Friday, March 16, 2007

Home loans are more expensive for minorities

Home loans are more expensive for minorities
By Rebecca Knight in Boston
Copyright The Financial Times Limited 2007
Published: March 16 2007 02:00 | Last updated: March 16 2007 02:00

Mortgage lenders sell a -disproportionate share of high-cost, or subprime, home loans to blacks and other minorities in big cities across the US, according to two new reports.

A study conducted by the Woodcock Institute, aChicago-based organisation that promotes community development, and four other groups found that home loans are more expensive for minorities in Boston, Charlotte, Chicago, Los Angeles, New York City and Rochester, New York.

In these six cities, blacks were 3.8 times more likely to receive a higher-cost home loan than were white -borrowers, while Latinos were 3.6 times more likely than white borrowers to receive a higher-cost loan. Subprime loans - mortgages tailored to homebuyers with poor credit ratings - typically have interest rates at least 3 percentage points above regular mortgages.

Subprime loans have attracted heightened scrutiny in recent weeks as defaults on US mortgages have increased and banks that specialise in these products have imploded.

"It's the ugly geographic pattern that we've seen before," said Paul Collier, the director of litigation for Harvard Law School's clinical programme as well as a trial lawyer mostly representing lower-income clients. "Subprime lending is narrowly focused on neighbourhoods of colour."

The study focused on lending by Citigroup, Countrywide, GMAC, HSBC, JPMorgan Chase, Washington Mutual and Wells Fargo. These lenders were analysed because they are among the biggest financial institutions in the US and all originated a substantial volume of both subprime loans and lower-cost prime loans, according to the study. The banks that responded to requests for comment dismissed the study's findings. Each said it used automated tools to evaluate whether loans met investor guidelines. Those tools did not consider race, gender or ethnicity in determining the risk profile of a customer and, therefore, the interest rates available on any loan, according to -several banks.

A separate study on the subject showed that the trend is particularly pronounced in Boston. Jim Campen, an economics professor at University of Massachusetts Boston, found that high-income minorities were six to seven times more likely to have an expensive mortgage than high-income whites. Around 70 per cent of black and Latino borrowers in Greater Boston with incomes between $92,000 (£48,000, €70,000) and $152,000 took out mortgages with high interest rates in 2005, according to the study.

"This is just one manifestation of the great inequality of American society," said Prof Campen, a long-time analyst of mortgage lending to minorities.

"This is news because it's not just black people losing their homes; it's white investors on Wall Street losing their money."

He said that because blacks were historically more "wary of the banking system", they were especially vulnerable to the "aggressive marketing tactics" of subprime lenders. "They come knocking on your door, and bombard you with letters and phone calls," said Prof Campen.

There was also some evidence that blacks and Latinos did not know their credit rating, he said, so the lenders, which are often divisions of mainstream banks, made getting a loan much more convenient.

"Their motto is: 'When the banks say no, we'll say yes,' '' he said.

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