Racial Disparity For Subprime Loans
(Mortgage lending is a competitive business.)
In order to obtain a traditional mortgage, one has to have adequate credit (at least) and good spending habits.
If you have less than ideal credit, with a bad history of default payments or even bankruptcy, you will most likely have to apply for a broker loan mortgages$. The terms and rates of these loans are usually not as good as with traditional loans, but they allow you the opportunity to finance a house, where as 20 years ago this would have been difficult.
The September 6, 2006 article, "Study Cites Disparities in Refinancing" posted on latimes.interest.com by Matthew Perrone, explains how one study discovered that subprime lending targets particular racial groups.
A study released by the Consumer Federation of America found that Black and Hispanic homeowners were much more likely to receive refinancing loans for lower credit ratings than Caucasian borrowers. The majority of these originated loans were subprime.
"In a survey of nearly 5 million refinanced mortgages made by 30 lenders nationwide, the consumer advocacy group found that about half of black mortgage seekers and one third of Hispanics got subprime loans with higher interest rates, compared to less than a quarter of white borrowers."
Subprime loans have higher rates due to the fact that borrowers with lower credit ratings are a higher risk for payment default. Interest rates on adjustable rate subprime loans are even higher, making it difficult for many people who already have credit problems, meet their monthly payments.
"The 300-city study also looked at regional differences in lending practices. More than 36 percent of broker loan mortgage was made at subprime rates in the Southwest and Great Plains states versus more than 18 percent in the Pacific and Northwest states. The group studied mortgages reported by 30 lenders, including market leaders Countrywide Financial Corp., National City Corp. and New Century Financial Corp."
But comparing loan mortgages from different regions of the country will produce unrealistic results. According to James Ballentine, director of housing and community development for the American Bankers Association, you should not be surprised if you find higher rates of subprime loans in remote areas because there tends to be less competing lenders in such areas to help drive rates lower.
"'It's important, when you look at a particular market, to compare it to similar areas and not drastically different ones,' Ballentine said. 'Comparing Jackson, Mississippi, to Los Angeles doesn't tell you much because it's not even comparing apples and oranges; it's more like apples and grapefruits.'"
Regardless of region or race, subprime lending appears to be affecting the sales business of major mortgage originators.
"Shares of Countrywide fell 40 cents in midday trading Wednesday to $34.22 as National City shares rose 41 cents to $35.40 on the New York Stock Exchange. Shares of New Century Financial Corp. fell 64 cents to $37.75 as Washington Mutual fell 34 cents to $42.38, both on the NYSE."
Whether lenders are actually targeting specific races for higher rate loans, or if their income and credit history constitutes subprime lending, is unknown. But subprime loans are not all bad. They can be a blessing for those with bad credit.