Lacking the skills and information needed to shop for the best mortgage products available in the marketplace, many low-income and low-wealth home buyers and mortgage borrowers are saddled with high-cost mortgage debt, according to Harvard University’s Joint Center for Housing Studies.

In a briefing held at the offices of the Board of Governors of the Federal Reserve today, the Joint Center for Housing Studies released its comprehensive assessment of the challenges faced by community based organizations (CBOs) – and their public, private and philanthropic partners – in expanding access to capital in low-income and low-wealth communities. The 18-month study entitled, “Credit, Capital, and Communities: The Implications of the Changing Mortgage Banking Industry for Community Based Organizations,” was funded by the Ford Foundation.

“New computer and telecommunications technologies have spawned a revolution in mortgage finance that has enabled millions of low-income and low-wealth families to obtain home mortgages on favorable terms,” said Nicolas P. Retsinas, director of the Joint Center. “Yet at the same time, the mortgage broker-led ‘push marketing’ of low-down-payment, high-cost mortgages has left some unsuspecting borrowers with mortgage debt they cannot afford and may not even need.”

The study revealed that mortgage brokers are most prevalent in the subprime market. Brokers accounted for almost 45 percent of subprime home mortgage originations in 2002 – 16 percentage points higher than the share of prime mortgage originations made by brokers.

While legitimate risk factors contribute to the relatively low shares of prime conventional loans going to African-American and Hispanic borrowers and neighborhoods, race continues to be an important factor in determining the allocation of prime mortgage credit. Even in areas with rapid home-price appreciation over the decade of the ’90s, the share of higher-income African Americans with conventional prime loans trailed that of white borrowers by 20 percentage points, the study found.

Community loan programs face stiff competition from aggressively marketed, higher-cost subprime mortgage products with fast turnaround times.

The growth of higher-risk subprime lending has produced a substantial increase in foreclosures in low-income and/or minority communities, according to the study.

The report documents the changes in industry structure, the rise in higher-cost subprime lending, and the existence of a dual market structure. In particular, the report outlines a “home mortgage pricing guide” and a “buyer’s broker” network that would help low-income and low-wealth borrowers secure the best mortgage products available for their income and credit history.

“Today,” notes study co-author William Apgar, “the lack of effective regulatory oversight, along with the lack of readily available mortgage pricing data results in a mortgage delivery system in which some borrowers pay more for mortgage credit and/or receive less favorable treatment than other similarly situated and equally credit worthy borrowers.”

“CBOs must rethink their efforts to help borrowers evaluate and resist the misleading pitches of push marketers, and redouble their efforts to pressure government and industry officials to better address the problems that persist in today’s marketplace,” said study co-author Allegra Calder.

Harvard’s Joint Center for Housing Studies is a center for information and research on housing in the United States.


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