April 26, 2007 Thursday
Sue Kirchhoff and Judy Keen
CHICAGO — Charles Davis bought his home on the South Side of Chicago in 2003 using adjustable-rate, high-interest loans and betting an improving economy would help him handle rising payments ahead. Things didn’t go as planned.
Davis, 54, has struggled to stave off foreclosure on the brick ranch-style house where he lives with his wife, Valerie, and three teenage kids. He financed his home with a $200,000 mortgage at 8.5% interest, and a second $50,000 loan at nearly 12%. Those rates were fixed for only two years, and payments are escalating.
Davis went to his bankers to refinance. They said no. Over the past year or so, he talked to four or five companies and was turned away. His bank has him on a “forbearance” plan, which lowers his payments, but has also started foreclosure proceedings. If he misses a payment, he fears, he could lose his house.
“I got into a bad deal,” says Davis, an African-American, adding that no one told him about help for first-time home buyers or warned him about the risks of adjustable loans.
Across the nation, black and Hispanic borrowers helped fuel a multiyear housing boom, accounting for 49% of the increase in homeowners from 1995 to 2005, says Harvard’s Joint Center for Housing Studies. But Hispanics and African-Americans were far more likely to leverage the American dream with subprime loans — higher-cost products for buyers with impaired credit — that are now going bad at an alarming rate.
About 46% of Hispanics and 55% of blacks who took out purchase mortgages in 2005 got higher-cost loans, compared with about 17% of whites and Asians, according to Federal Reserve data. The South Side of Chicago, with a large concentration of minority borrowers, has a high concentration of subprime loans and the state’s highest foreclosure rate. In Boston, where defaults are rising — especially in minority areas — 73% of high-income black buyers (those making $92,000 to $152,000) and 70% of high-income Hispanics had subprime loans in 2005, compared with 17% of whites.
Concentrated foreclosures in minority neighborhoods could reduce property values. The NAACP, National Council of La Raza and other civil rights groups recently called for a six-month moratorium on subprime home foreclosures. Problems are centered on subprime borrowers who took out adjustable-rate mortgages, which are now resetting at higher rates, increasing the monthly payments.
One of those swept up in the subprime frenzy was Paris Alston, 35, of Boston, who moved from a homeless shelter to a steady job and hard-to-get federally subsidized housing. Last year, after seeing an ad targeted at first-time buyers, she jumped into a subprime adjustable-rate loan that started with a 9.95% interest rate that could jump to as much as 15.25%.
“I was getting older in my life, I wanted to have something for my kids,” says Alston, adding that the lender made the process easy — until it came time to sign the documents.
“They inflated everything. … My income was more than what I expected. When I asked to go over the loan application, they said, ‘You don’t need to. All you need to do is sign it,'” Alston says.
Instead of the $1,200 monthly payments she expected, Alston faced $3,000 in loan, tax and condo fee bills. That was not only more than her monthly income, it was more than she had paid for an entire year’s rent on her subsidized apartment. Alston lost her home. With the help of Boston non-profit ESAC, Alston recently moved into a rental apartment.
Targeting minority borrowers
There are many reasons minorities turn to subprime lenders. Firms have aggressively marketed their products to populations that have long been underserved by, and often don’t trust, traditional banks.
Recent immigrants lack credit histories, and 35% of Latino families don’t have checking accounts. Hispanic families are more apt to have undocumented income, leading them to lenders who make loans without income verification, according to the National Council of La Raza. Lower rates of minority homeownership mean less wealth to draw on.
Regulation has been spotty. Federal data on race or ethnicity and lending were recently expanded by regulators. But they don’t include credit scores, making it difficult to easily ferret out reasons for pricing disparities.
Independent analyses and government investigations indicate that minority borrowers are steered to higher-cost loans even when they qualify for cheaper products. Countrywide Home Loans settled a New York lawsuit over racial disparities in lending last year, compensating some Latino borrowers and setting up a $3 million education program.
Many subprime lenders, who operate through loosely regulated mortgage brokers, aren’t covered by federal banking laws that provide consumer protections and are designed to prevent discriminatory lending. The non-profit National Community Reinvestment Coalition, in a recent study of the 25 top U.S. metro areas, found fewer commercial bank branches in minority and working-class neighborhoods.
Doug Duncan, chief economist of the Mortgage Bankers Association, points out that voluntary data by lenders show many minority applicants who are turned down for loans are denied due to poor credit. Federal data also don’t take into account such things as collateral, property values and borrower debt-to-income ratio.
