A Federal Reserve Board analysis of millions of home loans suggests minorities were more likely to pay high interest rates when they took out a loan during the housing boom, and then had a harder time getting a loan when the boom turned to bust.

The Fed study reveals that, as a group, nearly 200 independent mortgage companies that failed last year were much more likely to make higher-priced loans to minorities, and that minority communities have been hit hardest by cutbacks in lending during the credit crunch.

The National Community Reinvestment Coalition said the study demonstrated lax regulations contributed to the boom-bust cycle that sent housing markets and then the economy into a tailspin. NCRC noted that all but two of the 169 lenders that failed in 2007 were independent mortgage companies that are more loosely regulated than depository institutions.

"It is clear from the Federal Reserve report that stronger regulatory oversight could have prevented much of the damage to the economy and to the working families who are facing foreclosure or who have already lost their homes," NCRC President John Taylor said in a press release.

In its analysis of the Fed’s report, NCRC noted home-purchase loans to Hispanics fell 49 percent from 2006 and 2007, 35 percent for blacks and 22 percent for whites.

The Federal Reserve study — summarized in a draft paper released Thursday — was based on 10.4 million loans made by 8,610 lenders in 2007, plus another 4.8 million loans the lenders purchased from other institutions.

The law that authorizes the Fed to collect such data from lenders, the Home Mortgage Disclosure Act, defines first-lien loans as higher-priced if the annual percentage rate exceeds 3 percent of the rate for Treasury securities of comparable maturity. The threshold for second or junior loans is 5 percent.

While HMDA does not define "subprime" loans, borrowers with good credit would generally not expect to pay such high interest rates. Most loans defined as higher-priced were within 1 or 2 percent of the threshold.

The study found that last year, 3 percent of all reporting institutions that specialized in such loans accounted for nearly 40 percent of loans classified as "higher cost" under HMDA. The 169 institutions that failed last year did not file HMDA reports for 2007 but accounted for nearly 15 percent of higher-priced conventional first-lien loans in 2006, the study found.

In 2006, 74 percent of black borrowers and 63 percent of Hispanic borrowers who obtained loans from the failed institutions were placed in higher-cost loans. That compares with the 54.7 percent of blacks who got higher-cost loans from all lenders, 46.1 percent of Hispanics, 17.2 percent of whites, and 16.6 percent of Asians.

Some of the differences in the incidence of higher-cost loans among minority groups can be explained by factors such as property location, income relied on in underwriting, and loan amount, Fed analysts said. After adjusting for borrower- and lender-related factors, the incidence of higher-cost loans in 2006 was 30.3 percent for blacks, 24 percent for Hispanics, and was unchanged for Asians and whites.

The incidence of higher-priced lending in 2007 fell sharply from 2006, regardless of race, ethnicity or sex. Among all loans, 18.3 percent were higher-priced in 2007, down from 28.7 percent in 2006.

In the second half of 2007, 29.5 percent of blacks obtaining conventional home-purchase loans got higher-priced loans, compared with 24.3 percent of Hispanics, 9.2 percent of whites and 5.6 percent of Asians. After adjusting for borrower- and lender-related factors, the incidence of higher-cost loans in the second half of 2007 was 20.3 percent for blacks, 15.4 percent for Hispanics, 9.2 percent for whites, and 7.8 percent for Asians.

Changes in lender and investor circumstances and risk tolerances, borrower conditions and preferences, and nonreporting by the failed lenders explains most of the reported decline in the incidence of higher-priced lending, the study said. A similar study by Fed analysts of 2006 loans revealed a correlation between higher-priced loans and the rate of serious delinquencies (see story).

Some of the change may also be due to regulatory guidance issued by federal regulators, which placed new requirements on subprime and nontraditional "exotic" loans, the latest Fed study concluded.

Reporting institutions in 2007 included 3,910 commercial banks, 929 savings-and-loans and savings banks, 2,019 credit unions and 1,752 mortgage companies. The total number of reporting institutions fell by 3 percent from the 8,886 reporting in 2006. The number of independent mortgage companies fell 15 percent to 1,124, and the number of mortgage companies affiliated with depository institutions declined by 7 percent to 628.

Higher-priced home-purchase loans to black borrowers in census tracts primarily served by lenders that went out of business in 2007 fell 70 percent between the first half of 2006 and the last half of 2007, compared with a 53 percent decline for whites.

However, the study found the number of lower-priced home-purchase loans to black borrowers in these census tracts increased by 7 percent, while the number extended to whites decreased 3 percent.

NCRC noted that the use of piggyback second loans in conjunction with high-cost, first-lien loans fell 87 percent from 2006 to 2007, and that independent mortgage companies extended between 55 percent and 63 percent of the high-cost piggyback loans between 2004 and 2006.

Piggyback loans, which have been associated with higher default rates, can also complicate the process of modifying the terms of troubled borrowers’ first loans.


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