October 2, 2005
Marilyn Kennedy Melia
Competitive rates for mortgages now are about 5 to 6
percent, but if you’re an African-American or Hispanic borrower, you’re
likely to pay a significantly higher rate.
A report published last month in the Federal Reserve Bulletin shows
that 32.4 percent of African-Americans and 20.3 percent of white
Hispanic borrowers who obtained a home purchase mortgage in 2004
received a high rate “subprime” mortgage. That compares to 8.7 percent
of non-Hispanic white borrowers who received a subprime loan when
buying a one- to four-unit family home.
Institute, a Chicago housing research group, conducted a preliminary
study of the mortgage data in the Chicago area, and the results seem
roughly consistent with the national findings, says Geoff Smith,
Woodstock project director.
Subprime loans can carry rates several percentage points higher than competitively priced loans.
While the report shows that minorities are paying more, it doesn’t
pinpoint the exact reasons. Housing advocates, though, have some
theories and suggestions on how the high minority share of subprime
loans might be reduced.
If a borrower knew more about his
credit and credit score before seeing a lender, he stands a better
chance of getting an economical loan, says Gail Parson, of the National
Training and Information Center, a Chicago umbrella group for community
Credit scores are derived through a computerized
analysis of a person’s history of paying credit card companies and
other entities that report to credit bureaus.
The lower a person’s credit score, the higher the rate a lender will charge.
However, borrowers with only slight credit problems are sometimes
charged subprime rates, Smith says. It can be easier and more
profitable for a lender to offer a subprime loan than suggest ways a
borrower could qualify for a lower rate mortgage, he adds.
Parson wishes borrowers would first go to a housing counselor who would
pull their credit reports. Free, individual counseling is available at
dozens of places around Chicago, says Jim Wheaton, associate director
for lending at Neighborhood Housing Services of Chicago, a non-profit
organization active in counseling.
People can often find individual counseling by asking local churches, neighborhood and community organizations, Parson adds.
It was by chance that Wallace LaGrone enrolled in counseling before he bought his Chicago home about 2 1/2 years ago.
A house that LaGrone was first interested in buying was being sold by
Neighborhood Housing Services. He called the number listed on the sign,
and although the house was no longer available, he was invited to
enroll in home-buying classes. Wallace, who is African-American, says
the counselor’s suggestions that he pay off a medical collection on his
report is the reason he now has a 5.6 percent mortgage.
recommended [counseling] to a lot of people,” says LaGrone. Still,
hardly anyone is interested in having their finances scrutinized, even
by a counselor. “People are scared of what their credit shows,” LaGrone
Instead of putting the entire burden on the borrower to
qualify and search out a good loan, housing advocates also want the
lending business to change some practices.
neighborhoods tend to have a high concentration of lenders specializing
in subprime mortgages, and fewer firms offering lower-rate loans, Smith
says. But the attention that mortgage data has received is beginning to
change that, he adds.
This mortgage study has already “caused
lenders to examine how they price loans,” Smith says. Some mortgage
firms are introducing new lending programs aimed at providing minority
borrowers lower-rate loans.
Wells Fargo, for instance, recently
announced that any borrower whose profile shows that he qualifies for a
prime loan will be offered one in any of its subsidiaries.
There are several firms in the Chicago vicinity that do not use credit
scores to approve and price mortgages, Parson says. At Liberty Bank for
Savings in Chicago, for instance, “it is not uncommon for us not to get
a credit score,” says Alan Kilburg, senior vice president. Instead, the
savings bank looks at payment records on rent, utilities, insurance and
other regularly occurring bills.
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