Expanded lending to lower-income borrowers has led to the creation of a “dual mortgage delivery system,” an almost distinctly separate process for lower vs. higher income borrowers, according to a national Harvard University study. But local mortgage industry players avow that borrowers with the same credit profiles receive the same options.

A dual system has emerged in most metro areas across the board, and in higher proportion in lower income, inner-city areas, according to William Apgar, senior scholar at the Joint Center for Housing Studies at Harvard University in Cambridge.

“The good news is that there’s been substantial growth in lending and credit flow in lower income areas. The bad news is whether it’s in the best terms possible,” said Apgar.

Apgar pointed to the national spike in subprime lending among low-income borrowers in low-income neighborhoods. Prime lending, under the most favorable terms, accounted for only 37 percent of the growth in lower-income lending, compared to 81 percent in lending to higher-income borrowers, according to the center’s 2002 “The State of the Nation’s Housing” report.

“Most subprime loans are not abusive,” Apgar said. “But some companies camp out in neighborhoods where, clearly, loans are made to people who don’t have a chance of repaying them, where the loan almost for sure will default.”

While no data specific to Boston has been gathered, studies have been performed in Atlanta, Baltimore, Chicago and New York’s Nassau County area. All show a high probability of subprime loans ending in default, Apgar said. And, according to a Freddie Mac analysis of national data, the probability of a subprime loan ending in default is eight times higher than a prime loan ending in such a way, Apgar added.

“The question is, one, will a subprime loan be the best loan for which a borrower would qualify and, two, if and once received, does it have abusive features,” Apgar said. Both points raise a subset of concerns not just for the individual alone.

“Foreclosed properties can have a devastating effect in lower-income areas. In areas where the market is slower, foreclosed properties could sit on the market, and empty properties in lower-income neighborhoods can be victimized,” said Apgar.

Local mortgage experts note that predatory lending was more predominant among subprime loans five years ago than it is now, and that they have not observed a dual system in the Boston area.

“From my perspective, when someone says there are two channels impacting certain areas of the market based on income or location of property, I don’t necessarily believe that’s true,” said Nathan Hagen, chairman of the Massachusetts Mortgage Bankers Association. “As long as we’re comparing the same borrowers, if there is such a thing, they should be getting the same products … Yet, certainly, different credit-rated borrowers do get different types of products, based on credit score, down payment, things like that.”

‘Paradigm Shift’

In the past five years, the Fannie Mae Foundation and Freddie Mac have extended their products and programs to take into consideration some borrowers who typically would not have qualified for “A”-type loans, Hagen added, leveling the playing field with what is now available to people with riskier credit profiles.

“If anything, they’ve narrowed the gap between the types of loan products available among different types of credit-profile borrowers,” he said.

The true gap is not necessarily between two channels of low vs. high income, but people who fall into the “A” category and out of the “A” category, according to Hagen. And with automated underwriting, the computer model actually places less emphasis on income and more on credit history, according to John Brodrick, president of First Service Home Mortgage of Westwood and vice chairman of the Massachusetts Mortgage Association.

“There’s sort of been a paradigm shift in the mortgage lending service with the development of automated tools. Underwriting used to be very rules-oriented, ratio-strict,” said Brodrick. “Now a lot of higher ratio loans … fly right through under Fannie Mae and Freddie Mac … that would never have gone through five years ago. Conversely, you could have a great income, but if there were credit problems in the past, it would be more difficult for you because of the computer model.”

This more accurate reflection of risk level is of benefit to all borrowers, said Brodrick, who noted that he also has not observed the development of a dual delivery system in the Boston marketplace.

The national Harvard study, however, found that a dual system was supported in other areas by the emergence of a set of “new types” of lending organizations that differentiate between high- and low-income borrowers and often fall outside the fully regulated environment. Many of these players are subprime subsidiaries of regulated entities, different institutions offering different terms in the form of higher-cost mortgage products. Visibility, regulation and market support are the major differences between these lending organizations and other institutions.

“Where a bank examiner would have raised eyebrows at a high probability of default, these companies sometimes fall through the cracks. There is not as good regulation from the top, or from the bottom, through community pressure,” Apgar said. “So there’s more possibility for mischief.”

Loan packing is another problem. Some subprime loans pack various features unrelated to the subprime loan – for instance, many are sold with credit life insurance policies, with $6,000 added to the loan amount to fund the life insurance policy.

“Some of the most abusive loans are made to folks for a small amount of money, but with fees and additional life insurance policies, they’re getting very little money,” a process also known as “equity stripping,” Apgar said.

“The predatory lender is protected as long as there’s value in the property, if the homeowner doesn’t have the ability to pay. The investor is protected because of foreclosure. But the homeowner and the neighborhood get chewed up,” said Apgar.

At the most basic level, the Federal Reserve Board has issued guidelines to enhance the regulation of subprime lending. Also, Freddie Mac and the Fannie Mae Foundation have imposed some discipline and standardization, and their transactions are subject to greater scrutiny by federal regulators.

Several national bills have been introduced to regulate mortgage loans to not include such features, Apgar said. Education is part of the response, as first-time buyers and seniors can be ripe for the picking. Monitoring behavior is also critical. Many communities are doing a better job of monitoring foreclosures and identifying areas where problem loans are being originated.

“If three or four foreclosures have occurred, 10 more are likely to happen,” Apgar said. “Increased lending to lower-income borrowers opens up opportunities, but there is some baggage it brings along.”