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Subprime Loans and Unanswered Questions

The reverse redlining that characterized the marketing and pricing of subprime mortgages during the housing boom rarely gets the attention it deserves for the insidious and unfair practice that it was - and for the damage it left behind. But in a welcome development, that’s about to change.

Don’t thank Congress. Lawmakers are still dithering over a mortgage rescue plan. So, in the meantime, local officials are getting aggressive about stopping foreclosures they say are related to reverse redlining, which involved targeting with higher-priced loans the same neighborhoods once redlined by banks and lenders.

The Massachusetts attorney general last week filed suit against Option One Mortgage Corp. and its owner, H&R Block, Inc., contending the firms pushed risky mortgage products specifically on black and Latino borrowers, and required them to pay higher fees - sometimes twice as much - than white borrowers. The AG wants to stop foreclosures due to the loans and require them to be modified at more reasonable rates.

The suit highlights something that hasn’t gotten much coverage during this crisis. People may disagree over whether subprime borrowers were victims, or whether they may have lied or cheated to get their loans, or whether they simply weren’t financially sophisticated and shouldn’t have signed on the bottom line. But there’s no getting around the fact that blacks and Latinos were more likely than white borrowers with similar credit scores to end up with subprime mortgages, and to have paid more for them.

That didn’t happen just by accident. Here’s how reverse redlining works, as described by the Massachusetts AG:

Specifically, the companies encouraged employees and brokers to focus on the “emerging markets” of black and Latino homebuyers, who Option One and H&R Block described as having credit concerns, a lack of familiarity with the credit system and difficulty demonstrating conventional credit history. The companies also instructed loan officers and mortgage brokers to partner with real estate brokers to who shared the same race or ethnicity as minority borrowers and to work with “trusted groups in the community” in order to sell H&R Block products. H&R Block encouraged specific tactics such as visiting community centers and houses of worship to target specific communities and gain the confidence of potential black and Latino borrowers.

The end result? A black homeowner with a credit score of 523 paid $10,635 to refinance a $167,000 loan, while a white borrower with a credit score of 520 paid $2,275 to refinance a $200,000 loan, according to the Attorney General.

At creditslips.org, Elizabeth Warren, a Harvard University credit expert, noted that the AG said this sort of thing happened systematically in Massachusetts and across the country. While the bad old days of redlining may be gone, “now some lenders seem to draw a line around minority neighborhoods, then paint a big bulls-eye on them,” she said.

To her, the AG’s action raises even more questions. Where are the other AGs? Why aren’t they investigating this? Where’s the outcry against H&R Block?

Redlining and its role in the subprime mess began getting a higher profile when Fannie Mae and other lenders started charging more for borrowers in zip codes with declining home values, a practice the company dumped after heavy criticism. The AG’s action is further proof that the redlining controversy only is going to continue - at least until the question of why minority borrowers paid more for loans during the housing boom finally is addressed.

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