As the credit spigot dried up in 2008, blacks and Hispanics were more likely to be denied mortgage loans than whites, an Observer analysis of the latest national mortgage data found.

    And the rejection gap is growing between whites and minorities, causing some community activists to worry about recurring discrimination in lending.

    Nearly one out of two African Americans who sought to buy a single-family home or refinance a loan were denied, compared with about one in four for whites, according to the analysis of top U.S. lenders. Hispanic loan applications were denied nearly as often as those submitted by blacks.

    Overall, the country's 10 biggest lenders, including Charlotte's big banks, denied nearly one out of every three applications - the highest rate in the past five years - as the financial crisis erupted. The denial rate was higher for refinancings than for home-purchase loans, as homeowners struggled to get loans with better terms amid rising economic woes and falling housing prices.

    A key reason for the latest spike in denial rates, experts suggest, is that lenders disproportionately peddled high-interest rate subprime loans to blacks and Hispanics. Now that market is drying up, eliminating a once-easy source of credit. And those who had unaffordable loans are having a tough time refinancing in the recession.

    "The role of race continues to play out in our society," said Peter Skillern, executive director of the Community Reinvestment Association of North Carolina. "Credit is hard to get for everyone. It's disproportionately hard to get if you're African American."

    Banks say race is not a factor when they make loans. Discrimination in lending is illegal. "Obviously, denials based on race are unacceptable," said Paul Leonard, vice president for government affairs with the Housing Policy Council, which represents big mortgage lenders.

    While the group has not yet studied this year's Home Mortgage Disclosure Act data, the Housing Policy Council expects denial rates to rise because of general economic conditions and tighter underwriting standards required by regulators, Leonard said. Lenders, for example, are taking more steps to document income, requiring bigger down payments and offering fewer products. "Mortgage lending will be tighter for the foreseeable future," Leonard said.

    The Observer's review of the biggest banks comes ahead of a Federal Reserve analysis of all lenders that is expected to be released in September. The banks in the examination accounted for more than 70 percent of total loans by dollar value in 2008, according to Inside Mortgage Finance.

    The Carolinas fared a little better than the rest of the nation, according to the Observer's analysis. The 10 lenders denied loans for applicants of all races 25 percent of the time in North Carolina and 27 percent of the time in South Carolina, compared with a national rate of 31 percent. In North Carolina, the rates for blacks rose to 38 percent denied from 33 percent in 2007, while whites increased to 21 percent from 17 percent.

    In the Charlotte metro area, the banks denied loans 23 percent of the time - 37 percent for blacks and 20 percent for whites.

    Historically, whites have had an easier time getting home loans and ones with better interest rates than minorities. Earlier this decade the rejection gap between whites and African Americans had narrowed in the U.S. But in 2008, that spread increased to 19.4 percentage points from 16.6 percentage points in 2007, the Observer found.

    There are myriad reasons why blacks might be denied more than whites, according to experts and government studies. Blacks on average have less wealth and more credit problems, and on average know less about the home-buying process. Discrimination can also occur throughout the lending process. Blacks get less information, less assistance and less favorable terms from mortgage lenders, studies have shown.

    The mortgage data studied by the Observer doesn't include information that would definitively show whether lenders are making lending decisions based on race. Banks don't have to provide information about credit scores or down payments - information that would shed more light on prospective borrowers' financial circumstances.

    The data does include borrower income, one sign of a borrowers' ability to make loan payments. Taking income into account, however, didn't erase the disparity. Blacks were denied more often than whites with the same or lower incomes.

    "Re-Redlining"

    To be sure, the decline in lending can be a positive development if it means banks are more thoroughly reviewing the loans they make and being more careful about a borrower's ability to make payments.

    "People are not getting into homes the way they used to," said Ralphine Caldwell, a senior vice president with The Homeownership Center of Charlotte, part of the nonprofit Housing Partnership. "That's the way it is. I'm not saying it's a bad thing. Some people are probably not ready to be in a home."

    But some community advocates worry that the Observer's findings point to yet another inequity in the mortgage lending process for minorities.

