Those of us who live in the high tower of credit worthiness can't imagine not negotiating for the best mortgage loans. We pay a penalty for prepaying a loan? Please. Not likely to happen for a prime-time borrower. There are two lending worlds out there -- the prime market (people who can get loans at the best rates) and the subprime market (people who are offered loans with higher interest rates than prime or "choice'' customers).
    
True, the subprime lending market has allowed many credit-challenged people and those without a credit history to buy homes. But within the subprime industry are players who prey on these riskier borrowers. They intentionally burden their customers with loan terms that make it difficult for them to ever join the prime market.
    
For example, two new studies show that subprime customers often get loans with prepayment penalties, which make refinancing a very costly endeavor. Prepayment penalties increase the risk of mortgage foreclosure in subprime home loans, even after controlling for the borrower's credit score, loan terms and varying economic conditions, according to a new report by the Center for Community Capitalism at the University of North Carolina.
    
Another report by the Center for Responsible Lending, a North Carolina-based nonprofit research firm and consumer activist group, indicates that people with subprime home loans who live in minority neighborhoods face 35 percent greater odds of being saddled with prepayment penalties than borrowers living in predominantly white neighborhoods.
    
A prepayment penalty is a fee charged by a lender when a borrower pays off a mortgage loan before the due date, often to refinance to a more affordable loan. For example, a $150,000 subprime mortgage at 10 percent interest could result in a $6,000 fee for prepaying the loan, according to Center for Responsible Lending.
    
These penalties can effectively prevent a family from refinancing -- something that some prime borrowers seemingly do as often as they change the oil in their cars.
    
"Taken together, the research shows (prepayment penalties) are costly, they are applied unfairly, and -- given the risk of foreclosure -- they are dangerous,'' said Keith Ernst, senior policy counsel for the Center for Responsible Lending, during a teleconference.
    
In a typical situation, Ernst said a subprime borrower might get into some financial trouble -- a lost job, broken-down car or something else that makes him or her run up a credit card or cards. To get some relief, the homeowner might try to refinance to consolidate his debt.
    
"For borrowers with a prepayment penalty, this can be impossible,'' Ernst said. "If you owe $135,000 and call up for a payoff quote, they are going to tell you $140,000 because that figure includes the prepayment penalty. Once someone hits this roadblock, foreclosure and/or bankruptcy is likely not far off.''
    
In the example Ernst lays out, having to pay the extra $5,000 in a prepayment penalty could eat up much of the homeowner's available equity. Consider these findings from the recent research, Ernst said:
    
-- Prepayment penalties go disproportionately to borrowers who live in rural areas and in communities with higher concentrations of minority residents.
-- Borrowers with prepayment penalties are 16 percent to 20 percent more likely to see their subprime loans fail.
-- Despite having a prepayment penalty clause in their loans, 37 percent of all borrowers with prepayment penalties prepaid their loans, resulting in the loss of millions of dollars in home equity-based wealth. This can worsen an already wide wealth gap for African-American and Latino families, whose homeownership rates are significantly lower than the average white household.
    
But Mitchell Feinstein, chairman of the National Home Equity Mortgage Association, disputes the findings of the two studies. (By the way, the Center for Community Capitalism received financial support from the Center for Responsible Lending.)
    
Feinstein said in an interview that there is a positive benefit to prepayment penalties because the option can lower interest rates for borrowers.  Not so, according to Michael Stegman, director of the Center for Community Capitalism. Stegman said that, based on the center's research, prepayment penalties do not deliver an offsetting benefit in the form of reduced interest rates. So why should we all care what happens to subprime consumers?
    
If you're an investor, you should be concerned because the higher risk of foreclosures associated with prepayment penalties means greater investment losses, Stegman points out.
    
"Policy-makers should be concerned because predatory lending is draining homeowner equity and increasing foreclosures and home losses, especially in minority communities, just at the time that national housing policy is attempting to close the minority homeownership gap,'' he said.
    
Homeownership has a stabilizing effect on neighborhoods, and that benefits us all. So it is in all of our interests to discourage practices that may cause our neighbors to lose their homes. 
     
Listen to Michelle Singletary discuss personal finance every Tuesday on NPR's “Day to Day.'' To hear her reports online go to www.npr.org. Readers can write to her c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responses are not always possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.
    
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