Across the United States, blacks and Hispanics are more likely to get a high-cost, subprime mortgage when buying a home than whites, a major factor in a wave of foreclosures in poor, often black neighborhoods nationwide as a housing slowdown puts millions of “subprime” borrowers at risk of default.
Even more troubling, real-estate industry analysts say, is an alarming proportion of blacks and Hispanics who received subprime loans by predatory lenders even when their credit picture was good enough to deserve a cheaper loan.
In six major U.S. cities, black borrowers were 3.8 times more likely than whites to receive a higher-cost home loan, and Hispanic borrowers were 3.6 times more likely, according to a study released this month by a group of fair housing agencies.
“Blacks and Latinos have lower incomes and less wealth, less steady employment and lower credit ratings, so a completely neutral and fair credit-rating system would still give a higher percentage of subprime loans to minorities,” said Jim Campen, a University of Massachusetts economist who contributed to the study.
“But the problem is exacerbated by a financial system which isn’t fair,” he said.
In greater Boston, 71 percent of blacks earning above $153,000 in 2005 took out mortgages with high interest rates, compared to just 9.4 percent of whites, while about 70 percent of black and Hispanic borrowers with incomes between $92,000 and $152,000 received high-interest rate home loans, compared to 17 percent for whites, according to his research.
“It’s a huge disparity,” he said. High-cost mortgages usually have interest rates at least 3 percentage points above conventional mortgages.
Predatory lenders moved aggressively into the subprime mortgage market as a housing price boom between 2000 and 2005 cut the risk of lending to people with damaged credit ratings.
Many focused on minority neighborhoods in slick sales pitches that offered the American dream: home ownership with no money down and little worry about poor credit.
“The predatory lenders reach out to those who don’t really know, people with a lack of education,” said Cassandra Hedges, a black 37-year-old mother of two fighting to stave off foreclosure of the Ohio home she bought three years ago.
“One of the first things my broker asked me was ‘How do you know you are ready to buy a house. Have you done any research?’ We said ‘No’. At that point I think he realized ‘Okay I got some people that don’t know what the heck they are doing’.”
She and her husband Andre now face a 10.75 percent interest rate on an adjustable-rate mortgage and monthly payments of $1,600—more than double the $650 she told her broker she could afford. Foreclosure looms after she missed a payment.
“If you’re white they overlook the fact that your credit score is a little too low or you have one extra late payment,” said Barbara Rice, a community organizer at the Massachusetts Affordable Housing Alliance, a nonprofit advocacy group.
Rice, who is white, and a colleague who is black took part in an experiment in Massachusetts last year to test the racial bias of mortgage brokers. They both posed as prospective home buyers in a separate meetings with several brokers.
Rice presented a worse credit rating and lower income than her black colleague to brokers but received better treatment.