Blacks dominate subprime loans
By CARRIE TEEGARDIN
The Atlanta Journal-Constitution
Published on: 11/04/07
Black Atlantans of all income groups were much more likely than whites to take out high-interest “subprime” mortgages when buying a home, making them more vulnerable in the ongoing mortgage meltdown.
Nearly half of blacks who bought a house in 2005 or 2006 ended up with a high-interest mortgage, compared with 13 percent of white home buyers, according to an Atlanta Journal-Constitution analysis of federal mortgage data.
The disparity was striking, even in a comparison of home buyers with similar incomes. Among black home buyers making more than $100,000 a year, 41 percent got a subprime mortgage, compared with 7 percent of whites in the same income category.
Experts on mortgage lending offer a variety of explanations. Some say differences in credit history cause the variation. Others argue that subprime mortgage lenders aggressively targeted minority communities that have historically been underserved by mainstream lenders.
More Atlanta homeowners than ever are facing foreclosure. The metro area’s highest foreclosure rates are in minority communities.
“So much wealth for families in this country is tied up in their homes, and that’s even more true for minorities,” said Debbie Bocian, a senior researcher at the North Carolina-based Center for Responsible Lending. “It just exacerbates wealth inequality” if a greater share of minorities end up losing their homes, Bocian said.
At 49 percent, blacks were the most likely minority group in metro Atlanta to end up with a subprime loan. For Hispanics, about a third of home buyers got a subprime loan in 2005 and 2006. Only 10 percent of Asians used a subprime loan to buy a house, the lowest of any group.
The disparity is not unique to metro Atlanta. Federal mortgage lending statistics show that blacks and Hispanics across the country are much more likely than whites and Asians to end up with a subprime loan.
“I’m not surprised,” said the Rev. Timothy McDonald, senior pastor at First Iconium Baptist Church in Atlanta. McDonald said churches throughout Atlanta are seeing an unprecedented number of parishioners being hit by foreclosure and bankruptcy.
“It’s destroying whole families. It’s not just destroying credit,” he said.
Subprime mortgages across Georgia are nine times more likely to be seriously delinquent or in default than prime mortgages, according data compiled by the Mortgage Bankers Association.
A loan is considered subprime if it comes with an interest rate significantly higher than the “prime” rate — or the best mortgage rate available on the market at the time. For this analysis, a mortgage was considered subprime if its Annual Percentage Rate exceeded a threshold set by the Home Mortgage Disclosure Act: 3 percentage points above the comparable rate on U.S. Treasury securities. A prime mortgage is typically priced at 1 to 2 percentage points above the cost of the Treasury securities.
The federal mortgage lending data analyzed by the Journal-Constitution includes the race and income of borrowers. But the government does not require lenders to report information about credit history or down payments. Those are key factors in determining whether a home buyer qualifies for the lowest interest rate.
Lenders say credit scores are a better predictor than income of whether someone will pay their mortgage on time.
“People who have low [credit] scores are people who have difficulty managing credit and repaying promptly,” said Anthony M. Yezer, a professor at George Washington University who is an expert on subprime lending. “Many high-income people have very low credit scores,” he said.
A national study of credit scores of all consumers, not just mortgage loan applicants, found that 52 percent of blacks have credit scores that would classify them as subprime borrowers, compared with 16 percent of whites.
Robert B. Avery, a Federal Reserve economist who is one of the authors of the study, said the differences in credit scores explain at least a portion of the differences in the incidence of subprime loans.
“How much of a portion and why those scores have gotten to where they have gotten to — that is something we don’t know,” Avery said, adding that the matter deserves more attention.
If half of black homeowners are going to be paying a subprime rate, he said, “there are real implications for that.”
A study by the Center for Responsible Lending that was able to link information about subprime loans with data on credit scores and down payments found that those risk factors could not entirely explain the higher rates that minorities were paying for subprime mortgages.
Academic studies have found that significant numbers of home buyers with good credit scores end up with subprime loans, even though they could have qualified for prime loans.
Many experts say that differences in credit score are clearly not the end of the story.
“It doesn’t explain all of it, or even most of it,” said Dan Immergluck, a Georgia Tech professor who is an expert on mortgage lending.
Immergluck said the heart of the problem lies in which lenders minority borrowers turn to. He said subprime lenders tend to market heavily in minority neighborhoods.
“If what you get in your mailbox is from a certain set of lenders all the time, then those are the lenders you think about going to,” he said.
Immergluck said lending studies show that subprime lenders tend to focus on minority communities. He said that once a borrower does business with a high-interest lender, the chances are good that their credit rating will suffer. That’s because the hallmarks of many subprime mortgages — adjustable rates, prepayment penalties, balloon payments — make defaults more likely.
“This is a vicious cycle,” Immergluck said. “You get into an expensive loan, or a loan with bad terms, and that will make it harder for your credit to stay good.”
William J. Brennan Jr., a 39-year veteran attorney at Atlanta Legal Aid who focuses on mortgage lending issues, said he has reviewed case after case in which blacks were aggressively targeted for the worst loans on the market. Often, he said, subprime borrowers ended up losing the equity in their homes that they worked years to accumulate.
“Since the day I started working here, economic oppression of black people has been going on nonstop,” Brennan said.
McDonald, the Atlanta pastor, said many minorities who got a subprime loan in recent years were first-time home buyers, and often the first in their family to have a chance to buy a house.
“We have been denied the American Dream,” McDonald said. “If you have the opportunity to get it, you would rather pay to the hilt instead of not getting it, and the lenders know that.”