It’s no secret that minorities are more likely than whites to take out high-cost mortgage loans, but a new study finds racial disparities are even more pronounced among middle- and upper-income borrowers.
An analysis of loan data by the National Community Reinvestment Coalition suggests that minorities are more likely to get stuck with high-cost loans because they are targeted by lenders, not because they are less creditworthy, the group said.
Although it’s logical to assume that racial disparities in the prevalence of high-cost loans would decrease at higher income levels — because wealthier borrowers presumably have better credit scores — the NCRC study found the opposite was true.
In their analysis of loan data collected by the Federal Reserve in 2005, NCRC staff found wealthier borrowers of all races were less likely to take out higher-cost loans than low- and moderate income borrowers of the same race. But the study found the reduction in the use of high-cost loans by relatively wealthy whites was more pronounced than for minorities in the same income range — an indication that race influences lenders in their decisions on what loans to push.
That wide racial disparities remain even after accounting for income levels means lenders could be steering minorities into high-cost loans, or that lenders specializing in high-cost loans are working harder to make loans to minorities than market-rate lenders, the study concluded.
“These startling and persistent disparities suggest that the burden lies on skeptics to disprove the existence of discrimination and other barriers to equal access to market-rate loans,” NCRC said.
Warning of a “looming foreclosure crisis,” the study offered a laundry list of recommendations, including funding for foreclosure prevention programs, tougher anti-predatory-lending laws, stepped up enforcement of existing fair lending laws, and strengthening of the Community Reinvestment Act to encourage lending in minority neighborhoods.
NCRC is a Washington, D.C.-based nonprofit that seeks to increase access to credit, capital and banking services in underserved areas.
The Mortgage Bankers Association criticized the NCRC’s analysis as overly simplistic, noting that income is only one measure of creditworthiness, and that numerous other factors used by lenders to make underwriting decisions — such as debt-to-income ratios, past payment history and down-payment size — were not analyzed.
NCRC’s study “ignores other important credit variables in order to make a broad generalization and seeks to identify an overly simplistic answer to a much more complex issue,” MBA Vice President of Research and Economics Jay Brinkmann said in a newsletter article distributed to the group’s members.
The Federal Reserve noted similar issues last year in its own analysis of the same data, which is collected annually under the authority of the Home Mortgage Disclosure Act (HMDA). While minorities were more likely than whites to take out higher-priced home loans, it was unclear whether they were targeted by lenders, the Federal Reserve said, because HMDA data does not include loan-level information on credit scores, debt-to-income ratios and loan-to-value ratio.
Another recent study of HMDA data — by academics at Harvard University’s Joint Center for Housing Studies — argued that the structure of the mortgage lending industry and a lack of uniform regulation are factors that allow unfair pricing of loans to minorities.
It its analysis of HMDA data, NCRC examined the disparity between high-cost loans taken out by African Americans, Hispanics, Asians and whites by metropolitan statistical area.
High-cost loans are defined as first-lien loans with an annual percentage rate exceeding 3 percent of the rate for Treasury securities of comparable maturity. The threshold for junior, or subordinate, loans is 5 percent.
The study found disparities between whites and blacks were most pronounced in the South and Midwest. Blacks were 3.88 times more likely to take out high-cost loans than whites in Charlottesville, Va., and Durham, N.C.; 3.56 times more likely in Greenville, N.C.; and 3.44 times more likely in Raleigh, N.C., and Cambridge, Mass. In Charlottesville, 44 percent of all home loans to African Americans were higher-cost, compared with 11 percent of those to whites.
For Hispanics, three of the five worst metropolitan areas in terms of the disparity of high-cost loans were in Massachusetts — Cambridge (where the disparity ratio was 3.54), Essex County (3.02) and Barnstable Town (2.94). Boulder, Colo. (3.39), and San Francisco, Calif. (3.23), also made NCRC’s top five list of MSAs with the most disparity for Hispanic borrowers.
NCRC said Asian borrowers experienced the greatest disparity in the prevalence of high-cost loans compared to whites in Napa, Calif. (1.69), Rochester, Minn. (1.61), Anchorage, Alaska (1.59), Minneapolis-St. Paul, Minn. (1.5) and San Francisco (1.46).
The study found greater racial disparities in high-cost loans made to middle- to upper-income minorities than to low- to moderate-income borrowers.
In Durham, N.C., whites in the higher-income scale took out high-cost loans at about half the rate of poorer whites — 8.6 percent of the time, compared with 16.4 percent of the time. The drop among African Americans was much less pronounced — 38.6 percent of wealthier blacks ended up with high-cost loans, versus 48 percent of poorer ones.
Poorer African Americans were three times as likely (or more) to take out high-cost loans than whites in the same income scale in only 1 percent of the metropolitan statistical areas. But when the same comparison was made between middle- to upper-income blacks and whites, it held true in 12.4 percent of metropolitan statistical areas.
Wealthier African Americans were twice as likely (or more) than wealthier whites to receive high-cost loans in 167 MSAs, the report noted, compared with 70 MSAs for low- to moderate-income borrowers.