Budgeting tips for low-income families (FCN, 11-30-2004)

The recent rise in mortgage foreclosures, fueled by subprime lending, seriously threatens stability and revitalization across America. With interest rates at historic lows during the recent real estate boom investors poured trillions of dollars into mortgage securities in search of higher-yielding assets. Now, possibilities of a national recession loom large.

Mortgages form the financial underpinnings of the nation’s housing market and allowed over two-thirds of households to own their own homes. The flush real estate times of the 1990s and 21st Century allowed many homeowners to buy homes or tap into the equity of their properties which drove home prices up. Now, mortgage defaults and foreclosures are rising and homeownership rates falling. As many as 2.2 million American homeowners are at risk of defaulting on loans and losing their homes because they cannot afford to repay or refinance their loans because home prices are falling.


Traditionally, banks made and held home loans with money from local deposits. But over the last 30 years, financing for mortgages has increasingly shifted to investors in the bond market. High-cost subprime mortgages, loans to people with blemished credit records or little experience with debt, have grown. Subprime borrowers (below “A” rated credit) are charged a higher fee to compensate for their greater risk of delinquency and higher costs of loan servicing and collection. The majority of subprime loans are refinance loans and ranged from 74 percent of subprime loans in 1996 to 65 percent of subprime loans in 2000.

Last year, Blacks were 2.3 times more likely to get high-cost loans as Whites. (Asians are somewhat less likely than Whites to take out high-cost loans.) A Federal Reserve study notes that neighborhoods where people tend to have lower credit scores also tend to a greater concentration of high-cost loans. The study suggests that a big part of the reason may have to do with the lenders that minority borrowers do business with. The biggest home lenders in minority neighborhoods are mortgage companies that provide only subprime loans, not full-service banks that do a range of lending. Banks typically locate branches where they will get the most deposits; consequently, they have fewer branches in minority neighborhoods.

Sales of subprime loans were measurable predatory actions and in 2005 the number of homeowners defaulting on subprime mortgages began to soar. Ironically, many subprime loans were not sought out by borrowers but actively sold to them by brokers and telemarketers. A majority of the loans were refinance transactions allowing homeowners to take cash out of their appreciating property or pay off credit card and other debt. Lenders that made the risky loans often sold them to Wall Street investors.

Black homeowners are not without fault either. While some refinanced to reduce the interest rate of their mortgage, most liquefied some of their home equity as a source of funds. This reduced the amount of equity in their home, and increased both the monthly payment amount and the loan’s length of maturity. Black or White, a home is generally an individual’s or a family’s largest investment and greatest asset. Therefore, their loss of a home can be a shattering personal tragedy. It is also a social and neighborhood tragedy. Concentrations of mortgage foreclosures can lead to vacant, shuttered properties, which in turn can lead to criminal activity, neighborhood blight, and declining real estate values.

More often than not, Blacks were victims of predatory mortgage lending; subprime practices have grossly affected us as well as the total economy. More than 100 mortgage lenders have gone out of business and banks, hedge funds, pension systems and other investors are expected to lose up to $400 billion. Banks and the financial markets have become more wary of mortgage securities and borrowing costs have risen for all but the safest borrowers and loans. The value of American residential real estate could fall by up to $4 trillion. The situation, bordering on recession, is immediate and of such crisis proportions that the Bush administration and the mortgage industry are currently hammering out proposals to temporarily freeze interest rates on certain troubled sub-prime mortgages.