Sub-Prime Loans Hurt Minorities
In 2005, 53 percent of African-Americans who received new mortgages in Philadelphia and its adjacent Pennsylvania counties got high-cost loans, according to recent research by the Association of Community Organizations for Reform Now ("ACORN"), as reported by the Sun Herald. Furthermore, the figure was 35.5 percent for Latino borrowers, followed by 13 percent for whites.
ACORN found that the disparity is not a result of economic differences, because upper-income African-Americans were almost five times as likely, and upper-income Latinos were three times as likely, as their upper-income white counterparts to receive high-cost loans. The results were basically the same in most of the 130 U.S. cities studied.
ACORN concludes that lenders are pushing such profitable high-cost loans to borrowers who could qualify for less expensive, conventional loans. Accordingly, previous studies have found that one third to one half of sub-prime borrowers could have gotten better deals.
A typical sub-prime loan has an adjustable rate figured by adding 5.5 percentage points to the six-month London Inter-Bank Offer Rate. Early in 2004, the LIBOR rate was about 1.2 percent. Currently, it is about 5.4 percent. That means a loan that charged 6.7 percent at the start of 2004 could jump to nearly 11 percent at its next adjustment - compared with the 6.5 percent fixed-rate you can get on a typical 30-year mortgage. For every $100,000 borrowed, the monthly payment would rise from $646 to $952. Thus, it is no wonder that lenders would be motivated to market and sell such high-cost loans.
Because 60 percent of sub-prime loans are set to have their interest rates change by the end of 2006, adjustable-rate mortgages (ARMs) pose a large threat to individual homeowner and neighborhood security.
Homeowners facing rate increases that make their payments too expensive can try to sell their properties, which may be difficult in today's market. The other option is to refinance with a standard 30-year, fixed-rate loan. It is a good idea for consumers in such situations to obtain debt counseling, check their credit reports for mistakes, and shop around among lenders for a good refinancing deal.