Report: High-Cost Loans on The Rise
Saturday, September 9, 2006
In another indication of increasing consumer debt, a new federal report has found that the percentage of borrowers who turned to high-cost loans to buy or refinance their houses rose last year.
Such loans accounted for 26.2 percent of mortgages in 2005, up from 15.5 percent in 2004, an increase of nearly 70 percent, according to home-loan data released yesterday. In 1994, only 5 percent of borrowers had high-cost loans.
"People are stretching further and further to purchase or refinance their homes," said Allen Fishbein of the Consumer Federation of America.
Federal regulators define high-cost loans as those with interest rates 3 percentage points higher than a benchmark rate for first mortgages, and 5 percentage points higher for second mortgages. That can make a big difference in payments. For example, a $300,000 loan at 6 percent costs $1,799 a month; at 9 percent it costs $2,414, or $615 more a month.
There is wide racial and ethnic disparity in who gets such loans, according to the numbers. About half of blacks and Hispanics received high-price mortgages, compared with less than a fifth of whites. In 2005, 54.7 percent of blacks got higher-price loans, up from 32.4 percent in 2004. The increase was even sharper among Hispanics, of whom 46.1 percent got high-cost loans, up from 20.3 percent in 2004. In 2005, 17.2 percent of whites got such loans, compared with 8.7 percent the previous year.
Part of the explanation for the 2005 increase, according to the Federal Reserve, which released an analysis of the statistics yesterday, is that the 2004 numbers were understated because of interest rate aberrations.
About 57 percent more buyers in 2005 than in 2004 took out two mortgages to buy houses, according to the new federal statistics. Such an arrangement, known as a piggyback loan, allows smaller down payments without requiring mortgage insurance. The second mortgage is usually at a higher rate than the first.
The increase in costly mortgages is partly because more people are getting loans, even if they have bad credit and would not have qualified in the past. About 70 percent of Americans own homes, a near-record. But buying a home can end up hurting borrowers if they can not afford the payments. Regulators said they were worried that people might have been steered into unsuitable loans.
"Although affording many consumers greater access to credit, this growth also has led to concerns about the appropriateness of loan term and lending practices and the potential for unequal treatment of borrowers," officials of the Federal Financial Institutions Examination Council, the group that released the data, said in a written statement. This is the second annual release of this particular data, correlating lending practices by price, race and location.
Lenders say high-cost loans go to borrowers who are a higher risk because they have poor credit, low income, low down payments or income they can't document. Critics say discrimination and predatory lending practices play a big role in how much borrowers are charged.
Banking industry spokesmen also said that more people are getting unattractive loans because they are not rejected outright, as they would have been in the past.
"People are reaching [to buy] when they are not ready from a credit point of view," said Jay Brinkmann, an economist with the Mortgage Bankers Association. "People are buying who are not quite qualifying" on traditional terms.
Some borrowers with bad loans have only themselves to blame, others said. "People shop more for a loaf of bread than they do for a mortgage," said James C. Ballentine, director of housing and community development for the American Bankers Association. "The mortgage market has never been more complex than it is today."
Some state regulators, however, say that aggressive lenders are taking advantage of naive consumers and that federal regulators have been reluctant to act against them. Last year, after the data was released the first time, New York Attorney General Eliot L. Spitzer announced an inquiry into whether there was discrimination in lending. The federal Office of the Comptroller of the Currency blocked his effort in court, saying Spitzer had no authority to investigate federally regulated businesses.
A spokeswoman for Spitzer's office, Juanita Scarlett, said the new data, which she called "disturbing," underscores a need for "additional investigation."
Federal officials said they are investigating. A year ago, the Department of Housing and Urban Development said it was reviewing 179 firms for possible violations. The investigation is "moving along," Bryan Greene, deputy assistant secretary for enforcement and programs at HUD's fair housing office, said yesterday.
"A number of reviews are still ongoing," said Susan Stawick, a spokeswoman for the Federal Reserve Board.