New Fed data shows national problem of borrowers hit with unexpected loan costs
CHICAGO, Sept. 17 /PRNewswire/ — Chicago and Los Angeles followed by Riverside County metro areas lead the nation in high-cost loans, which have become a troubling and persisting trend in communities around the country. These loans often affect people across race and community lines and have a disproportionate impact on African Americans and Latinos.
The Chicago-Naperville-Joliet metro area ranked highest in the country in total high-cost loans in 2006. Two California metro areas — Los Angeles-Long Beach-Glendale and Riverside-San Bernardino-Ontario — ranked second and third are followed in ranking order by Phoenix, Washington D.C., Atlanta, Houston, New York, Miami, and Tampa metro areas.
New data on high-cost loans was released Wednesday by the Federal Financial Institutions Examination Council, which promotes uniformity and consistency in the supervision of financial institutions. Chicago data for 2005 and 2006 has been analyzed by The Chicago Reporter, an award-winning bimonthly print and online newsmagazine that focuses on race and poverty issues and serves as a watchdog of government and other institutions.
“High-cost loans have become a national problem, and if you want to understand more about high-cost loans, the first place you should look is Chicago,” said Alden Loury, senior editor of The Chicago Reporter. “For three years running, Chicago has led the nation in high-cost loans.”
“High-cost” loans are identified in federal mortgage lending data as first-lien loans with interest rates at least three percentage points above the U.S. Treasury standard, which stood at 5.19 percent in mid-July for a 30-year mortgage. In the Chicago area, three out of every five loans to African Americans in 2006 were “high-cost” loans; two out of every five mortgages to Latinos were “high-cost” loans.
“The Chicago Reporter's detailed analysis of this data raises huge questions about the fairness of lending practices in the Chicago region. Over the coming months, my office will continue to take a hard look at this data and investigate whether the number of high cost loans, which generally equate to subprime loans, is attributable to questionable lending practices and whether these practices violate any Illinois fair lending or civil rights laws,” said Illinois Attorney General Lisa Madigan.
The Reporter story reveals that the crisis of high-cost loans is having an enormous — and unnecessary — impact. According to Fannie Mae, the nation's largest source of financing for home mortgages, about half of the people who get high-cost loans could have qualified for prime-rate loans.
“The High Price of Home Ownership,” a story in the current online edition of The Chicago Reporter, details the scope of a problem that is hitting residents of the Chicago area — and hitting them hard. For this story, The Reporter analyzed 2006 mortgage lending totals for 50 of the nation's largest housing markets. This research was based on federal data released Wednesday for first-lien, conventional home purchase, home improvement and refinance loans on owner-occupied, one-to-four family properties. In addition, The Reporter analyzed more than 342,000 of these loans granted in the Chicago metro area during 2005. This research was based on a comprehensive set of 2005 federal data supplied by Investigative Reporters and Editors, Inc., a grassroots nonprofit organization dedicated to improving the quality of investigative reporting.
In 2005, the federal government first required lenders to report loan pricing information. And in each year since, the data has shown that lenders grant more high-cost loans in the Chicago metro area than anywhere else in the nation.
Other findings include:
— The Chicago metro area not only ranked first in total high-cost loans
(88,315) in 2006, it ranked first in high-cost home purchase and
refinance loans, as well.
— The Los Angeles metro area ranked first in home improvement loans
(3,307), with Riverside second (2,672) and Chicago third (2,387).
— Chicago is the only city in the Midwest that ranked in the top ten.
After the Los Angeles and Riverside metro areas, the list of top ten
metro areas in terms of high-cost loans was rounded out by areas whose
largest cities are Phoenix, Washington, D.C., Atlanta, Houston, New
York, Miami and Tampa.
Communities Hit Hard
The experience in Chicago — like many community areas around the country — raises questions about which communities are being hit hardest by high-cost loans. The answer is a troubling one: In the Chicago metro area, 2005 data show there was clearly at least one trend – lower-income, primarily minority communities were more likely to have a much higher percentage of high-cost loans than wealthier communities. Though this fact may not be surprising, the numbers are striking:
— In 27 of Chicago's 77 community areas and in five Chicago suburbs, more
than half of all loans made in 2005 were high-cost loans.
