State report says race, income influence mortgage rates

Ingrid Stegemoeller, Herald staff writerMarch 23, 2009 

Lower-income homebuyers in Benton and Franklin counties were twice as likely as higher-income borrowers to buy mortgages with high annual percentage rates in 2006, according to a new report by the Washington State Budget & Policy Center.

Lower-income borrowers make less than $50,000 and higher-income borrowers bring in more than $150,000, according to the report.

And statewide, black and Hispanic homeowners also were more likely to get high-cost loans, the report said. A county breakdown of the race information was not available.

"Everyone sort of fell down on the job on this issue," said Jeff Chapman, research director for the center. "I think state, federal and local governments fell down on making sure people had access to education."

In Benton and Franklin counties in 2006, 24 percent of home mortgages for primary residences were high-cost loans, which matches the statewide rate, the report said.

But 40 percent of mortgages in lower-income neighborhoods in the two counties were high-cost loans, compared with 28 percent in moderate-income neighborhoods and 14 percent in higher-income neighborhoods, according to the report. Raw numbers were not listed in the report.

"Data suggests companies were going after low income borrowers," Chapman said.

Dana Mundy of AmeriChoice Home Loans in Richland agreed that predatory lending practices were part of the problem.

"Most people don't want to read the document word for word," she said. "If a loan officer is so inclined, they can briefly summarize the paperwork. They trust that the summary (given) is correct."

Higher-income borrowers likely are more experienced in managing their credit and finances, Mundy said, which also could contribute to the higher rate of pricey loans for lower-income borrowers.

And in the Hispanic community, many people pay cash and may not have credit, she added.

Subprime loans aren't inherently bad, said Dave Huey, state assistant attorney general in consumer protection, but he noted the market for them was not bottomless, as was the apparent assumption of some companies.

"It's a fairly limited market because within that group are people who have blemished credit for a very good reason," he said. "Making a very expensive loan to them is not necessarily a good idea."

He also laid much of the responsibility for consumers' lack of education on loan officers.

"I think you have to appreciate the disparity of resources," Huey said. "Who was in a better position to know all about the potential features of the loan, the lender who is doing hundreds a day, and had thousands of people on staff to develop these products and sell them, or this person who was just hoping to buy a home?"

During the peak of the mortgage lending bubble, "pretty much anybody" that wanted to buy a house could, said Mark Manthei, broker for Arboretum Mortgage in Kennewick.

"It was the perfect storm," he said, of lack of regulation and education. "The system as a whole created these mortgages to allow everyone who wanted to buy a house to buy a house."

The disproportionate number of Hispanics and blacks in high-cost loans might appear suspect, but it's a hard situation to unravel, Huey said.

"You certainly do see a lot of minority folks victimized, but whether that's a systemic problem as a result of discrimination or a result of other factors" is hard to prove, he said.

More than 40 percent of mortgages made statewide to blacks and Hispanics were high-cost, compared with about 22 percent for non-Hispanic whites and Asians, according to the report.

Chapman said those results were unexpected.

"The idea that Hispanics and African Americans were so much more likely (to have high-cost loans), even at twice the median income, was quite a surprise," he said.

Though some legislative efforts have been made to ease the situation -- such as creating more access to financial education and better disclosure requirements so borrowers understand their loans -- Chapman said Washington state needs to get more aggressive.

A program created last June called Smart Homeownership Choices was designed to help low- and moderate-income homeowners who are delinquent on mortgage payments and facing foreclosure.

But no loans have been made through the program, Chapman said.

In North Carolina, a new program requires lenders and loan servicers to notify borrowers 45 days before foreclosure starts, as well as alerting state agencies in order to help the borrower figure out the best course of action, according to the report.

"We really need to be able to give state agencies the ability to work with borrowers and with lenders," Chapman said, particularly because interest rates on 23 percent of Washington's subprime adjustable-rate loans are expected to reset in the next year. That's a higher amount than in most other states, the report said.

Nationally, more than three-quarters of subprime loans with adjustable rates have reset, compared with 67 percent statewide, according to the report.

Manthei said the combination of national programs now available and housing prices that have held steady in the Tri-Cities will make refinancing out of high-cost loans easier for many.

And while the state Department of Financial Institutions and federal banking agencies have issued guidelines on limiting some of the "worst practices," Huey said, the market right now is doing its own regulating.

"The major development that prevents this from happening again is that virtually nobody is making subprime loans anymore," Huey said.

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