Mortgage Lending

CONTACT:
Kathleen Tullberg
Manager, MCBC
(617) 244-0271
tullberg1@rcn.com

REPORT SHOWS CONCENTRATED HIGH-COST MORTGAGE LENDING TO MINORITY GROUP BORROWERS

BOSTON, MA –February 28, 2008. In its fourteenth  annual report on mortgage lending patterns, the Massachusetts Community & Banking Council (MCBC) documents high concentrations of higher-cost mortgage loans among members of minority groups and the neighborhoods where they live.  The report shows that higher-cost loan shares for black and Latino borrowers at all income levels are substantially higher than the loan shares for white borrowers.

Changing Patterns XIV: Mortgage Lending to Traditionally Underserved Borrowers & Neighborhoods in Boston, Greater Boston and Massachusetts, 2006, provides analyses of prime and subprime lending patterns in the city of Boston, Greater Boston, and Massachusetts in 2006, as well as for each of the state’s fourteen counties and each of its thirty-three largest cities and towns.  In addition to the data in the report, MCBC is also providing for the first time data on all Massachusetts cities and towns in a set of on-line tables.

Changing Patterns XIV was prepared for MCBC by Jim Campen, professor emeritus of economics and senior research associate at the Gaston Institute at UMass Boston.  The report documents that the highest income black and Latino home buyers in the city of Boston (those with incomes over $165,000) had 55 percent and 49 percent loan shares of higher-cost loans respectively, as compared with seven percent for white borrowers.  At the same time, higher-cost loans were concentrated disproportionately in areas where the percentage of minority residents is high and where income levels are low. 

“Yesterday’s subprime lending has resulted in today’s foreclosure crisis.  This report suggests that the financial difficulties that homebuyers and, in particular, minority group homebuyers will face as a result of often inappropriate subprime lending is not over, “ said Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance and co-chairman of MCBC’s Mortgage Lending Committee.  “It is important that lenders and community groups work together to help homeowners in trouble and to ensure that tomorrow’s homebuyers find their way to the best mortgage products at the most responsible institutions.”

Beginning in 2004, lenders were required to compare the annual percentage rate (APR) on each loan to the current interest rate on U.S. Treasury securities of the same maturity.  If the “spread” between a loan’s APR and the interest rate on Treasury securities is three percentage points or more for a first lien loan (five percentage points or more for a junior-lien loan), then the spread for that loan must be included in the lender’s reported data.  In this report, loans for which the spreads are reported are referred to as “High-APR loans” or “HALs.”

“The findings of this report are troubling and validate the importance of education and outreach by public officials, lenders and community organizations to ensure that homebuyers and homeowners have the information they need to make informed decisions about mortgage products that are both affordable and appropriate,” said Cynthia Merkle, senior vice president of Eastern Bank and MCBC’s chairperson.  “While Massachusetts banks and credit unions have done a good job of reaching out to traditionally underserved borrowers and neighborhoods, the report suggests that there is still much work to be done."

Responsible subprime lending can provide a useful service by making credit available to borrowers who might not otherwise be able to obtain it.  Subprime loans are offered at a higher cost to the borrower, ostensibly to cover the perceived or actual increased expenses and risks borne by the lender.  However, many subprime borrowers pay more than they should.  Sometimes this is because they could have qualified for a prime loan.  More often, it is because they could have qualified for a lower-cost subprime loan than the one they received.  In Greater Boston and in Massachusetts, the likelihood of receiving a higher-cost mortgage loan was much greater for members of minority groups, regardless of income. 

The report shows:

Levels of Higher-Cost Mortgage Lending

• In 2006, there were over forty thousand HALs in Massachusetts, accounting for about one-fifth of all home purchase loans and one-quarter for all refinance loans in the state.  HALs accounted for much higher shares of total loans in Lawrence, Springfield and Brockton (where HAL shares of home purchase loans ranged from 43 percent to 56 percent and HAL shares of refinance loans range from 39 percent to 48 percent).  Every city and town in Massachusetts received at least one HAL loan in 2006.

Lending by Borrower Race and Income

• Black and Latino borrowers were much more likely to get HALs than were whites.  For home purchase loans in Greater Boston, the HAL loan shares were 49 percent for blacks and 48 percent for Latinos, but only 11 percent for whites.  More than 60 percent of black home buyers in Brockton and Worcester received HALs as did more than 60 percent of Latino homebuyers in Lawrence and Framingham. For both blacks and Latino, HAL shares exceeded 50 percent in fifteen of the state’s thirty-three largest cities, while the HAL shares for whites was always below one-third.
• Higher-cost loan shares for black and Latino borrowers were substantially higher than the higher-cost share for white borrowers in the same income category.  Moreover, the disparities tended to increase for higher income levels.  For home buyers in the city of Boston with incomes over $165,000 (more than double the area’s median family income), the HAL loan shares were 55 percent for blacks and 49 percent for Latinos, but only seven percent for whites.
• HALs were not directed primarily toward low- and moderate-income (LMI) borrowers.  LMI borrowers (defined as borrowers with incomes no greater than 80 percent of are area’s median family income) received only nine percent of all home purchase HALs in Boston, 12 percent of home purchase HALs in Greater Boston and 20 percent of all home purchase HALs statewide.