— Many south and west side community areas and suburbs were hit
especially hard – including Roseland on the south side (64% of loans
were high-cost loans), Austin on the west side (60% were high-cost
loans), and Dolton in the south suburbs (69% were high-cost loans).
— In some suburban communities, the percentage of high-cost loans was
comparatively small, including Glenview (14%), Northbrook (10%) and
One comparison may suggest the range of how high-cost loans impact communities in the region. In the south side community of West Englewood, 75% of loans were high-cost loans. On the north side, in the more affluent Lincoln Park community, only 7% of all home loans were high-cost.
African-Americans, Latinos are Hardest Hit
Data show that, on average, while Latino and black homeowners were far more likely to get high-cost loans, the Chicago metro area ranked first in the nation in 2006 for high-cost loans to white homeowners. Meanwhile, the Chicago area ranked second in high-cost loans to African-Americans and fifth in high-cost loans to Latinos.
Research conducted by The Reporter clearly indicates the staggering impact of high-cost loans on African-American and Latino communities:
— Black homeowners were nearly three times as likely to get high-cost
loans as their white counterparts. Latino homeowners were twice as
likely as white homeowners to get high-cost loans.
— Even when black applicants went through prime lenders, they got
high-cost loans 37 percent of the time. From prime lenders, Latinos
got high-cost loans 19 percent of the time compared with just 9 percent
of the time for whites.
— Data also show that African-American homeowners earning more than
$100,000 a year were more than twice as likely to get high-cost loans
as white homeowners earning less than $35,000 a year.
Lenders Eager to Offer High-Cost Loans
In 2005, subprime lenders provided nearly two-thirds of all high-cost loans in the Chicago metro area. According to The Reporter, African Americans and Latinos have used subprime lenders on an increasing basis between 1993 and 2005. Once again, Chicago serves as an example of how subprime lenders and high-cost loans are impacting communities as well as specific groups of people:
— The data documents that subprime lenders often make several times as
many high-cost loans as prime loans. For example, Encore Credit Corp.,
whose parent company is ECC Capital Corporation, wrote 4,545 high-cost
loans in 2005, and 271 prime loans.
— In 2005, nearly 51 percent of all loans from subprime lenders went to
African-American or Latino homeowners compared with nearly 23 percent
of all loans from prime-rate lenders.
Impact on Families
The Chicago Reporter article shares the devastating story of Thaida and Ed Booker, a married couple that bought a house on West 64th Street in the West Englewood community. When the Bookers bought the house in 2001, the interest rate on their mortgage was 6.2 percent. They later refinanced in order to help pay medical bills — and thought the new 6.8 percent interest rate was a fixed rate. The loan, however, was an adjustable-rate mortgage, meaning that how much the Bookers paid would be tied to current market conditions.
The result — which is undoubtedly familiar to many families that have been burned by high-cost loans in recent years — is that the Bookers had a loan whose interest rate grew and grew. Ed Booker — his wife passed away in 2005 — paid $800 a month on the loan in 2005; this year he has paid $1,053 a month.
Next year, according to the article, the interest rate could hit 12.8 percent and cost him $1,425 per month — at twice the interest rate Booker and his wife paid for the loan when they purchased the home. This interest rate poses an especially difficult problem for Booker, since his disability and pension income would make it tough for him to afford the mortgage.
Problem Impacts Thousands
Booker's story is not, however, all that unusual. Booker, according to the article, “is among an increasing number of homeowners who've helped the Chicago metropolitan statistical area become the 'high-cost' mortgage capital of America.”
“It doesn't matter how much money you make, nobody in the Chicago region has been immune to this trend,” said Kimbriell Kelly, who wrote the story along with Loury. “You see these loans affecting wealthy and poor residents and communities throughout the region. At the same time, the figures for African Americans and Latinos are alarming.”
High-Cost Loans No Coincidence — But a Product of System
It is no accident at all that so many high-cost loans are impacting families in the area, according to the article. These loans often result from a subprime market that charges higher fees and interest rates “to compensate for the risk of lending to people with damaged credit.”
