A study warns that homeowners in the Midwest and South and minority communities nationwide are most at risk of mortgage rate shock as the three-fourths of all subprime home loans that are adjustable rate mortgages (ARMs) become harder for borrowers to repay.
The report, "The Impending Rate Shock: A study of home mortgages in 130 American Cities," looks at which communities will be hit hardest by rising interest rates. It was issued by ACORN, a grass-roots community activist organization.
Using data available under the Home Mortgage Disclosure Act, ACORN's study examines the extent of high-cost (subprime) lending in 130 metropolitan areas and the disparities between borrowers of different race and income levels.
Borrowers with subprime loans are already paying higher interest rates and are more likely to be lower-income and have fewer resources to cope with the coming "rate shock" when their interest rates adjust even higher.
The top 10 areas at the greatest risk of "rate adjustment shock," where high-cost loans represented more than two of every five home purchase and refinance loan, were largely concentrated in the South and Midwest. These areas are: Detroit and Flint, Mich.; Memphis, Tenn.; Jackson, Miss.; McAllen, El Paso, Laredo and Brownsville, Texas; Springfield, Ill.; and Birmingham, Ala.
"Rate shock could mean and a sharp increase in foreclosures in some of the urban and minority communities that most need to build wealth through homeownership," said ACORN President Maude Hurd. "Too many of our neighbors are being steered into ARMs without given an option for a fixed rate and without given an explanation of the risks."
Racial Disparities
The study revealed that minority neighborhoods are at a greater risk of rate shock than neighborhoods that are predominantly white, because of the disproportionately high share of subprime loans held by homeowners in these communities.
In most metropolitan areas, upper-income minority borrowers are at a greater risk than upper and lower-income white borrowers as well.
There were 12 metropolitan areas where upper-income African-Americans were at least three times more likely to receive a high-cost loan than upper-income whites. Five of those areas are in California -- San Francisco, Oakland, San Jose, Los Angeles, and San Diego.
The disparities were even greater between upper-income African-Americans and upper-income white homebuyers. The study identified 15 metropolitan areas where upper-income African-Americans were at least five times more likely to receive a high-cost purchase loan than upper-income whites.
And upper-income Latinos were at least five times more likely than upper-income whites to receive a high-cost refinance loan in the following seven metropolitan areas: San Francisco, Calif.; Bethesda, Md.; Washington, D.C.: San Jose, Calif.; Bridgeport, Conn.; New York, N.Y.; and Santa Ana, Calif.
ACORN used a sample of 275 lenders that are owned by 15 of the largest lenders in the country. According to industry estimates, these lenders represent 65.5 percent of all residential mortgages originated in 2005 and 55 percent of the subprime market.
ACORN recommends that federal banking regulators require lenders to underwrite risky loans, such as interest-only and option ARMs, based on the borrower's capacity to repay the mortgage during the life of the loan considering the highest interest rates, the maximum possible negative amortization, and significant increases in monthly payments after the introductory minimum payment period expires.
Borrowers are advised to seek HUD-certified homeownership counseling to receive advice about receiving an appropriate loan and to ensure they are not taken advantage of by unscrupulous lenders. Borrowers can also call a local ACORN office for assistance.
The complete text of the report is available online (.pdf file).
