Study Points Out Alarming Rise in Use of Subprime Mortgages by Minorities

Racial minorities in Hampton Roads have sharply increased their use of more costly subprime mortgages when buying a home, a consumer advocacy organization said in a study of lending in more than 100 metropolitan areas.

In addition, blacks and Latinos in the region and the nation are much more likely than whites to resort to subprime loans, even when adjusting for the applicants’ income, the Association of Community Organizations for Reform Now, or ACORN, said in its report.

ACORN conducted the study because “one of the issues that really affects our members is affordable housing,” said Allison M. Conyers, a spokeswoman in the organization’s Washington, D.C., office.

Subprime loans carry a higher interest rate to compensate a mortgage lender for the increased risk of lending to someone with tarnished credit. ACORN and other advocacy groups have contended that some lower-income borrowers and minority borrowers have been enticed by lenders to accept a subprime home loan when they would qualify for a less costly mortgage loan.

“Some predatory lenders make loans based solely on a homeowner’s equity, even when it is obvious that the homeowner will not be able to afford their payments,” ACORN said in its report. “Especially when there is significant equity in a home, the lender can turn a profit by reselling a house after foreclosure.”

The organization’s study of mortgage lending in 117 metropolitan areas is likely to add fuel to the debate over what steps should be taken to curb promotions of loans with high rates and onerous terms that prospective borrowers probably cannot meet. The study cited instances of homeowners being charged interest rates that exceeded the interest rate for a conventional ‘A’ home loan by 2 to 6.8 percentage points.

ACORN’s study calls for more stringent legislation to protect borrowers from abusive practices, additional federal funding for the Department of Housing and Urban Development’s counseling program and greater regulatory scrutiny of deceptive lending practices.

Lenders have contended that the availability of subprime loans has provided credit to borrowers who otherwise would be excluded from the mortgage market. This lending swelled from $34 billion in 1994 to an estimated $173 billion in 2001, according to a study issued last year by the Mortgage Bankers Association. Subprime loans jumped from 5 percent of total mortgage originations in 1994 to more than 13 percent in 1999, the study said.

However, ACORN’s report on mortgage lending patterns didn’t account for differences in borrowers’ creditworthiness, which has triggered criticism from lenders.

“Creditworthiness is a tremendous issue, and there are a lot of people in Tidewater with bad credit, ” said Chip Simkins Jr., sales manager in the Virginia Beach office of CTX Mortgage. “If you were bankrupt yesterday, you’re not going to qualify” for a conventional mortgage.

Simkins acknowledged that subprime lending has attracted some unscrupulous lenders, but he attributed some borrowers’ problems to low credit scores and a failure to shop around for a loan.

“Predatory lending is illegal. It is not something we condone,” said Heather McElrath, a spokeswoman for the American Bankers Association. “Banks are trying to make credit available, and we want to reach out to under-served communities.”

In Hampton Roads, the percentage of black homebuyers who used a subprime loan for purchasing a home jumped to 33 percent in 2002 from 25 percent the previous year and less than 10 percent in 1997, the ACORN study said.

The report included a favorable development among minority homeowners in the region who refinanced existing mortgages. The percentage of blacks who relied on a subprime loan when refinancing a home loan in 2002 dropped to 22 percent from 36 percent the previous year and 39 percent in 1997.

Nationwide, more than 27 percent of black homeowners who refinanced in 2002 used a subprime home loan.

For its study, ACORN drew on the records that mortgage lenders must file with federal regulators under the Home Mortgage Disclosure Act. However, the study did not include mortgage loans made with guarantees by the Veterans Administration or the Federal Housing Administration. VA and FHA loans are routinely used by homebuyers with moderate incomes, including many in Hampton Roads.

Source Citation   (MLA 8th Edition) “STUDY POINTS OUT ALARMING RISE IN USE OF SUBPRIME MORTGAGES BY MINORITIES.” Virginian Pilot, 25 Mar. 2004, p. D1. Infotrac Newsstand, Accessed 24 Mar. 2019.