Higher subprime rates for blacks, Hispanics baffling

WASHINGTON -- Blacks and Hispanics were far more likely than whites to take out higher-cost subprime mortgages in 2006, the Federal Reserve said Wednesday, even as a respected economic forecast center said the nation was in for a "near-recession experience" due to housing market turmoil.

The Fed report comes as an estimated 2 million or more homeowners — many in minority neighborhoods — are at risk for foreclosure as adjustable-rate subprime loans reset to higher rates. Subprime loans are higher-cost products for those with poor credit.

The housing carnage is hurting the financial markets and the broader economy. The UCLA Anderson Forecast predicts that growth will fall sharply into 2008 but that the economy will be supported by strong exports.

According to the Fed, 53.7% of African Americans who took out mortgages to buy homes in 2006 used higher-cost loans, compared with 46.6% of Hispanics and 17.7% of whites. That's near the 2005 figures.

The longstanding racial disparities narrow when adjusted for such factors as income, the amount borrowed, lender characteristics and loan-to-value ratios, but cannot be explained completely, the Fed said in its annual report on mortgage lending. The gap between blacks and whites narrows from 36 percentage points to about 13 percentage points when other factors are included. The unexplained difference between Hispanics and whites shrinks to about 6 points.

However, even the adjustment "is insufficient to account fully for racial or ethnic differences in the incidence of higher-priced lending; significant differences remain unexplained," the Fed said.

The central bank does not have access to all information that lenders use, such as credit scores.

The Fed told Congress in July it recently referred two cases of possible racial discrimination in lending to the Justice Department. Other federal regulators have taken similar steps, though consumer advocates such as the National Community Reinvestment Coalition say regulators have done too little to protect borrowers.

Treasury Secretary Henry Paulson met Wednesday with lenders to urge them to take all possible steps to help borrowers restructure their mortgages, but he warned there was no quick fix.

"It is going to take some time to work its way out," Paulson said. "We are going to work our way through this, in some markets more quickly than others."

The percentage of borrowers refinancing their mortgages last year who used higher-cost products rose by about 5%. Overall, mortgage borrowing fell 6%, led by a 15% drop in refinancing.