Lending by Neighborhood Race and Income.

• Higher-cost mortgage loans accounted for disproportionate shares of total lending in neighborhoods with low income levels and high concentrations of minority households.  The report documents this finding for census tracts in Boston, Greater Boston and statewide.  In Boston, the neighborhoods with the highest percentage of minority residents – Mattapan and Roxbury – also had the highest HAL shares; for home purchase loans, these shares ranged from 54 percent to 49 percent, as compared to three percent in Charlestown and two percent in Fenway/Kenmore.
• Total home purchase lending to blacks and Latinos was highly concentrated in a small number of the state’s cities and towns, and entirely absent in many others.  Just nine cities accounted for over two-thirds of total loans to blacks in Massachusetts, although they accounted for less than one-sixth of the state’s total loans to whites.  At the same time, blacks received no home purchase loans in 148 of the state’s 351 cities and towns, and only a single loan in 57 more communities.

The Biggest Lenders

• Licensed mortgage lenders had by far the largest market share among the three major types of lenders.  In Greater Boston, licensed mortgage lenders (LMLs – mainly mortgage companies not related to banks) accounted for 50 percent of all mortgage loans, and for 70 percent of HALs.  Massachusetts banks and credit unions accounted for 20 percent of all loans but for only one percent of all HALs.  Nearly one-third of all loans by LML lenders in Massachusetts were HALs, as compared to 1.6 percent by Massachusetts banks and credit unions.
• The state’s biggest HAL lenders operated statewide.  H&R Block/Option One was the state’s biggest subprime lender in 2006, with 4,080 HALs statewide.  New Century, Countrywide, Fremont and WMC/GE rounded out the top five, each with over three thousand HALs in the state.  These five lenders accounted for 42 percent of the total HALs statewide, and for 45 percent of the total HALs in Boston.  None of these top five subprime lenders are still in the business of making subprime loans.

 The Cost to Borrowers 

• HALs involve very substantial costs to borrowers, as compared to prime loans.  A borrower in Greater Boston who received a thirty-year fixed-rate loan of $325,000 (which was the average size HAL loan in Greater Boston in 2006), and whose interest rate was 10.44 percent (the estimated median interest rate on HALs in Massachusetts in 2006), would face monthly payments of interest and principal more than $900 per month greater than if he or she had received the same loan at 6.5 percent (a typical interest rate for prime loans).

The report includes detailed information on higher-cost mortgage lending in 108 individual communities, including all 101 cities and towns in Greater Boston, plus the seven largest Massachusetts cities outside the area. This year, for the first time, the report also includes, in addition to statewide information, data on all of the state's major subdivisions: fourteen counties, nine federally defined metropolitan areas and thirteen Regional Planning Agency areas.

About the Massachusetts Community & Banking Council

The Massachusetts Community & Banking Council (MCBC) was established in 1990 to bring together community organizations and financial institution to affect positive change in the availability of credit and financial services across Massachusetts by encouraging community investment in low- and moderate-income and minority neighborhoods; promoting fair and equitable access to financial products and services for minority group members; and providing research, other information, assistance and direction in understanding and addressing the credit and financial needs of low- and moderate-income individuals and neighborhoods. .

MCBC is funded through the financial support of member banks.  MCBC 2007 bank members include: Avidia Bank, Avon Co-operative Bank, Bank of America, Bank of Canton, Benjamin Franklin Bank, Boston Private Bank & Trust Company, Braintree Cooperative Bank, Cape Ann Savings Bank, Central Bank, Chelsea-Provident Co-Operative Bank, Citi, Citizens Bank, Dedham Institution for Savings, Eagle Bank, East Cambridge Savings Bank, Eastern Bank, Everett Co-Operative Bank, Fiduciary Trust company, Hyde Park Co-operative Bank, Hyde Park Savings Bank, Mt. Washington Bank, North Cambridge Co-operative Bank, Reading Co-operative Bank, Sovereign Bank, State Street Corporation, StonehamBank, TD Banknorth, The Bank of New York Mellon Corporation and Wainwright Bank.