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Minority members who live in highly segregated neighborhoods in the Twin Cities area are caught coming and going.

Regardless of their income, they're more likely to be denied a mortgage. And if they can get a mortgage, they're more likely to pay a higher interest rate. Those issues contribute to much higher defaults and foreclosures in their neighborhoods.

Those are the conclusions of a study released today by the Institute on Race and Poverty at the University of Minnesota's Law School, which analyzed data provided by mortgage lenders under a federal mandate called the Home Mortgage Disclosure Act (HMDA).

Myron Orfield, an associate law professor and co-author of the study, said that although it was no surprise that minority members in the Twin Cities area were treated differently by mortgage lenders, he was shocked at how pervasive the problem is even among high-income residents.

"It's a piece of a really deep problem of racial segregation we've never come to terms with," Orfield said.

According to the report, blacks are five times more likely to receive a subprime home purchase loan than whites, while Hispanics were four times more likely and Asians were twice as likely. In addition, the report said that high-income black, Hispanic and Asian applicants have a higher denial rate for purchases and refinances than even low-income whites.

Paul Schuster, vice president of Marketplace Home Mortgage and president of the Minnesota Mortgage Association, said there's no denying that some borrowers have been overcharged. But he cautioned that HMDA doesn't collect enough information to draw the conclusions cited in the report.

'Many factors' in loans

"There are many factors that go into a loan and a loan decision," Schuster said. "And the HMDA doesn't tell the whole story."

In particular, he's concerned that the data don't include critical details that could shed light on what's really happening in the broader market, such as credit scores, debt-to-income ratios, how the loan was documented and loan-to-value ratios that can affect the cost of a loan. He said the association has been an advocate of increased regulation in an effort to weed out unethical behavior.

"There was inadequate regulation in our industry and inadequate enforcement of existing laws, to some degree," Schuster said. "Our industry supports fair lending in all areas with no discrimination of any type. If any borrower feels they've been discriminated against, we encourage them to take the next step and report it."

Orfield agrees that it would be enlightening to include credit score data in the analysis to get a better understanding of what's happening. He blames the federal government for not doing a better job of enforcing fair housing laws and punishing those who violate them.

Prentiss Cox, a University of Minnesota law professor who has spent years researching lending practices in the Twin Cities, said that even without the credit score information, the data point to serious problems. At the core of the issue, Cox said, is uneven enforcement of fair housing laws.

In addition, he said, the mortgage industry has long offered incentives to brokers who charge a higher interest rate than the best-available. "In those instances, you almost always see racial discrimination."

Cox compared what has happened in the mortgage industry to discriminatory lending practices that were found when an analysis of car loans -- which factored in credit scores -- showed that minority members paid more for financing.

Though the Race and Poverty report found that overcharged borrowers are concentrated in highly segregated communities, Orfield said it's a concern for everyone. He noted that there's a strong correlation between high-priced subprime mortgages and the incidence of foreclosure, and that brings down home values throughout the community. What's more, he said, prospective employers and businesses are less likely to locate in communities with highly segregated neighborhoods and widespread pockets of declining home values.

"Billions of dollars have been lost in these neighborhoods because of racial segregation, and that lack of prime credit has contributed to segregation," Orfield said.

He said that there's a contrast between the economic health of segregated neighborhoods in cities such as Milwaukee, Baltimore and Gary, Ind., and the more desegregated neighborhoods in cities such as Boston, Seattle and San Francisco.

"Allowing really serious segregation to take root in a neighborhood is a deterrent to the strength of the economy and the workforce and the wellbeing of the people," Orfield said.

A complete copy of the report is available at www.startribune.com/pdf.

Jim Buchta • 612-673-7376