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Loans to minorities rise, but at a price

The 30-day past-due rate for subprime mortgages rose from 5.4 percent to 7.1 percent during 2005.

By Staff writer of The Christian Science Monitor / March 24, 2006


When it comes to home loans, minority neighborhoods used to be the forgotten land.

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Now these same communities are the promised land - or at least the land of promises. Their airwaves are jammed with commercials urging residents to refinance and "cash out;" their telephone poles are papered with ads luring first-time buyers to apply for loans, no W2 form needed.

These days, customers working two jobs with little savings get talked into $3,000-a-month mortgage payments, says Leticia Tetzaguic, a loan officer for East Boston Savings Bank in the largely immigrant community of East Boston. "Mortgage companies are giving them crazy rates," she says. "They know people are paying crazy money for their houses."

Indeed, the underbelly of the mortgage industry has metamorphosed in the past 15 years. Banks and other financial firms, once chastised for not lending enough to minorities, are now being accused of lending too much.

Many of these loans have been a boon to minorities, raising their rates of homeownership to record highs. But others prey on the vulnerable, leaving borrowers at the brink of foreclosure.

Take Joan, a Boston resident who goes by that pseudonym to protect her privacy. She was buried under $10,000 in credit- card debt when she got a letter in in 2002 to refinance the home she bought in 1995.

She soon regretted her decision to accept the offer. The $40,000 subprime refinance loan she took out ballooned to $65,000 almost immediately, because of prepayment penalties and unanticipated taxes. Then she got ill and was out of work for a year. "They didn't want to hear about that," says Joan.

After getting behind on her payments, she got help from the Ecumenical Social Action Committee in Boston. She also joined the largest class-action suit to date against her mortgage lender. But her financial problems have not gone away: She is now trying to sell her unit and move in with her parents. "It is causing me a lot of stress," she says.

Her plight is not uncommon. The 30-day past-due rate for subprime loans rose from 5.4 percent to 7.1 percent during 2005, ending an eight-year drop, federal data shows. The foreclosure rate for subprime loans, meanwhile, was nine times higher than the prime-market rate last year.

RealtyTrac, which tracks foreclosures nationwide, reports that the number of properties entering some stage of foreclosure last month rose 68 percent from a year earlier.

Housing advocates say that the subprime market unfairly targets minority and low-income neighborhoods. A Federal Reserve study in September showed that blacks and Hispanics are far more likely to receive high-cost home loans than whites, even when adjusting for factors such as income.

"There was the charge for years that minorities were underserved," says Karl Case, an economics professor who specializes in housing at Wellesley College in Massachusetts. "Now the attitude is reversed. Instead of discrimination, [lenders] are taking people who are not sophisticated, talking them into low-down-payment, high-ratio, interest-only, and stated-income mortgages, and we call it predatory lending."

Experts say such lending flourishes in the subprime market, which gives loans to those with impaired credit at higher interest rates - sometimes prohibitively high.

The Federal Reserve Bank of Boston made headlines in 1992 with a report detailing mortgage discrimination of minorities in the Boston area. Bankers and some scholars criticized the results, but the study opened eyes: Despite more than a decade-long effort aimed at fair lending, black and Hispanic applicants, it found, were about 60 percent more likely than whites to have their loan applications turned down.

Role of fair-lending laws