The data have been accumulating for a while now: Blacks and Hispanics are far more likely to get trapped in high-priced mortgages than are whites. But lenders always had a ready response: the real reason loan rates are higher for blacks and Hispanics is their low credit scores, their low incomes, etc. In other words, the high-priced mortgages are correctly priced for risk. The Center for Responsible Lending has now completed a powerful study to test the lenders’ excuses. What did they find? Race matters. When they control for all the other factors, African Americans and Hispanics are about a third more likely to end up with higher rate loans than their white counterparts. In other words, the fact of being black or Hispanic costs a potential homeowner big time.
The CRL carefully breaks down both the cost of the mortgage and the prepayment penalties, identifying vulnerability by racial group. The study is sufficiently compelling that, at a minimum, the burden should now shift to the home mortgage lenders to explain why this isn’t a case of pure-and-simple racial bias. The data seem to say that lenders charge blacks or Hispanics more because they think they can get away with it.
Here’s an idea of how much a subprime mortgage costs. My coauthor and I worked up this example for our book, The Two-Income Trap:
To give a sense of just how expensive subprime mortgages are, consider this: In 2001, when standard mortgage loans were in the 6.5 percent range, Citibank’s average mortgage rate (which included both subprime and traditional mortgages) was 15.6 percent. To put that in perspective, a family buying a $175,000 home with a subprime loan at 15.6 percent would pay an extra $420,000 during the 30-year life of the mortgagethat is, over and above the payments due on a prime mortgage. Had the family gotten a traditional mortgage instead, they would have been able to put two children through college, purchase half a dozen new cars, and put enough aside for a comfortable retirement.
The tactics by which an industry has managed to bilk homeowners out of billions of dollars are appalling, regardless of which racial groups get hit hardest. Congress is currently considering two bills: one that would provide weak protection against predatory lending and one that would be much stronger. Guess which bill has the most momentum?
One of the biggest problems with predatory lending practices is that that the people who are cheated often don’t know it. Even if they figure it out, they are far less likely to figure out to whom to complain or how to demand better protection. Indeed, the ways in which the lenders take advantage are largely based on their all-too-accurate assessment of whom they can cheat without getting caught.
Will the CRL data change the political dynamics? Will the evidence that blacks and Hispanics are more often cheated rouse the NAACP or La Raza to move this issue to the top of their agenda? Will predatory lending finally not be someone else’s problem, but instead become a problem taken up by a high-profile group? If so, racializing the home mortgage industry practices could have a beneficial effect for every homeowner.
