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Report: Minority Mortgage Rates Run Higher in Orange County, Calif.

Posted on: Friday, 30 September 2005, 00:00 CDT

By Jeff Collins, The Orange County Register, Calif.

Sep. 30--Local Hispanics -- Orange County's largest minority -- are three times more likely than whites to pay above-market interest rates for home loans.

The disparity, found in a review of new federal lending statistics by The Orange County Register, raises concerns about possible flaws in lending practices that are supposed to be colorblind.

In 2004, one in six Hispanic borrowers in Orange County took out higher-cost loans, according to U.S. government data.

Borrowers who described their race as white, however, were sold higher-priced loans in one in 20 cases, the mortgage data show.

Experts give various reasons for the disparities: from income gaps between whites and minorities to unscrupulous loan brokers preying on uneducated borrowers and credit-review shortcomings that overlook the collective buying power of extended families.

The new data are based on home-purchase, refinancing and home-improvement loans reported last year under the Home Mortgage Disclosure Act.

The 2004 numbers, released this month, are the first to include data showing the number of high-priced loans -- defined as having a rate of at least 2 percent or more above typical market deals for a conventional home-purchase loan.

These higher-priced loans were likely "subprime" mortgages that are aimed at borrowers with less-than-favorable finances. Orange County is a national hub of this kind of lending.

In addition to Hispanics, about one in seven blacks, American Indians and Pacific Islanders in Orange County paid above-market rates.

However, Orange County's Asians took out above-market rate loans at a comparable pace to local whites.

The trend is similar across the state, officials said. The new data show loan-price disparities are greater in Orange County than in the nation as a whole.

The Federal Reserve Board and the government council that compiled the data warn against blaming the disparities on racial discrimination. These studies of the data note that various economic factors -- such as lower incomes or higher debts loads -- could be behind the differing mortgage rates.

And lending industry officials vehemently deny that they discriminate on the basis of race or ethnicity.

"There's a lot of things you can point to as reasons for disparity, and discrimination is not one of them," said Dustin Hobbs, spokesman for the California Mortgage Bankers Association. "There's no redlining going on. That's in the past."

Several fair-lending advocates seized on the new mortgage data to cite what they called intolerable inequities, though they concede there's no conclusive proof of racism.

Consumer advocates maintain that credit-rating systems are rife with cultural biases; that unscrupulous loan officers may steer unsophisticated borrowers into higher-cost products; and that many subprime lenders target minority communities in advertising campaigns.

"It's unacceptable to have the disparities," said fair-lending advocate Robert Gnaizda, policy director of the Oakland-based Greenlining Institute.

"You can't conclusively determine that there is discrimination. That doesn't mean there isn't any." The economic gap is steep.

The U.S. census shows that 54 percent of Orange County's white households, accounting for more than 60 percent of the local population, earn $75,000 or more -- income that could help a family buy a modest home.

That compares to 45 percent of local Asian and black households with earnings at or above that same amount.

Only 24 percent of Hispanics -- a third of the county's inhabitants -- live in households earning $75,000 or more.

Or look at the income gap another way: Orange County's white households had a median income of $68,738 in 2003 vs. Hispanics' $45,551.

Lenders argue that these kind of economic gaps are likely culprits for loan-price disparities.

Borrowers with weakest finances typically pay the highest mortgage rates.

In theory, that extra interest mitigates the lender's risk of making such loans to borrowers with dicey credit profiles.

Without such high-priced loans, lenders argue, only families with pristine credit could buy homes.

"We believe that any pricing variation between blacks and Hispanics is explained by objective economic and credit criteria including the borrowers' (credit) scores, loan-to-value ratios and mortgage history," wrote Erin Freeman, communications vice president for New Century Financial Corp. of Irvine, one of the nation's five largest subprime lenders.

"New Century's automated credit-scoring and origination process is color blind and not discriminatory in any respect," Freeman added.

Ameriquest Mortgage Co., another top subprime lender based in Orange County, declined to comment.

Instead the company referred a reporter to statements by the Fed: "The (Home Mortgage Disclosure Act) data alone, no matter how much they are manipulated, cannot be used to conclude whether a particular applicant was treated adversely on the basis of (race or ethnicity)." The recent advent of higher-prices on risky loans "has greatly expanded the availability of home loans to borrowers" with credit weaknesses.

The lending industry is going above the call of duty to eliminate lending disparities, California Mortgage Bankers spokesman Hobbs said. As an example, he cited his group's educational efforts that include a new financial literacy Web site.

The lack of financial savvy usually leads borrowers to an overpriced loan, said financial planner Ruben Olguin of San Clemente.

Olguin noted that 90 percent of his Latino clients use Latino mortgage brokers, who in some cases signed up creditworthy clients for pricier subprime loans. This kind of problem is worse among first-time homebuyers, Olguin said, because these shoppers usually care more about their monthly payment amounts than the mortgage's interest rate or associated fees.

"Even if you explain it to them in Spanish, a lot of the times, they don't understand what they signed for," said Olguin, who has begun offering financial literacy seminars.

Critics say the lending industry has plenty of work to do to ensure a fair shake for all.

Greenlining Institute's Gnaizda says the credit scores -- so critical to a loan approval -- don't take into account cultural factors in many minority households that actually make them less of a risk than whites.

For example, low-income minority borrowers often have multiple breadwinners contributing to the household budget. And lower-cost homes are in greater demand than homes owned by high-income borrowers, providing more collateral security, Gnaizda said.

Landon Taylor of First American Corp. in Santa Ana agrees. His title insurance and real estate information company is working with lenders to improve credit reports.

For example, lenders should be able to get reports on favorable histories of paying rent and utility bills on time -- things not currently included, said Taylor, First American's vice president of market development.

"Is there a need for change? Yes," Taylor said. "And a lot of companies in the industry are working on solving that problem." Mortgage broker Jeff Lazerson, president of Portfolio Mortgage Corp. in Laguna Niguel, worries about independent loan brokers who make many deals for the major lenders.

An unscrupulous independent loan officers could steer credit-worthy customers to higher-priced loans that generate higher commissions. Such deals are also often simpler to process, Lazerson said.

Ultimately, the lending disparities must be addressed -- regardless of what causes them, said Matthew Lee, director of New York-based Fair Finance Watch.

"It's an alarm," Lee said.

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To see more of The Orange County Register, or to subscribe to the newspaper, go to http://www.ocregister.com.

Copyright (c) 2005, The Orange County Register, Calif.

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NCEN,

Source: The Orange County Register

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