Color of money: Lenders more likely to give minorities costly loans

By Mike Wagner and Doug Haddix

Jun. 3, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- At each bus stop, Rodney Young's riders receive a friendly nod, even 10 hours into a shift that began at 4 a.m.

His grin fades to a grimace as he turns the COTA bus into a Near East Side neighborhood peppered with for-sale signs and brightly colored foreclosure tags stuck to modest homes.

It's a reminder that he, too, faces a financial death sentence for his home.

"I see this every day all over the city, but it's worse in neighborhoods where people of my color live," says Young, who is black. "Those bad loans have got a lot of us in trouble."

The mortgage crisis has harmed virtually everyone, leaving a wake of foreclosures and falling property values that will ripple through neighborhoods for years to come.

No longer is the problem confined to poor neighborhoods. More and more middle-class black families such as Young's are struggling to stay in their homes or already have been evicted.

Some of those black families built their dream home, others bought an older home and some refinanced, thinking interest rates would drop.

But many have one thing in common -- mortgages with adjustable interest rates that typically are at least 3 points higher than the rate given to borrowers with good credit. Those loans then escalate every six months to a year, causing house payments to rise hundreds of dollars.

A Dispatch analysis of the most recent federal Home Mortgage Disclosure Act data shows that in Ohio, from 2004 through 2006, black borrowers at all income levels were far more likely to receive loans with high interest rates than white borrowers.

In fact, black borrowers with incomes above $100,000 were likelier to receive high-rate mortgages than whites with incomes below $40,000, the analysis found.

"This is an epidemic, a disaster for our African-American communities," said Linda Stallworth, housing services director for the Columbus Urban League. "These families were preyed upon and targeted by lenders, typically with mass mailings and phone calls. Some people will blame the borrowers for this, but now we are paying the price for all these bad deals."

Several national experts agree that middle-class minority families were victims of predatory lenders. They accuse companies of using millions in marketing schemes that targeted vulnerable minority families looking for a quick fix to financial problems by selling them mortgages that they couldn't afford.

A 2006 study by the Center for Responsible Lending, a watchdog group based in Washington, D.C., that protects consumers against predatory lending abuses, found that black and Latino families were far more likely to be sold high-interest mortgages than whites with a similar financial history. Minorities received an especially high number of mortgages with penalties for paying off the loan early.

The study of 177,000 subprime loans factored in credit scores, property values, borrowers' income and other risk factors.

"We feel there is something going on within the lending industry that produces such a disparity in the way the loans are distributed," said Debbie Bocian, the report's lead author. "These loans will have dire consequences for minorities, and we believe the lending industry is responsible for much of this."

In January, the city of Cleveland sued 21 lenders, saying they enabled the foreclosure crisis. The same month, the city of Baltimore sued Wells Fargo & Co. (NYSE:GWF) (NYSE:JWF) (NYSE:WSF) (NYSE:WPF) (NYSE:WFC) , saying it broke laws by steering black borrowers into high-rate mortgages, a charge denied by the lender.

Lenders have long argued that middle-class minority families often have poor credit, accumulated debt and little savings for a down payment to get a traditional prime loan.

They say that race plays no role in mortgages.

"It's not a black-and-white thing. Everybody's money is green," said Brian Landis, president of the Columbus Mortgage Bankers Association.

Landis said that many of the mortgages sold in the past few years, even those to borrowers making more than $100,000, did not require proof of income. Some families, black and white, inflated their income and took loans they couldn't afford.

Other lenders said people shouldn't make assumptions based on the racial disparity in the federal data.

"It's a good discussion to keep going," said Bob Niemi, treasurer of the Ohio Mortgage Bankers. "But from those numbers alone, you can't draw conclusions."

As the debate continues, families such as Young's are stuck in a financial hole.

He lives in a neighborhood on the city's Far East Side, just south of Refugee Road, that contains several subdivisions where homes typically are valued at between $70,000 and $200,000. In recent years, the streets have been littered with for-sale signs and eviction tags.

Young bought his home in 1997 for $74,500 and signed a fixed-rate mortgage that steadied his monthly house payment at about $700. Like many other families, his was blitzed by advertisements from lenders to refinance.

Young, 50, and his family had built up debt and decided to consolidate it into a refinanced loan. In 2006, Young signed a new loan with a beginning interest rate of 11.8 percent that could have climbed to nearly 18 percent.

They refinanced again in 2007. Now, their monthly payments could nearly double to $1,400.

"A lot of us were sold a dream," Young said, "and now we are living a nightmare."

Grocery bags hang from the arms of three elderly women when Young glides the bus to the curb. The bags seem to lighten when the women greet their favorite driver.

Rising house payments have caused Young to work extra shifts, meaning that, some weeks, he sees more of his regular riders than his family.

As the bus rolls past a park in full bloom surrounded by huge refurbished homes, Young says he's angry at mortgage lenders and himself. He's angry for signing loans that may cause him to lose his home and eliminate any chance to move into a bigger one.