Duncan warns that efforts to tighten lending laws to protect borrowers, including minorities, could end up constricting credit and preventing people from refinancing. At a recent meeting, subprime lenders told the Mortgage Bankers Association they expect loan volume to fall 30% to 40% next year.
“This is before any regulatory action,” Duncan says. “This is the reason why we’re cautioning regulators and lenders to be very careful.”
In Denver, Gaby Sanchez, 33, found her lender through her Realtor and was given a high-cost loan she couldn’t afford when the interest rate reset.
“They said our credit wasn’t that great, so the loan we were given was two-year, interest-only. … To refinance we were going to go through them again,” Sanchez says. “We had the number; we kept trying and trying until we found out they were no longer in business.”
Sanchez tried other lenders who also offered high-rate loans, until she found non-profit group Del Norte Neighborhood Development Corp. The group helped her and her husband, Fabian Lopez, 36, get an affordable fixed-rate loan.
Another reason for the subprime surge: Lenders have been supported by politicians and community leaders eager to promote minority homeownership, which remains about 25 percentage points below that of white non-Hispanics.
“Access became such a buzzword that people forgot about basic lending practices,” says Keith Corbett, executive vice president of the Center for Responsible Lending. “You are really in debt servitude, having a loan with a loan-to-value ratio of 100% or greater.”
How to regulate
Trying to protect borrowers or neighborhoods targeted by high-cost lenders can be challenging.
Illinois last year created a program of mandatory financial counseling for borrowers taking out certain high-cost loans. It was implemented in 10 ZIP codes, focused on Chicago’s South Side. The program was a boon to John McKinley, 70. After fielding marketing calls from mortgage firms, McKinley decided to use a company promising a 30-year, fixed-rate product. Before closing, he met with a financial counselor at the Greater Southwest Development Corp. who discovered the rate was set for just 10 years, with rising interest and payments thereafter. He got out of the loan.
“I’m disgusted with all these people,” says McKinley, an African-American, of lenders he believes are trying to scam their clients.
“These lenders are thinking, ‘If you pay three or four payments then stop, we’ll repossess it,'” McKinley says, adding that the problem is fueled by willing borrowers, many with poor credit or low savings, who want a cheap deal.
From Sept 1, 2006, to Jan 19, 2007, a dozen federally certified counseling groups worked with 1,200 borrowers, most on loan refinances, not initial purchases. They found signs of fraud in about 9% of the cases. In about half, they said borrowers could not afford the home or were perilously close to not being able to afford the loan.
The state has proposed changes to the program, which was suspended after tension with community leaders who called it racist for singling out minority ZIP codes, privacy concerns and data showing a large drop in home sales in neighborhoods where it was in effect. The changes would widen the program to all of Cook County and change the focus to loan terms viewed as predatory, rather than borrowers’ credit history.
“On the southwest side … there’s more mortgage brokers than there are doctors and lawyers and grocery stores. It’s like the Las Vegas strip of mortgage brokers,” says Illinois Democratic state Sen. Martin Sandoval, who sponsored the law, though not with the idea of singling out minority borrowers.
Federal regulators have tightened lending standards. But the record is muddy regarding whether they have done enough to go after possible lending discrimination.
A Fed analysis of higher-cost loans, defined as those 3 percentage points above select Treasury bill rates, shows a good chunk — but not all the difference in lending among races and ethnic groups — can be explained by other factors, such as borrower income.
The Fed two years ago said its analysis of 2004 data indicated that 200 lenders might be making too many high-cost loans to minorities who might be able to qualify for better deals; 35 of those lenders are overseen by the central bank. The 2005 data raised red flags about 270 lenders, 45 under Fed oversight. It conducted follow-up examinations and has referred one lender to the Justice Department.
The Office of the Comptroller of the Currency, another bank regulator, based on an analysis of the 2004 data, did a number of targeted exams. But the OCC says the vast amount of day-to-day OCC supervision does not involve public enforcement actions, and it doesn’t keep data on enforcement actions based on the lending information.
“There’s a real lack of transparency,” says Marva Williams, senior vice president of the non-profit Woodstock Institute in Chicago and a member of the Fed’s community advisory panel. “It’s difficult or impossible to know which institutions have received complaints, the nature of those complaints and the status of any investigation.”
Looking to a tough future
Going forward, Congress is debating national standards for lending, while regulators and lenders are setting up multibillion-dollar programs to help people get out of bad loans. Robert Pulster, executive director of Boston’s ESAC, says recovery will be tough.
“These are poor communities. … (Homeowners) were borrowing money. They did everything they could to sustain them for as long as they could, so any resources they have are depleted,” Pulster says. “There’s no quick fix.”