NICOLAS P. RETSINAS – Technological ‘revolution’

With technology constantly improving to make the chores of day-to-day life easier, tech-savvy consumers are able to manage much of their time-starved lifestyle online via the Internet or through new computer programs aimed at budgeting and providing financial expertise. One rapidly growing trend is use of the Internet to search for homes and compare mortgage loans and interest rates, but some industry analysts speculate the technology advantage is becoming a disadvantage to some unsuspecting consumers.

In a recent study conducted by the Joint Center for Housing Studies at Harvard University, industry analysts concluded that growing accessibility to technology in some communities is only fueling deceptive lending practices by some members of the mortgage industry.

Nicolas P. Retsinas, director of the housing studies center, said that while technology has helped improve education and efficiency in the mortgage industry, some underprivileged communities are still being taken advantage of with subprime – and sometimes predatory – loans being offered to them online.

“New computer and telecommunications technologies have spawned a revolution in mortgage finance that has enabled millions of low-income and low-wealth families to obtain home mortgages on favorable terms,” said Retsinas. “Yet at the same time, the mortgage broker-led ‘push marketing’ of low-downpayment, high-cost mortgages has left some unsuspecting borrowers with mortgage debt they cannot afford and may not even need.”

Retsinas defined “push-marketing” as a way mortgage lenders entice a consumer with available cash, credit and types of mortgage products they might be able to afford.

“Push marketing is taking advantage of a consumer’s desperation for need of cash,” said Retsinas. “We believe that the current [online] situation is a fertile environment for predatory lending. Technology has allowed lenders to rate credit scoring and underwriting needs and Â… technology enables lenders to sell these mortgage products to consumers.”

‘A Huge Mistake’

The Harvard study found that mortgage brokers are most prevalent in the subprime market. Brokers accounted for almost 45 percent of subprime home mortgage originations in 2002 – 16 percent higher than the share of prime mortgage originations made by brokers – and race continues to be an important factor in determining the allocation of prime mortgage credit. The study also found that the growth of higher-risk subprime lending has produced a substantial increase in foreclosures in low-income and/or minority communities.

Retsinas said the center has studied housing markets over the past 30 years, but several years ago the faculty took a renewed interest in the housing markets and consumer access to capital and credit because “most people don’t have enough under their mattress to buy a home.”

But some Realtors and lenders disagree with the study’s findings and say consumers should simply be smarter when shopping online.

“People think they can get it [loans] better cheaper on their own and that is not necessarily true. I’m a Realtor – I help my buyers get financing all the time – and I help them get the best rates I can without having to go online and, in return, they have someone look out for their best interest,” said Nelson Zide, senior executive vice president of ERA Key Realty in Framingham.

Zide said consumers do take enormous risks if they are going to purchase mortgage products online.

“If they [consumers] are relying on online lenders to get their loans, they are making a huge mistake. Lending, like real estate, can be done on your own but you run the risk of consequences online, because online lenders don’t know you,” said Zide. “Anything done online can be done by a reputable in-person lender. I think there are a lot more opportunities for abuse by a lender – and it can be rampant – if done online with no one there to protect the consumer.”

However, some in the mortgage industry say that even online, a savvy consumer does have protections and tools available to find an appropriate loan. Consumers must take some responsibility for protecting themselves, according to mortgage industry professionals, and education and availability of resources can aid in protecting them from making bad mortgage and homebuying decisions.

While subprime and predatory lending often is targeted to low-income and minority borrowers, lenders have the ability to use technology that only rates the credit scores of the borrower and not the borrower’s ethnic or financial diversity, when offering a loan.

As part of the American Dream Commitment – announced in 2000 to provide $2 trillion in private capital for 18 million minority Americans searching for a home – national lender Fannie Mae introduced technology to further its goal to lower the costs of mortgage originations and expand access to mortgage credit for low-income and minority homebuyers.

“We have introduced technology for quite some time in low- and moderate-income and minority communities,” said Alfred King, spokesman for Fannie Mae. “With automated underwriting technology becoming more widespread, it makes it much easier for online lenders to [satisfy] consumer needs. The beauty of the underwriting system is that it’s color blind – it makes a determination solely on credit and what you [the consumer] are qualified for.”

Fannie Mae recently introduced the “True Cost Calculator” for prospective homebuyers on its Web site. Consumers can use the calculator to compare the cost of various mortgage options. Borrowers can then choose the best, lowest-cost option to meet their needs by calculating all the costs of getting a mortgage, including interest rate and points, mortgage insurance costs, appraisal fees, title insurance fees and miscellaneous settlement charges.

For lenders, Sysdome, a fraud interception and prevention technology company in California, provides an online system for lenders and brokers to check state predatory lending rules and regulations when working with an out-of-state customer.

“Every lender is doing redundant duties to analyze, interpret and put together rules based systems to allow them to understand if they are in compliance with various state predatory lending laws,” said Sysdome executive Jeff Moyer. “The system checks against national laws and Fannie and Freddie [Mac] guidelines when a lender goes to make a loan to make sure they are in compliance with state and national laws.”

But regardless of such technology, recent studies have shown that subprime lending activity is on the rise in the Bay State.

According to a study released last week by the Association of Community Organizations for Reform Now, black borrowers are 4.7 times more likely to get hit with subprime loans, which carry higher interest rates and fees, while Latinos are 3.4 times more likely than whites to get socked with more expensive refinancing deals. The national average is 4.1 for blacks and 2.6 for Latinos, said the report, which is based on 2002 home mortgage data.

Nationally, subprime lenders originated about 27.6 percent of refinance loans to black homeowners and 17.6 percent for Latinos, compared with 6.7 percent for whites. In Massachusetts, about 22.8 percent of black homeowners were stuck with subprime loans and 16.5 percent for Latinos.

ACORN said only 4.9 percent of white homeowners in Massachusetts used subprime lenders, which makes Massachusetts’ racial disparity higher than the rest of the nation.

Retsinas said these studies are published to alert consumers and members of the mortgage industry that certain types of loans and lending activity is prevalent and homebuyers should beware, but he also said education plays a big role in protecting the consumer.

“Mortgage lending is a very complex subject and while we have a whole series of disclosures, you will find very few people who have read these disclosures. Consumer education is a good thing, but for many consumers it’s often desperation that motivates them. They are not in a position to go rate shopping; they are looking for someone to say ‘yes’ to them at the right point in time when the roof is leaking,” said Retsinas. “In the prime market we have made certain strides where we list the rates and fees, but we don’t do that in the subprime market and there are a whole different set of fees and point charges.”

Zide said online mortgage products can be deceiving and consumers who are not familiar with the mortgage industry should rely on a physical person to help them with their homebuying process.

“If you [a consumer] were buying and found a rate that was 4 percent online, I’m going to question that because I know the industry,” said Zide. “There is noting wrong with online lending – there is certainly a niche for it – but if you are looking for reports about predatory lending, online lending is a huge marketplace for predatory lenders and there are always people out there who will take advantage of the consumer.”