When it comes to home loans, minority neighborhoods used to be the forgotten land.
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.
That claim renewed attention to fair lending laws and the Community Reinvestment Act (CRA) of 1977. The federal government backed up its campaign for fairness by levying tens of millions of dollars in fines against discriminatory lenders.
Under pressure to reach out to underserved neighborhoods, many banks discovered that lending to low- and moderate-income residents could be profitable. Subprime lending was made possible in the 1980s when the federal government lifted mortgage interest ceilings, but it wasn't until the 1990s that it took off. By the late 1990s, "there was huge pent-up demand," says Wright Andrews, a lobbyist for the subprime industry in Washington.
Subprime mortgage loans increased nearly tenfold between 1994 and 2003, according to Edward Gramlich, who wrote about subprime lending as a governor on the Federal Reserve Board until August 2005.
Today, the subprime market accounts for 19 percent of all home-loan origination. But, some warn, it has drawn its share of unscrupulous lenders, who target the very people who would have been denied for home loans a decade earlier.
"It is the nasty side effect of opening up credit markets, which did benefit millions of people," says Mr. Gramlich.
That side effect has played out in several high-profile settlements recently. In January, Ameriquest Mortgage Co., the country's largest subprime lender, agreed to a $325 million settlement to some 725,000 borrowers in 49 states for alleged abuses such as concealing high interest rates. In 2002, Household International Inc. agreed to the largest settlement to date, nearly $500 million, after being accused of practices such as charging higher rates than disclosed.
Some of these alleged deceptive practices have been a "nagging concern" for Alicia Munnell, who wrote the 1992 Boston Federal Reserve Bank report and who now teaches finance at Boston College. "I've been worried that in a good faith effort [by banks] to reach minorities that lending standards are too lax."
Some say that a flawed market is better than no market at all. "We have done what needed to be done and made credit available to millions of folks who could otherwise not get it," says Mr. Andrews.
Others say the industry needs more regulation. "I would urge a hard look at the lending records of non-bank lenders," says Eugene Ludwig, who was the federal comptroller of the currency in the 1990s.
Industry advocates, including Andrews, are pushing for a federal law to regulate the subprime market, but some consumer advocates say that would just weaken the stronger state laws.
More than two dozen states have put protections in place against predatory lending, says Debbie Goldstein, executive vice president at the Center for Responsible Lending in North Carolina.
More minority homeowners, meanwhile, are getting squeezed, says Norma Moseley, a 20-year veteran of fair housing advocacy at the Ecumenical Social Action Committee. She says the problem will get worse if home values drop..
Some of her clients, she says, made bad choices; many others were swindled. "These lenders promote the American dream and lure people into home ownership," says Ms. Moseley. "A home may be something that everyone wants, but it's not a thing that everyone can afford."
Watch out for loans ...
• with higher monthly payments than promised.
• with high interest rates and adjustable rates that climb.
• with large sums of money due at the end of the term.
• that have a lot of fees, including "yield spread" and points.
• that require little or no documentation.
• that are offered regardless of credit history, income, and/or financial circumstances.
• that are aggressively marketed on radio, television, fax, e-mail, and Internet.
Ecumenical Social Action Committee