Lenders, in fact, pay brokers for getting borrowers to accept higher interest loans — even if they qualified for a cheaper rate, according to Geoff Smith, research director of the Woodstock Institute, a Chicago-based nonprofit organization promoting community reinvestment and economic development in low-income and minority communities. Lenders also offer bonuses to brokers who “get borrowers into products with pre-payment penalties.”
The problem spiraled in the late 1990s, when a flourishing housing market cut some potential homeowners out of the picture because they couldn't qualify for mortgages. Many of these buyers went to subprime lenders.
One practice that can harm borrowers, the article points out, is when brokers and loan officers with mortgage companies use a low “teaser rate” to entice a client — even though it would not be the rate they'd ultimately get at closing.
In addition, once homeowners run into trouble through this process, they may have nowhere to turn, since brokers have already been paid, according to the article. Their incentive is to give high-priced loans — not to serve customers afterwards.
“These loan officers think their borrowers don't know anything and they think they can get anything past them,” said Kristen Komara, director of financial services for The Resurrection Project in Chicago, which works to create healthy communities through organizing, education and community development.
Meanwhile, the article shows, it would be a serious oversight to ignore the role of larger lenders in this story.
“I was a little taken aback by the volume of high-cost loans that were coming from some of the 'big boys,' like Countrywide,” said Loury. Countrywide Home Loans provided nearly 5,800 high-cost loans in 2006, the most of any lender in the Chicago metro area. “The subprime market is not one that only involves smaller, far away mortgage companies. It is a market that also involves some of the largest lenders in the nation.”
The data also show that several large lenders that rarely write high-cost loans fail to do much business among African-Americans and Latinos. Just 2 percent of the more than 10,000 loans granted in 2006 by Chicago-based LaSalle Bank were high-cost loans. However, the company made just 7 percent of its loans to African-Americans and another 11 percent to Latinos.
“For many of these bigger lenders, on the other hand,” Loury said, “the question is 'Why are you not serving this population?'”
Borrowers Acting Too Fast?
Sources cited in “The High Price of Home Ownership” also suggest that borrowers often don't have the information they need or are unfamiliar with the process when they apply for a loan. Undocumented Latinos are “particularly at risk,” according to the story, because federally funded lenders won't make loans to undocumented workers. Mortgage brokers in communities, though, may make those loans — even if borrowers don't understand the terms.
Key Step: Educating Borrowers
“The High Price of Home Ownership” also suggests that educating people and communities about high-cost loans can make an impact.
In 2006, The Resurrection Project hosted a roundtable discussion on predatory lending — participants included nonprofit organizations, families impacted by the problem and U.S. Rep. Luis Gutierrez (D-4th). The Resurrection Project was featured on a news spot on a local Spanish-language broadcast network — and received “30 phone calls the next day with people saying 'I think I might have a bad loan.'”
In response to the mortgage foreclosure crisis in Illinois, Attorney General Madigan's office has been taking aggressive action to protect consumers from the financial ruin that often comes with unfair high cost loans, “Most recently, we drafted legislation to protect consumers from being placed into loans that are more expensive than they deserve,” said Madigan. This legislation is now awaiting the Governor's signature.
Meanwhile, Ed Booker is now getting the word out about high-cost loans — and the damage they can do. First, though — with assistance from Neighborhood Housing Services of Chicago (NHS) — he reached a less expensive agreement on his mortgage with his loan servicer.
Kathleen Van Tiem, Booker's housing counselor at NHS, suggested that this kind of problem should be addressed much, much earlier. “The fixing doesn't need to be in the counseling,” she said. “The people who contributed to this problem are the ones who need to play fix up.”
In June, Booker was spreading the word about high-cost loans — and how to fight them — on a national level, according to the story. He spoke to a group as NeighborWorks America and the Ad Council launched a public service announcement about “reaching out for help when falling behind on mortgages.”
“This is a common problem,” said Kelly. “As the research shows, thousands of people around the country are spending considerably more on these loans than is necessary. When it comes to housing and home loans, leading the nation in high-cost loans is something we all need to look at closely in Chicago.”
The Chicago Reporter is published by the Community Renewal Society, a progressive, faith-based organization that works to eliminate race and class barriers. Founded in 1882, Community Renewal informs, organizes and trains both communities and individuals to advocate for social and economic justice.
SOURCE The Chicago Reporter
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