"Look at that one over there," says Young, pointing to the three-story beauty on the corner. "That could have been us."

About three blocks from Young's home, James Roy built his fiancee's dream house, complete with vaulted ceilings, plush carpet and nearly every upgrade offered. The price: $178,000.

Roy, however, had to pay only $1,000 out of pocket.

"I figured the value was only going to get higher, so why not build the best house we could?" Roy said. "It did seem a little too good to be true."

Roy, 55, who had a poor credit score at the time, soon learned that the two loans he signed to finance the home were anything but a dream.

To avoid paying mortgage insurance, Roy received one loan that covered 80 percent of the borrowed amount, with an 8.5 percent adjustable interest rate that continued to climb to nearly 12 percent. The second loan, covering 20 percent of what he borrowed, was fixed at an interest rate just above 11 percent.

Roy's monthly house payments rose from $1,400 to $1,600 after six months and were scheduled to climb higher.

He then looked to refinance late last year and was besieged by out-of-town lenders offering consolidation loans. One company appraised Roy's home at $167,000. He eventually refinanced his loan with a fixed rate, but now Roy, who rolled other debt into the mortgage, has even bigger house payments on a home that has lost value.

Roy, who works as a patient attendant at a psychiatric hospital, stood in front of his home and pointed to the various houses that were foreclosed on during the past two years.

"I'll take some of the blame for signing loans like that, but these companies are good at confusing people," Roy said. While financial details were listed in closing documents, Roy said they were difficult to understand.

"They shouldn't talk to people about ARMs and adjustable rates and all that. Just tell us the bottom line in dollars and cents. But they don't do that, and now I'm stuck. A whole lot of us are stuck."

Two black men in business suits step onto Young's bus as it nears its turn-around point at Easton Town Center. One stop later, two nurses climb aboard. At the next stop, even more professionals.

Young says he has overheard many people just like them complain about keeping up with house payments or worry that the value of their home has plummeted.

"We are doctors, bus drivers, lawyers, construction guys, psychiatrists, black, white and everything in between," he says. "It's hard to tell it out here at a place like Easton, where it's a different world when it comes to money, but the housing crisis has got all of us in a bind."

For nearly three decades, Carl Royal was sending rent checks to one landlord or another. It wasn't until four years ago that the 50-year-old Royal and his wife were able to buy their first home, just down the street from the Youngs.

They cashed in on their American dream -- carefully. Royal's wife attended a training program for first-time home buyers. The couple signed a 30-year mortgage with a fixed interest rate of about 5 percent on their $110,000 home.

They still love their home and have had no trouble making payments, but Royal knows his investment has taken a hit. Like so many families caught in neighborhoods plagued by foreclosures and bad loans, Royal fears that his property value has fallen.

Houses in the neighborhood typically have lost 14 percent of their value since 2005, a Dispatch analysis found.

Royal said he has considered moving in a year or two but is afraid to have his home appraised.

"There are so many more for-sale signs and empty houses around us than when we first moved in," said Royal, an assembly-line worker for Honda of America in Marysville. "I feel for the people losing their homes, but it really bothers me that we could lose money on our home even though we did nothing wrong."

While some in this neighborhood worry about their house's value, others struggle just to stay in their home.

Across the street from the Young home, 80-year-old Edith Driscall sat in her living room examining the latest county foreclosure list with a picture of Martin Luther King Jr. hanging behind her.

She pointed to her address on the list, shook her head in disgust, and said her son has cut a deal with their lender to ensure that they can remain in the home -- for now.

The trouble started for Driscall and her son when they used an adjustable-rate mortgage to buy their home for $115,000 in 2005. The interest rate soon started ballooning, causing monthly payments to surge from $650 to more than $900.

Driscall, who worked 34 years at a General Electric (NYSE:GE) light-bulb factory in Youngstown, now uses nearly half of her $1,500 monthly income from her pension and Social Security to keep up with house payments, which for now are back down to about $700.

Her son lost his job as a state corrections officer in 2005 and has since had a leg amputated. She helps support him and wishes she could do more for her three grandchildren.

"It's a struggle to make it here, to keep our home," she said. "It's wrong what those loan people did to a neighborhood like this."

The Downtown skyline draws closer, meaning the end of another long day behind the hulking steering wheel for Young. Before he's replaced by the next bus driver, Young receives one more reminder of the financial crisis he can't seem to escape.

He slides his dark sunglasses up on his shaved head, glances toward the row of boarded-up houses on the right and grimaces one more time.

Along this stretch of Mount Vernon Avenue, about a mile from the King Arts Complex, the predominantly black neighborhood is sprinkled with orange and pink foreclosure tags and abandoned houses.

"It's a shame," he says, "to see what has happened to all these homes."

mwagner@dispatch.com

dhaddix@dispatch.com

Newstex ID: KRTB-0147-25712678