Study: Wealthier minorities get high-cost loans

A new study of high-cost, or sub prime, mortgages in Massachusetts unearthed a surprising fact: The loans are most prevalent among minorities with substantial incomes.

Around 70 percent of African-American and Latino borrowers in Greater Boston with incomes between $92,000 and $152,000 took out mortgages with high interest rates in 2005, according to the study released yesterday by Jim Campen, an economics professor at University of Massachusetts Boston and a long time analyst of mortgage lending to minorities.

"It's an astounding number," said Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which finances low-income home buyers. "I don't know anybody who can read that number and not be shocked."

Indeed, Campen determined that nearly half of all African-American and Latino borrowers in 2005 with incomes above $152,000 used a subprime loan to buy a home. Moreover, in Boston high-income minorities were six to seven times more likely to have an expensive mortgage than high-income whites, the study found.

High-cost mortgages typically have interest rates at least 3 percentage points above conventional mortgages; fixed-rate 30-year mortgage rates are currently around 6 percent. More than 20 percent of all mortgages made in Massachusetts in 2005 were such loans.

The higher rates cost those borrowers an additional $4,200 to $10,000 -- or more -- a year than if they had a traditional, 30-year fixed mortgage, Campen said.

Generally sub prime and high-cost mortgages are for borrowers with poor credit or lower incomes to compensate for the risk of their not making loan payments. Lenders have long been accused of targeting low-income minorities for such loans.

But Campen's analysis reveals another counter intuitive finding: The high-cost loans were less prevalent among lower-income minorities. For example, while 60 percent of middle-income African-American and Latino borrowers in Greater Boston used subprime loans, just 13.6 percent of low-income African-Americans and 29 percent of Latinos did.

"I've struggled to come up with some sort of reason why that would be the case, and I haven't come up with a good one," said Charles Nilsen, a mortgage executive and spokesman for the Massachusetts Mortgage Bankers Association.

Nilsen noted federal data also show borrowers are typically rejected for loans because of checkered credit histories, which "cuts across all incomes."

Those denials may "drive them to subprime lenders because of low credit scores and high debt-to-income ratios," said Nilsen, who is New England manager for Chase Home Finance.

Meanwhile, higher-income white borrowers were also more likely to use these expensive mortgages than lower-income whites, though they are not as widespread: 15.8 percent of high-income white borrowers took out a high-cost loan in 2005 in the Boston area, compared with 12.8 percent of moderate-income whites.

"This isn't a problem which is primarily for lower-income people," said Campen.

Many subprime loans often offer a low introductory "teaser" rate, of up to two years for example, which allow borrowers to more easily afford the initial monthly payments of a home in Massachusetts, where housing costs have soared. After the teaser rate expires, these loans usually adjust rates upward.

As the use of such loans has increased, so too have the number of borrowers in Massachusetts defaulting on mortgage payments.

Campen based his analysis on data banks and mortgage companies are required to submit to federal regulators. The study included more than 59,000 high-cost loans in 2005, a little more than half of which were used to purchase homes, the remainder to refinance debts. The study was funded by the Massachusetts Community & Banking Council, an organization of community leaders, activists, and local banks.

Federal data show that the state's biggest subprime lenders in 2005 were, in order, Option One Mortgage Corp. of Irvine, Calif., a subsidiary of H&R Block; Fremont Investment & Loan of Brea, Calif.; and New Century Financial Corp. also of Irvine, the study said.

"We lend in a non discriminatory way and price a mortgage based on the economic risk involved in making the loan, and not on racial or ethnic considerations," Option One said in a statement yesterday.

New Century spokeswoman Laura Oberhelman said "drawing conclusions based on" federal loan data "can be dangerous" because it does not include credit scores and other salient financial characteristics of borrowers, which determine the interest rate they are charged.

New Century's preliminary loan approvals are done entirely with computers and consider "only relevant financial factors," she added.

Kimberly Blanton can be reached at blanton@globe.com.