More people are paying higher interest rates, Fed says - Those with mortgages more than 2.28 percentage points above the prime lending rate doubled in a year, it reported

The proportion of U.S. home buyers who took out high-priced mortgage loans doubled last year, according to a new Federal Reserve study of home-purchase loans.

One-fifth of the six million home-purchase loans counted by government agencies last year were priced at more than 2.28 percentage points above the prime lending rate, Fed researchers found. That's up from just one-tenth of the similar-size portfolio of loans that were made at higher rates the previous year.

In 2005, high-rate loans included half of all home-purchase loans by African Americans, two out of five loans to Latinos, and one-sixth of loans to whites and Asians. More than half of all trailer-home buyers -- most of whom are white -- paid higher rates as well.

Why are so many paying extra? Thanks to improved credit reporting and high demand for mortgage loans by investors, many people who used to get turned down for loans are now "offered credit at higher prices," according to the Fed.

Part of the disparity between black and Latino home buyers, who tended to get above-market-cost loans, and white and Asian borrowers can be explained by differences in incomes between different groups, according to the study, which was released yesterday.

And part can be explained by different groups' patronizing different lenders: Some high-interest-rate lenders have largely African American clients, while others that feature lower loan rates lend mostly to whites.

But "significant differences remain unexplained" and could possibly result from poor credit history among some minority borrowers, higher lender costs for loans to first-time borrowers (who are more likely to be members of minority groups), or "discriminatory treatment of minority groups," according to the study.

High-rate mortgages were slightly less common in the Northeast than other regions, according to the Fed. Philadelphia and its Pennsylvania suburbs had below-average levels of high-cost home loans; the South Jersey suburbs were close to average; and the Vineland-Millville-Bridgeton area had one of the highest proportions of high-cost mortgages in the Northeast.

The authors, Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner of the Fed's Division of Research, adjusted the data to reduce distortion from last year's unusual changes in long-term interest rates; otherwise, the increase in high-cost loans would have looked even bigger. But they warned that the number of high-cost loans may still have been exaggerated by the formula that government agencies use to collect data on adjustable-rate mortgages, which accounted for about one-fifth of home-purchase loans last year.

The Fed also found a steep increase in the number of home buyers -- many of them relatively affluent, but with low credit scores -- who "piggybacked" two loans to afford the large homes they wanted. Lenders financed 1.4 million piggyback home-purchase loans last year, up 74 percent from 2004.

The loans have obvious advantages: "Instead of getting a 95 percent loan and paying mortgage insurance, they get an 80 percent loan plus a 15 percent loan," plus the usual mortgage-tax advantages, said Art Herling, regional vice president for Long & Foster Real Estate Inc. in the Philadelphia area.

The study also found that lenders were less likely to make high-cost loans in the low-income, mostly inner-city areas targeted by the federal Community Reinvestment Act of 1977, which requires banks to lend money in poor neighborhoods. According to the study, banks often make market-rate loans in those neighborhoods, where they support credit-education programs that tell borrowers how to qualify for better rates.

But poor people living in middle-income neighborhoods or smaller cities are less likely to benefit from special bank-loan programs, and are more likely to pay higher rates for their loans to mortgage companies or other home lenders that are exempt from the reinvestment act, the study showed.