loans have substantial prepayment penalties, according to the Center for Responsible Lending.
Action in Congress
As foreclosures rise, calls are growing for Congress to bail out homeowners facing foreclosure or freeze interest rates.
In Washington last week, Senate Republicans and
Democrats disagreed over a plan to allow judges to adjust mortgage rates for at-risk borrowers. So far, few proposed solutions address the subprime racial gap directly.

A bill sponsored by Rep. Brad Miller, D-N.C., passed the House in the fall to crack down on predatory lending. A similar bill was introduced late last year by Sen. Chris Dodd, D-Conn., but has not moved in the Senate. Both would eliminate prepayment penalty mandates and ban the yield spread premium.
Sean Mussenden is a staff writer at Media General News Service’s Washington bureau.  Bertrand M. Gutierrez is a staff writer at Media General’s Winston-Salem (N.C.) Journal.

“A small group of people, the independent brokers, want to keep doing business that way,” Miller said of the yield spread premium. “But anyone who has looked at mortgage lending dispassionately agrees that it puts the interest of the broker at odds with borrowers. And borrowers depend on the advice of brokers,” Miller said.

Sean Mussenden is a staff writer at Media General News Service’s Washington bureau.  Bertrand M. Gutierrez is a staff writer at Media General’s Winston-Salem (N.C.) Journal.