Choosing the right mortgage loan is complicated.
Borrowers must pick from options including adjustable interest rates, interest-only payments and making no down payment. Even the most educated borrowers struggle.
Small things, such as saving a little more for a down payment or paying a few debts to improve a credit score, can make a big difference in the interest rate a borrower receives.
As many as 6 in 10 borrowers from high-rate lenders were close to qualifying for a lower rate, industry statistics show. Studies show half of those could have qualified for a lower rate immediately.
Blacks on average are less familiar with the steps borrowers must take to secure the lowest rates, according to Fannie Mae's 2003 national housing survey. Most grew up in families that rented.
But if blacks need more guidance, studies suggest they get less: Real estate agents may offer less advice; brokers may recommend more expensive loans.
African Americans also face outright rejection. Last year, the nation's 10 largest banks denied 8 percent of white applications and 21 percent of black applications.
As a result, some blacks never ask a bank about a loan, said Louise Mack, who runs Prosperity Unlimited, a community development group in Kannapolis, N.C.
"People just feel like a bank is going to turn them down," she said. "You see this house and you want it right away, so you just go to whoever you think will give you the money."
Often that means going to an independent mortgage broker who specializes in high-rate loans. These brokers sell two-thirds of high-rate loans. Their offices and advertisements are common in lower-income neighborhoods.
Brokers, who can help guide borrowers through a complex process, play a large role in determining prices. They match borrowers with loans, drawing on offers from multiple lenders, for a fee paid by the borrower.
Brokers are not required to give customers the lowest possible rate. Often, they can make more money by increasing the interest rate. And they are paid a percentage of the loan amount, so they make more money if they convince a customer to take a larger loan.
The Department of Housing and Urban Development estimated in 2002 that brokers overcharged customers by about $3 billion a year.
High-rate lenders let borrowers use more of their income for loan payments _ typically up to 55 percent for all debts. That can allow people to buy larger homes but leaves them more exposed if they experience financial setbacks.
High-rate borrowers default far more often, industry statistics show. They stop making monthly payments, and the house is taken by the lender.
These foreclosures decrease the value of surrounding properties by thousands of dollars and increase crime, according to a study of Chicago foreclosures released in May by the Homeownership Preservation Foundation, a nonprofit funded by the lending industry.
High-rate lenders say those defaults validate their pricing model, and that some defaults are the price of extending homeownership to people who can't get loans from banks.
After stagnating for 30 years, homeownership rates climbed toward 70 percent over the last decade _ 76 percent of white households and 49.7 percent of black households in 2004.
"If you have zero defaults, you're letting too many people that would otherwise be helped go away," said Jay Brinkmann, vice president of research and economics for the Washington-based Mortgage Bankers Association.
Community advocates say the concentration of defaults in minority neighborhoods hurts the places high-rate lenders say they are seeking to lift up.
Advocates hope the federal government's release of national pricing data next month will pressure lenders to improve the pricing on loans they sell in minority communities.
Already, New York Attorney General Eliot Spitzer has walked into a fight with federal regulators by insisting banks turn over more data so the public can judge how prices are determined.
And several activist groups say they are waiting for final data before filing lawsuits charging that lenders are not providing minority communities with equal access to low-rate loans.
"Now we have one more tool to expose" discrimination, said Stella Adams, director of the North Carolina Fair Housing Center. "The more we can hold folks accountable, the better."
(c) 2005, The Charlotte Observer (Charlotte, N.C.). Distributed by Knight Ridder/Tribune Information Services.
