Subprime mortgages: a double-edged sword for borrowers

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Analysis

NEW YORK - The chaos and turmoil going on in the subprime mortgage market brings up the question: How prevalent is this kind of lending in Indian country? And are American Indians targets of predatory lenders?

Although hard numbers are tough to find, it appears that subprime mortgages are a double-edged sword for Native people. On one hand, they bring an access to mortgage credit routinely denied (at least on tribal homelands) until the very recent past. But they also can bring the price gouging and sharp practice of predators.

With the liquidity crisis under way, the closing of dozens of subprime lenders and the sale and bankruptcy of others would appear to have a limited impact on their Native borrowers, except for rumblings growing louder that many subprime borrowers were sold unsuitable mortgages. Specifically, these are adjustable rate mortgages (called interest-only and payment-option mortgages) set to re-price this year or next to higher interest rates that borrowers will find hard to afford.

Indian Country Today recently sorted loans for American Indians in 2005 by those financial institutions that reported to the federal government under the Home Mortgage Disclosure Act. These totals do not separate lending made to Natives on reservations from those made to urban Natives and they do not break out prime (made to those with the best credit) and subprime (tarnished or no credit history). But they suggest a strong percentage of mortgages made to American Indians are subprime and many Natives fit the subprime profile of little or no credit history, bad credit or low incomes.

Just about all of the top 10 lenders to American Indians in 2005 were subprime specialists or a mainstream bank or mortgage bank with a big subprime unit.

The largest lender to American Indians and Alaska Natives in 2005 was Countrywide Home Loans of Pasadena, Calif. Countrywide made $4.5 billion in home loans to American Indians and $3.2 billion to Native Hawaiians. That was a jump of 10 percent for American Indian mortgages and an increase of more than 70 percent to Native Hawaiians.

Countrywide is also one of the largest subprime lenders in the country and made news recently by announcing that a shocking 19 percent of its $100 billion or so in subprime mortgages is delinquent.

Wells Fargo Bank, San Francisco, was the second biggest lender to both Americans Indians and Native Hawaiians. Wells' numbers are hard to determine precisely because it has dozens of units reporting HMDA numbers separately. But its two biggest units, including its finance company based in Minneapolis, reported $2 billion in mortgage lending to American Indians and another $1.5 billion in home loans to Native Hawaiians. Finance companies traditionally are big players in subprime mortgages, and Wells Funding made $322 million in loans to Natives in 2005. Wells has recently laid off hundreds of workers due to the subprime crisis.

Lehman Brothers Bank of New York came in third for 2005, with $1.2 billion in mortgages to American Indians and another $1.2 billion to Native Hawaiians. Lehman owns several subprime mortgage units.

New Century Mortgage of Irvine, Calif., another subprime lender with a big Indian volume, is one of the central lenders in the subprime crisis. It has filed for bankruptcy protection. It was a top 10 lender to Indians in 2005, with $500 million in business.

In all, some 3,500 lenders made $27.2 billion in mortgages to American Indians and Alaska Natives for 2005, HMDA numbers show, and $26.5 billion in home loans to Native Hawaiians and other Pacific Islanders.

The total of $53.7 billion in Native lending is a big jump from 2004, when lenders reported making $24.9 billion in American Indian loans and $21 billion to Native Hawaiians. That's a 17 percent boost in lending. Subprime lending seems to be a big part of this increase judging from the top 10.

What about predatory lending? In 2005, the Federal Reserve Bank issued an analysis of 2004 HMDA numbers that showed considerable mortgage overcharging to Natives.

While subprime lenders are legitimately allowed to charge higher interest rates to borrowers because of increased risk of delinquencies, the industry has always been accused of overcharging more than it legitimately should.

The Fed found that 17 percent of American Indian borrowers were overcharged in 2004, compared to 10 percent for whites. On refinances, 20 percent of Native borrowers were overcharged (by 4 percent to 7 percent more than comparable Treasury securities), compared to 10 percent of whites. And a whopping 35 percent of Native ''government'' loan borrowers were overcharged, although 30 percent of whites were, too.

The National American Indian Housing Council surveyed its members on predatory lending a couple of years ago. While its sample was small, many of its member Native housing agencies reported price gouging of up to 30 percent interest rates.

Another nonprofit, the National Community Reinvestment Corp., studied HMDA data and reported that more than 60 percent of Natives in New Mexico received high-cost or manufactured housing loans, as well as more than 30 percent of Natives in South Dakota.