A 'smoking gun' on race, subprime loans

New evidence shows that blacks and Latinos in Boston were more likely to get a high-cost, subprime mortgage when purchasing a home than were white borrowers at the same financial institutions.

Fifty-five percent of black and Latino borrowers in metropolitan Boston who obtained loans for single-family homes from seven US lending institutions had subprime loans, compared with 13 percent of white borrowers, according to a study prepared for the advocacy group Massachusetts Affordable Housing Alliance. The study, by a University of Massachusetts at Boston economist, analyzed 2005 mortgage data submitted by lenders to regulators. Similar patterns emerged in separate analyses in Charlotte, N.C., Chicago, Los Angeles, New York City, and Rochester, N.Y.

The Federal Reserve Bank of Boston recently said borrowers falling behind on high-cost subprime loans was a major factor behind the record 15,000 foreclosure notices filed in Massachusetts Land Court in 2006.

The study "is the first smoking gun on the subprime market in the metropolitan area that captures some of the dynamics around race, class, and neighborhood that many of us have been worried about for a long time," said Tom Shapiro, a Brandeis University sociology professor who studies homeownership and wealth issues in the context of race.

Real estate agents, economists, and housing researchers said it is well known that subprime loans are prevalent in minority communities in Boston and surrounding communities. What is much less clear is why.

Some said that because blacks and Latinos have lower incomes, on average, and fewer assets such as savings, investments, and real estate, they often do not have the down payments white borrowers bring to the table . Subprime loans charge higher interest rates to compensate the lender for the risks associated with customers who have low credit scores or large credit card or other debts. Subprime lenders pioneered what is known as "100 percent" mortgages, which finance the entire purchase price of the home.

"It's part institutional. It is also part geographic and about who's operating where. But the race part is also still there," Shapiro said.

Doug Duncan, the chief economist for the Mortgage Bankers Association, said "it is a matter of public record" that a higher percentage of minorities have subprime mortgages than do whites. But when lenders deny loans to any customer, "almost exclusively the reason for denial is credit quality," which is based on credit card levels, incomes, employment history, and other factors, he said.

The new study examined seven major lenders that make so-called prime mortgages to borrowers with high credit scores but also make subprime loans, often through a separate subsidiary. At the nation's third-biggest US lender, Countrywide Financial Corp., 28.8 percent of loans made to blacks and 14.4 percent to Latinos in Boston were subprime compared with 9.4 percent of loans made to whites. At Wells Fargo amp; Co., 20 percent of black borrowers and 8.2 percent of Latinos had subprime loans, compared with 2.2 percent of whites. At Washington Mutual Inc., it was 75.8 percent of blacks, 80 percent of Latinos, and 17.1 percent of whites.

Wells Fargo criticized the study in a statement, because it excluded its federally backed loans to low- and moderate-income borrowers. The report also "fails to point out" 75 percent of all loans it makes to blacks in Boston and 85 percent to Latinos were below what the federal government defines as a high-cost loan, Wells Fargo said.

While Washington Mutual spokesman Tim McGarry said the issue of race and lending is "important," the company automatically screens all applicants to subprime loans to determine whether they qualify for a regular loan.

One weakness of the report, lenders and advocates said, is that it excluded independent mortgage companies, such as New Century Financial Corp. and Fremont General Corp., which specialize in subprime loans and are major lenders in Massachusetts.

The Federal Reserve has also said in the past the data analyzed do "not provide a final basis on which to draw a conclusion" about whether lending is fair.

Shares of several subprime lenders have fallen sharply in the past several months as they have reported a rising number of loan defaults among their borrowers, sparking concerns that the troubles of the subprime market could ripple through the larger economy.

Real estate agents who serve immigrant Latino communities said that while many first-time home buyers scraped together big down payments, some were poor candidates for homeownership. "About a year ago, everyone that was coming through -- every single client who walked through my door -- had a subprime loan approval," said Michelle Fermin, a real estate agent in Lawrence, which has a large Latino population. "They're making $11 an hour, and they're qualified for $500,000. Common sense tells you these people aren't going to be able to make the payments."

Lack of a down payment is the biggest issue for the black community. Black households, according to Shapiro, have accumulated one-tenth the wealth available to white households, because blacks are more likely the first generation to attend college or get a professional job. Blacks and Latinos also earn about half as much as whites in Massachusetts, the Census Bureau said.

Boston real estate agent Randy Wilburn, a black minister who gives home buyer seminars at his Jubilee Christian Church, said many blacks are not educated about financial matters, because they don't have family members who own homes to counsel them. "The crux of it is always going to be education," he said.

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