    Decades ago, banks "redlined" minority neighborhoods where they refused to lend. Then during the subprime boom, mortgage data showed minorities disproportionately received high-rate loans, leaving them with unsustainable high payments that have helped fuel the foreclosure crisis. Now, in the credit crunch, loans are hard to come by again. And blacks are being excluded more often.

    "It's the re-redlining of neighborhoods," said Kevin Stein, associate director of the California Reinvestment Coalition.

    Community advocates worry about the far-reaching impact of loan denials, particularly on minority or low-income neighborhoods. A lack of credit could feed the foreclosure boom that is already disproportionately hurting these communities because borrowers won't be able to refinance or take out loans to buy available homes.

    One community that saw a significant jump in denials was the census tract that includes the Shannon Park neighborhood east of uptown Charlotte. In that tract, the overall denial rate was 42 percent in 2008, compared with 26 percent in 2007.

    Larry Hines, an officer for an east Charlotte neighborhood association that encompasses Shannon Park, wonders what the fallout will be.

    "It worries me - the people who want to live the American dream, buy a house, white picket fence - there will be fewer homeowners," said Hines, who is second vice president of Charlotte East Community Partners.

    "Don't get me wrong, I don't think people should be able to go out and apply for a loan and just get it," he added. "But I don't think the standards should be the way they are right now."

    Hines, who is black, said he doesn't believe that the higher denial rate for minorities is strictly a matter of racial discrimination. Rather, he theorizes, minorities are less likely to have well-paying jobs and thus can't set aside money for savings. So when they lose their jobs, they're more likely to fall behind on some bills - which lowers their credit scores, which in turn raises the denial rate.

    "I don't think it's a racial thing," said Hines, referring to the mortgage denials. "Now, maybe some employers are less willing to hire minorities for some jobs, but that's another issue."

    Refinancings Are Denied More

    Lenders are required to submit home loan data every year to the federal government, allowing it to be reviewed by regulators and the public.

    As the housing market slumped and the economy slowed, the top 10 banks made fewer loans overall in 2008 - 2.3 million compared with 3.2 million in 2007. They also received fewer loan applications - about 4 million in 2008 compared with 5.2 million in 2007.

    The data included Charlotte-based Bank of America, which bought Countrywide Financial last year, and San Francisco-based Wells Fargo, which acquired Charlotte's Wachovia last year. With their acquisitions, the two banks were the biggest mortgage lenders in 2008 - accounting for about 40 percent of the total dollar value of all mortgage loans, according to Inside Mortgage Finance.

    Of the lenders reviewed by the Observer, New York-based Citigroup had the highest denial rate for all applicants at 45 percent, followed by Detroit-based GMAC Financial Services at 44 percent. Atlanta-based SunTrust had the lowest denial rate at 9 percent.

    Citi said it considers each applicant "by the same objective criteria, which are blind to race, ethnicity, gender and any other prohibited basis." GMAC attributed higher denials to a number of factors, including tighter underwriting standards required to sell loans to investors, stricter requirements for obtaining private mortgage insurance and declining property values that made it tougher to refinance. SunTrust said its denial rates have been lower than its competition for some time and that it believes this is a result of its efforts to match applicants with appropriate loans.

    Borrowers seeking to refinance are typically denied more than those seeking to purchase a home, experts said. Refinancings may be spurred by pressures such as mounting credit card debt or job losses. Home purchases typically come at a time of the buyer's choosing.

    "Refis are sometimes people trying to save themselves," said Matthew Lee, executive director of the New York watchdog group Inner City Press/ Fair Finance Watch.

    Overall, refinancings in 2008 were denied 38 percent of the time, compared with 20 percent of the time for home-purchase loans. Blacks had refinancings turned down 52 percent of the time, compared with 33 percent for whites.

    Some borrowers seeking to refinance in 2008, regardless of race, were likely families who lived beyond their means and, when they began to struggle, sought to refinance to take cash out of their homes, said Mark Pearce, N.C. deputy commissioner of banks.

    In particular, minorities may have faced difficulties because they were more likely to be saddled with subprime loans that often left them with little equity in their homes, he said.

    "For a decade, subprime lenders targeted minority families," Pearce said. "Now the economy is in stress and the market has dried up, and a lot of people are in loans they can't afford. Their credit is impacted and it's affecting their ability to get credit."

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    Staff Writer Christina Rexrode contributed.