Executive Summary

Report

Recommendations

Appendix I

Press Release

Statewide, home purchase and refinance lending increased to all ethnic groups, but Black and Hispanic applicants remain a much smaller proportion of the total applicant pool relative to their proportion of the population.

Loans to Hispanic applicants increased 22.6% over 1996 levels, while lenders reported a 21.9% increase in loans to White applicants in 1998. Although lenders made far more loans to Hispanic applicants, their share of the loan market remained flat at about 16%, and far short of the Hispanic population in Texas, estimated at about 29.7% of Texans. (4)

Home purchase loans to Black applicants increased only 19.4%—less than the growth in the market as a whole. As a result, although more Black applicants received loans in 1998, Blacks also saw their share of the overall home purchase loan market remain flat at 5.7%, less than half their presence in the population. (5) By contrast, more than three times as many Black borrowers refinanced their homes in 1998 as in 1996, a larger increase than the increase in refinance for Whites in 1998. Combined with the dramatic decline in home improvement lending to Black borrowers, we believe that a substantial number of Black Texans sought cash-out refinance once Texas approved home equity lending in 1998.

While the number of home purchase loans to minority applicants grew statewide, minorities in some cities actually took fewer home loans in 1998 than in 1996. Blacks are a smaller proportion of the applicant pool and received a smaller number of loans in Austin/San Marcos, Beaumont/Port Arthur, and San Antonio in 1998 than they did in 1996. Hispanics are a slightly smaller proportion of the loan pool in Laredo and Brownsville.

Minority Applicants Get More Subprime and Manufactured Home Loans

Manufactured home and subprime lenders—who typically charge more in interest, points or both for a mortgage loan—make a disproportionate number of the total home purchase loans to minority borrowers. 20 percent of Black borrowers and 18 percent of Hispanic borrowers statewide received home purchase loans from a manufactured home or subprime lender, compared to only 14 percent of White borrowers. While only 2.3 percent of White borrowers got subprime home loans, 7.8 percent of Black borrowers got subprime home loans.

This is in part because certain subprime lenders, like Amresco Residential Mortgage, make more home purchase loans to minority borrowers than to white borrowers. Although Blacks accounted for only three were subprime lenders, and two were large FHA-program lenders. Loans in all these categories tend to cost more than prime, conforming mortgage loans. (6)

Refinance in Low Income/Minority Areas

Black applicants disproportionately get their refinance loans from subprime lenders as well, and the disparity is even stronger than in the home purchase market. Statewide in 1998, 27 percent of Black borrowers refinanced their home through a subprime lender, compared to 15.3 percent of Hispanic borrowers and only 6.3 percent of White borrowers. While Blacks made up only 4.8 percent of the refinance market, they took out 12 percent of the subprime loans.

Six of the top ten refinance lenders to white borrowers statewide were banks, and none were subprime lenders. By contrast, five of the top ten refinance lenders to black borrowers were subprime lenders, and only three were banks (or bank affiliates).

Overall, subprime lenders are also more common in low income tracts. The ten largest lenders refinancing all homes in low income areas included five subprime lenders, one manufactured home lender, and two banks (or bank affiliates).

The top ten lenders to Black refinance borrowers in low income census tracts were nearly all subprime companies—seven of ten. (7) By contrast, only one of the top ten refinance lenders to White borrowers in low income tracts statewide is a subprime lender—Ameriquest Mortgage. WMC Mortgage, Aames Funding, and Ameriquest made far more loans to minority borrowers in low income tracts than to white borrowers.

This pattern is most striking in Dallas. There, eight of the top ten refinance lenders to Black borrowers in low income census tracts in 1998 were subprime lenders, while only two of the largest lenders to whites refinancing homes in these same tracts were subprime lenders. While most large subprime lenders operating in the Dallas area are independent mortgage companies, some are bank affilitates. Bank One Texas—a prime lending bank— was the top refinance lender to all racial groups in low income areas. Banc One Financial Services, the subprime affiliate of Bank One, made more loans to minority borrowers than white borrowers and was one of the top lenders to Blacks. Five of the nation’s largest subprime companies are owned by banks, except that Bank One recently sold Banc One Financial Services to Household Finance. (8)

When we look at all Dallas census tracts at low, moderate or median income levels (up to 120% median family), we find that six of the top ten lenders to Black applicants were subprime and none of the top ten lenders to White applicants were subprime. In Dallas census tracts with income below 120% median family, 39.2% of Black applicants received subprime home refinance loans while only 10.2% of whites and 17.1% of Hispanics borrowed from a subprime lender.

In Houston, six of the top ten refinance lenders to Blacks in low income areas were subprime, including the two largest ,Ameriquest and WMC Mortgage. In Austin, the largest refinance lender to black borrowers in low income tracts was Aames Funding, a subprime lender, while Countrywide Home Loans was the largest lender to white borrowers. In San Antonio, seven of the top ten refinance lenders to Hispanic borrowers in low income areas were subprime lenders, while only three of the top lenders to white borrowers were subprime companies.

The Woodstock Institute recently released a report of mortgage lending in the Chicago area that found subprime lenders dominant in black neighborhoods, regardless of the income level of the area. From 1993 to 1998 subprime home equity lending in Chicago grew in Black neighborhoods by 30 times, compared to 2.5 times in white areas. (9)

In Texas, where 1998 was the first year for home equity lending, we have already seen that the refinance market grew more among black borrowers than white borrowers in that first year. The relatively high level of refinance lending among Black borrowers in 1998, combined with the high level of subprime refinance lending among Blacks in low income areas, may indicate that lenders are steering Black applicants into higher cost home equity loans.

The high level of subprime lending among Black borrowers does not necessarily indicate discrimination, because HMDA data provides no information about a borrower’s credit history. However, the strong distinction between the lenders who loan to blacks and those who loan to whites—all living in low income areas—raises questions that can only be answered by direct testing.

NOTES:

4 Population Estimates for States by Race and Hispanic Origin: July 1, 1998. U.S. Census Bureau, (ST-98-30). www.census.gov/population/estimates/state/srh/shrus98.txt.

5 ibid. Black population estimated at 12.3 percent of Texas population.

6 FHA loans cost more because borrowers must pay an insurance premium up front of about 2.25 percent of the loan amount, plus .5 percent of the loan amount annually. However, the loans are still very attractive for many borrowers because FHA interest rates are reasonably competitive with conventional rates, and FHA requires a downpayment of only 3 percent. We identified FHA lenders as any lender who reported more than 40 percent of its owner-occupied home purchase loans statewide as FHA loans. Many lenders that are primarily conventional lenders also make some FHA loans.

7 Seven of the ten largest lenders to black refinance borrowers were subprime companies: Ameriquest Mortgage, WMC Mortgage, Aames Funding, Banc One Financial Services, Amresco Mortgage, New Century Mortgage, and The Associates. Six of these were also among the ten largest refinance lenders to Hispanic borrowers (all but Amresco Mortgage).

8 Carpenter, Dave, "Bank One Sells Loan Portfolio to Household," March 23, 2000, Associated Press State and Local Wire, PM cycle. Muolo, Paul, "Wholesale subprime volumes up," B&C News, Vol. 9, No. 7, p. 41, April, 2000.

9 Woodstock Institute, "Report Finds Dual Market in Refinance Loans," press release November 15, 1999.