New study shows minorities more likely to be charged prepayment penalties on their home mortgage loans

New study shows minorities more likely to be charged prepayment penalties on their home mortgage loans

By CATHY JETT

Date published: 1/29/2005

By CATHY JETT

People with shaky credit histories who've paid dearly for a home mortgage often wind up in Laura Alridge's office.

Alridge, an attorney with Richmond-based Boleman Law Firm, helps them file for Chapter 13 bankruptcy protection so they can reorganize their finances and prevent foreclosure.

"A lot of times these people have bought too much house and gone to a third-tier lender, which means they've gotten a subprime loan," she said.

These increasingly popular loans come at a higher interest rate than those offered to applicants whose credit records qualify them for prime-rate loans. Some include additional terms, such as penalties for prepayment if the loan is refinanced and balloon payments, which increase the risk of foreclosure.

"These predatory lending schemes make it sound so wonderful, but they really don't explain what's in the loan document," said Alridge. "There's so much emotion wrapped up in buying a home that when people sign the mortgage papers, they don't read them as well as they should. They're just so excited to get the key to their new home."

Her clients would have done better if they'd shopped around before signing on the dotted line, she said. Many subprime lenders can help people with poor credit get a good home loan.

The National Home Equity Mortgage Association, which represents the subprime lending industry, did not return calls seeking comment about these loans.

Homeowners in predominantly minority neighborhoods are 35 percent more likely to have been charged prepayment penalties on subprime loans than those in mostly white neighborhoods, according to a new study by the Center for Responsible Lending at UNC-Chapel Hill.

This puts them at a substantially greater risk of losing their house--along with any equity they've built up, said Michael A. Stegman, one of the study's authors and director of UNC's Center for Community Capitalism.

In the last three months of 2003, more than 2 percent of all subprime loans nationwide entered foreclosure. That's 10 times the rate for all prime loans, according to the study.

And those foreclosure filings add up over time. More than 20 percent of all first-lien subprime refinance loans that originated in 1999 had entered foreclosure by 2003, the study found.

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Date published: 1/29/2005