Fed report shows loan inequities

African-Americans seen as hardest hit by mortgage crisis

Adding empirical evidence to what many community and housing activists already know anecdotally, a new report by the Federal Reserve Bank of Boston documents how minorities in Massachusetts were disproportionately affected by the mortgage crisis.

African-Americans, for example, overwhelmingly used subprime mortgages to buy homes in 2004 and 2005. And in 2007 almost half of African-Americans who moved out of their homes did so through foreclosure rather than a sale, the report said. Many of those lost homes were small multifamily properties. As a group, these houses make up 10 percent of the state's housing stock, but they made up nearly half of all foreclosed housing units in Massachusetts in 2007, according to the study. About two-thirds of foreclosed multifamily properties were purchased by minorities between 2003 and 2006.

"The loss of wealth in the African-American community is staggering," said Joe Kriesberg, president of the Massachusetts Association of Community Development Corporations. "The degree to which this has hit people of color and African-Americans is pretty stunning, and it is hard to chalk it up to just differences in income. It has to go back to where these lenders were marketing and who they were targeting."

Paul S. Willen and Kristopher S. Gerardi, coauthors of the paper "Subprime Mortgages, Foreclosures and Urban Neighborhoods," said the results prove that subprime mortgages in particular did not so much increase homeownership among minorities as it simply generated turnover among minority sellers and buyers.

"You have a lot of African-Americans buying homes from other African-Americans and then losing the homes to foreclosures," Willen said. The process, he said, "replaced a cohort of relatively stable homeowners with a cohort of unstable owners."

Among borrowers of subprime mortgages in 2005, 15 percent of African-Americans and 10 percent of Hispanics had lost their homes to foreclosure by the end of 2007, compared with 6.5 percent of white subprime borrowers.

Boston attorney Gary Klein, who has accused several mortgage companies in lawsuits of predatory lending practices, said the Fed study validates what he hears from clients.

"It is clear to me from the volume of calls we get from the minority community that there is an unprecedented housing crisis there," Klein said. "Minority borrowers didn't have access to bank loans through brick and mortar branches. So often they had little choice but to go through loan brokers who were incentivized to set people up with subprime loans."

Willen and Gerardi said their study may be helpful to policy makers looking to solve the foreclosure crisis because it would allow them to tailor assistance to people who really need it.

For example, Congress is considering a proposal that would allow bankruptcy judges to reduce the principal portion of a mortgage, to allow troubled homeowners to keep their properties. Lenders are concerned the unlimited scale of such power would end up benefiting some homeowners who could afford to pay their mortgages without help.

So Willen and Gerardi suggest concentrating on a small subset of borrowers: owners of multifamily properties with subprime mortgages, some 66 percent whom are likely to be foreclosed upon, compared with 33 percent of those owning single-family homes with similar loans.

"They are likely not going to pay off the mortgage anyway," said Willen, a senior economist and policy adviser at the Boston Fed. "It has to be the case that you are pretty sure they are going to lose their homes."

Even reducing the loan principal may not be enough to prevent foreclosure on some borrowers drowning in debt. So the authors suggest lenders try to find buyers for these properties, such as community organizations.

Mossik Hacobian, president of the Urban Edge community development corporation in Roxbury, said wherever possible he would want to help homeowners stay in their homes, which should in time increase in value.

"Where we can help them stay in the house and remain a homeowner, we should do that," Hacobian said.

"This is not about increasing homeownership rates. It's about equitable distribution of assets across all racial, economic, and ethnic groups."

Jenifer B. McKim can be reached at jmckim@globe.com.