Beware the Bad Home Loans

Recent foreclosure numbers spell bad news for home owners with subprime mortgage loans. But surprisingly, lendees with good credit are getting bad loans. Bill Spriggs, professor and chair of economics at Howard University, explains why.

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FARAI CHIDEYA, host:

And our last headline takes us to your neighborhood. Last week, the Federal Reserve broke a relative silence on subprime and predatory lending. Up until now, the reserve has resisted stiff regulation. But on Thursday, it held a hearing on possible reforms. That was good timing. The latest foreclosure numbers also came out last week. Nearly one in five subprime loans was either delinquent by more than a month or already in foreclosure.

For more, we talked to Bill Spriggs. He's a professor and chair of economics at Howard University. Spriggs says it's high time the Federal Reserve got involved because when it comes to keeping lenders honest, the buck stops with the fed.

Professor BILL SPRIGGS (Chairman, Department of Economics, Howard University): They have a number of regulatory functions when it comes to banks. And fairness, a major piece of civil rights legislation is their responsibility and that has to do with making sure that everyone has fair acess to credit. It is too often that civil rights organizations forget that.

And when you see the Federal Reserve being grilled by the Senate, when they confirm members of the Board of Governors for the Federal Reserve, rarely do you see people ask questions about what about credit fairness? What about making sure that everybody has access to credit to buy homes, to start businesses? Those questions are never asked of members of the Board of Governors. But that access to credit is access to the American dream because without access to credit, you can't participate in our economy.

CHIDEYA: Let's talk a little bit about redlining and how does - tell us briefly what redlining is. And what have you learned about how redlining is working in the era of the subprime mortgage?

Prof. SPRIGGS: Well, redlining refers to a term that came about when the federal government decided it was going to truly make America a middle class nation. And in '40s and '50s, the federal government got into making sure that home mortgages would be available. They quickly seized upon patterns of discrimination that existed within the housing market. They took the side of realtors who had already been practicing discrimination and setting up segregated neighborhoods.

What they determined was if the neighborhood was all white, then that was a good area to loan money. And if the area was mixed or had a high share of blacks, then it was not. So they literally drew a red line around certain neighborhoods. And we use the term redlining since then to talk about either residential segregation or to talk about banks that tended to follow the pattern of loaning money to white neighborhoods and then redlining or leaving out credit availability to minority neighborhoods. It is against the law and the Federal Reserve is supposed to enforce that law.

Each year, in many communities data, which comes from the Home Mortgage Data Set, which is abbreviated as HMDA, points out that it is more difficult for blacks to get access to home credit. And recently because we have data on the interest rates that blacks pay, we find out that blacks tend to also pay higher interest rates. The Fed has seen this data, the Federal Reserve Bank in Boston studied it extensively and found that there were disparities that could not be explained in any reasonable way. Yet the Federal Reserve is very lax in enforcing this provision of the law that they have the responsibility to enforce that would protect credit discrimination.

When you look at the pattern of where the subprime loans have gone, you see it's the same set of neighborhoods, the same zip codes where banks and others who loan at conventional mortgage rates - the lower interest rates, the more desirable mortgage products, they ignored those neighborhoods and those same neighborhoods are the ones where you see a lot of subprime activity. It's a misnomer because when you hear "subprime," it sounds like, oh, so, you're getting something below the normal rate. But subprime means below good market rate.

CHIDEYA: So people are paying a lot more money over the course of a mortgage. The question now though, since the Federal Reserve is starting to look into this, what is it actually going to do, you think?

Prof. SPRIGGS: Well, the problem, as I see it at the moment, is that the Fed is concentrated on tightening the way in which people get access to credit from anyone and they're making it more difficult for home buyers in the conventional market with the idea that we're going to make it more difficult for people to get loans and we will avoid the high rate of foreclosures that we see in the news all the time in the last couple of months.

But if the Fed looked more carefully, what they would see is that people who got the subprime loans - only a small share were first time homebuyers. The Mortgage Bankers Association says it's about 15 percent. The Center for Responsible Lending says it's something like nine percent. These aren't people who weren't homeowners, who didn't have a track record and the data also revealed that roughly 80 percent of these folks are making on-time payments. Even though they are paying horrendous interest rates and are at a huge disadvantage because these loans have triggers in them that in many cases will make their interest rates go even higher.

The Fed is talking about making it harder for people to get credit, but what they really should be doing is saying if 80 percent of these folks are paying on time under really bad circumstances, where were the banks and those responsible for making the loans at the conventional rate? Was there some discrimination? And if there wasn't discrimination, given that they've proven that they can make payments on a regular basis, they should be looking towards banks, converting those loans from the subprime market to the conventional market to refinance those loans where it's possible.

CHIDEYA: We've been talking about the big picture and government involvement, but if you are a homeowner who has one of these expensive forms of loan, is there anything you can do if you're making your payments and is there any way that you can basically get out of overpaying according - in relationship to other homeowners?

Prof. SPRIGGS: Well, one of the things is that some people because they would've been making regular payments need to get a new credit score and it is possible that their credit score is - will be much higher. It's also possible because some subprime lenders don't report to the credit rating agencies that people may find that their credit scores haven't changed at all.

But to the extent that they have changed, they should be seeking conventional mortgages, and because this has been in the news, hopefully, this will make them aware. They will then seek out some conventional loans where possible. A problem many people have is that some of these loans are predatory in the sense that they have huge pre-payment penalties. In order to get out of mortgage, you have to actually pay off the old mortgage.

CHIDEYA: Well, since we've been talking about the lending industry and how much money some people might be paying for their homes, you have also been working with the Community Service Society of New York, and you've been meeting -talking about the semantics of poverty, what exactly does that mean and what are you trying to bring to light?

Prof. SPRIGGS: Well, we want to reach people where they are in their understanding of things. So people have an understanding about poverty and they have an understanding about poor people. A lot of it comes from having 30 years drummed into their heads by folks who have not been very nice to poor people, who has characterized the poor as shiftless, lazy or doing something that have put them into poverty.

So it's realizing the stories that are in people's heads before you even get to talk about solutions and understanding how do I get you to understand my point when you come with a lot of preconceived notions about who's poor, why are they poor, and beliefs about whether the government can even help them.

CHIDEYA: So is your goal with all of these to change how people think about poverty? To change how people act whether it's government or public policy makers on poverty? What are you - what's your goal with the end-result of this?

Prof. SPRIGGS: Well, hopefully, it's to get policies in place that really would make a difference in the lives of people with low income. So it's to find a way to talk about the policy that makes sense to people and to policy makers in a way that makes sense to them. The numbers alone don't convince people and they are already in their heads, conceiving that poor person is going to be black in their minds. It's going to be woman. They have the welfare queen in their head that was created during the 1980s.

And so, when you approach them about the real world problems that are faced by children in low-income households, with that preconceived notion in mind, even though they would agree with the program, even though they would agree that we have to do better with our schools, we have to do better with our after-school programs, we have to do better with the nutrition of our children, we have to do better with the health of our children. They would get turned off if they think you're getting money to help out those people.

And so it's really how do I talk about it so that I'm on the same page you are on because most Americans, honestly, believe that all children should have a chance in this country and that all children should have the opportunity to a good education and a healthy life.

CHIDEYA: Well, Professor Spriggs, thanks so much.

Prof. SPRIGGS: Thank you.

CHIDEYA: Bill Spriggs is a professor and chair of economics at Howard University.

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