THE COST OF CREDIT AND
THE HOMEOWNERSHIP GAP
BY JULIANNE MALVEAUX

Not a week goes by when I don’t get an email from someone peddling home loans, or home loan refinancing, on the Internet. The rates are going down, they blazon, exclamation points all over the place. Loan guaranteed, they shout, casting the net as widely as they can to get me to respond to them. The rebel in me chafes at the credit-worthy citizen I’ve become. Since I’m a homeowner in an area that is gentrifying, with property values spiraling, I’m fresh meat for the lenders looking for hot prospects.

With the mortgage interest rate down to 6.42 percent for 30 year loans, and even lower for shorter-term mortgages, financial planners say this is a great time to buy or to refinance. But too many African American borrowers find the doors to conventional lending shut in their faces. A new report from the Neighborhood Revitalization Project of the Center for Community Change says that African Americans and Hispanics are disproportionately represented in the subprime home refinance market. That means they are paying at least one to six more percentage points higher than the 7 or 8 (and sometimes lower) percent than their white counterparts percent interest for loans while others are managing to get deals at 7 or 8 percent. Alarmingly, the disparity between whites and minority lenders actually grows at upper income borrowers. Higher-income African American homeowners do comparatively worse than their lower-income counterparts.

Data from all 31 metropolitan areas show that while 17 percent of whites borrow money in the subprime market, nearly half (49 percent) of African Americans, 30 percent of Hispanics, and 28 percent of Native Americans get subprime loans. Asian Americans, with a subprime lending level of 16 percent, were less likely than whites to get subprime loans. Like African Americans, though, disparities rose with income level. Lower income African Americans were only twice as likely to get subprime loans as whites, but upper income African Americans were three times as likely to get subprime loans. Similarly, while lower income Asian Americans were less likely than whites to get subprime loans, upper income Asian Americans were more likely to get subprime loans.

How can we explain these disparities? Most lenders say the subprime market is a function of the risk they take when they provide money to borrowers whose credit is not pristine. But Freddie Mac, one of the publicly chartered secondary mortgage market enterprises says that as many as 30 percent of those who get subprime mortgages could benefit from conventional mortgages, and from great savings. Further, I’d argue that in many cases the quality of your loan is a function of who you know. Some people with “good” credit end up with costly subprime products because they have had so many negative experiences with conventional lending that they demure from seeking credit from them. Instead, they respond to the television and radio ads that seek them out, help them to consolidate their credit or improve their homes, and charge them interest up the yin-yang.

This is all important because homeownership is often the way that lower and middle income families amass wealth. There is a 245 percent homeownership gap between whites and African Americans and Latinos, with 71 percent of white families owning their homes, but just 46 percent of African American and Latino families owning theirs. The gap helps explain the wealth gap but, more importantly, it explains differences in access that have to do with much more than homeownership. Families that own homes have resources they can borrow against during financial difficulty, for tuitions, or for other needs. While the income gap has been narrowing, the wealth gap has not, and at least part of that has to do with the homeownership gap.

The homeownership gap may grow wider still as predatory lenders set their sights on older African Americans who need small sums to fix up their homes. They are often enticed by advertisements for easy money, but end up paying interest rates as high as 12.5 percent along with fees that turn a $1000 loan into a nightmare of an obligation. While the Center for Community Change study focuses on subprime lending, there is a thin line between higher-interest rate subprime loans, and predatory loans that come with astronomical interest rates. Subprime loans are on the rise, with their share of the full mortgage market rising form 4.5 percent in 1994 to 12.5 percent in 1999. Some of the same forces are at work with predatory lending. Though concern with predatory lending is rising, and data on the share of predatory lending is scarce, it appears that the share of predatory mortgage loans is rising as well. Risk is a factor in the share of subprime and predatory loans that are given to minority lenders; It appears that race is also a factor.

The American dream has always included homeownership, a chicken in every pot, and a car in every garage. But chickens of inclusive rhetoric come home to roost when people of color can’t participate in the American dream except at high-interest, subprime rates. When will this inequality end?