- Blacks and the Subprime Mortgage Market (FCN, 12-21-2007)
- Housing Market: Boom To Bust To Economic Blueprint (FCN, 04-05-2007)
WASHINGTON (FinalCall.com) – While the sub prime mortgage crisis has White America wringing its hands, the real and substantial loser of wealth is the Black community, which makes up 56 percent of such loanholders, according to a new report, “State of the Dream 2008: Foreclosed.”
“There’s always been a gap in assets between Whites and people of color,” explained Amaad Rivera, a co-author of the report told The Final Call. “These loans were created under the guise of helping people of color. But the mortgage brokers made a fortune and now we see homes being foreclosed and taken at an alarming rate.”
“This has been going on over a 10-year period. It started in 1993 with $20 billion in mortgages. It has grown to $540 billion in mortgages in 2004. While it started growing bigger, the percentage of people getting this ‘help’ didn’t change.”
According to the report, Blacks and Latinos will lose between $163 billion and $278 billion from sub prime loans taken out over the past eight years. Blacks will lose $71 billion to $122 billion, while Latino borrowers will lose between $76 billion to $129 billion for the same period.
What is a sub prime loan?
When Lucas Morton got in financial trouble he refinanced his condo’s mortgage. “I thought I was getting a good deal. I needed the money and my home was the best way to get it or so I thought,” he told The Final Call.
He didn’t know he was getting a sub prime loan with an adjustable rate mortgage, a rate that would increase every few years.
“My original mortgage was only $595 when I bought this condo in 1994. Now after refinancing it’s $1,865. I’m on a fixed income and I’m tired of struggling. I’m trying to sell this and move in with my sister,” he said.
Mr. Morton’s story is typical of many who lose their homes as a result of unaffordable subprime loans, advocates said.
“Sub prime lending is a fancy financial term for high-interest loans to people who would otherwise be considered too risky for a conventional loan. These include middle class families who have accumulated too much debt and low-income working families who want to buy a home in the inflated housing market,” according to the United for A Fair Economy report. It was released Jan. 15
“To cover their risk, lenders charge such borrowers higher-than-conventional interest rates. Or they make ‘adjustable rate’ loans, which offer low initial interest rates that jump sharply after a few years,” it explained.
Housing policy discrimination and it’s impact
“Because of active government policies of the 1940s and 1950s that excluded Blacks from getting homes, they don’t have the generational wealth or homeownership history that Whites do. Most of the 20th century Blacks were prevented from buying a home. Now when they do, they can’t put a lot of money down,” explained Jonathan Kaplan, associate professor and chair of the Department of Philosophy at Oregon State University.
“If you have a history of home ownership in your family, you probably have equity built up in your home so you can help others buy a home. If you have equity you can get a home mortgage loan. But if things go poorly and you don’t have any equity, you’re liable to lose your home,” he said.
“Blacks were systemically excluded from the policies that allow people to build wealth,” Professor Kaplan added.
Another problem with sub prime loans, and targeting known as predatory lending, is that borrowers who would have qualified for a prime rate loan were steered to sub prime loans, advocates note.
In September testimony before a congressional Joint Economic Committee, Martin Eakes of the Center for Responsible Lending, said, “The sub prime mortgage market as currently structured doesn’t have adequate incentives to police itself; in fact, sub prime lenders continue to have strong incentives to make harmful loans.”
Mortgage brokers, who issue approximately 70 percent of sub prime mortgages, are not required to offer loans that are in the borrowers’ best interest, Mr. Eakes said. Brokers and lenders make more money when they steer people into high-cost sub prime loans, even when those people are qualified for a lower-cost prime loan, advocates said.
Fees and charges from brokers are taken out upfront, with the house, often owned by an equity rich but cash poor borrower standing as collateral. Many borrowers also did not understand their loans terms, advocates added.
According to the report, until recently, lenders reaped huge profits by ignoring a homeowner’s ability to repay the loan and/or neglecting to document the homeowner’s income. Unscrupulous lenders gained a competitive advantage over honest lenders by excluding the cost of taxes and insurance from monthly mortgage payments to make the loan appear more affordable.
More than just a house
While individual lives are being affected by the mortgage crisis, the ability of Black America to accumulate wealth is in jeopardy. “At this moment in time the key component to class mobility is homeownership,” said Mr. Rivera. “Wealth is defined by a person’s assets which are home ownership, stocks, bonds, 401K retirement funds and savings. For people of color this means their wealth is tied to their homes and if they lose their homes they lose their wealth.”
Mayor Eugene Grant of Seat Pleasant, Md., inside Prince George’s County, which has the highest average Black income in America sees, the crisis firsthand. “For many Americans the dream has turned into a nightmare. It may not affect you directly but it will impact you indirectly. The equity has been stolen out of many peoples’ homes. The equity was supposed to finance so many peoples’ dreams,” said Mayor Grant.
Between 2005 and 2006, “13,172 people in Prince Georges County went into foreclosure. Eight thousand are projected in 2008 alone. As their property values go down my city loses money and you lose services as a community. Our 56 percent of the problem represents 388,000 people but (nationally) 17 percent of the problem represents 1.2 million people,” he said.
“When it began to impact (Whites), it became an issue. Their ability to finance their American dream has made it an issue. This is an economic tsunami that is hitting our community,” said Mayor Grant.
When homes are foreclosed the property values in neighborhoods also begin to decline.
This is “a result of cold-blooded targeting of people of color, and low-income people in general, by the sub prime mortgage industry,” said Brenda Cotto-Escalera, co-executive director of United for A Fair Economy, and a co-author of the report.
“Communities across the nation are being torn apart. As mortgages go into foreclosure, people move out, houses are boarded up, crime and fires increase, neighboring properties are devalued, and the tax base erodes.”
The report observed Detroit ranked number one in foreclosure filings among the 100 largest metro areas in the U.S. between January and June 2007. Detroit was also ranked as the most dangerous U.S. city for 2007 by CQ Press. Though it disputed the ranking.
The report notes things can be done to solve the problem, such as increasing the development of affordable homes, simplifying homeownership and cutting home costs.
“Black Americans ought to be eligible for very favorable terms on mortgages, with very low interest rates and low or no down payment, with both mortgage insurance and the low interest rates subsidized by the government,” Mr. Kaplan said.
Blacks should have the opportunity to create wealth beyond the housing market, including improved access to good primary education, improved access to funding for secondary education, very favorable terms for loans to start new businesses, and improved “safety nets” for crises, according to United for A Fair Economy.
“The dream of economic stability and opportunity for everyone living in the U.S., so eloquently described by Martin Luther King, Jr., is bound up with homeownership, the most significant source of wealth for most people,” said Dedrick Muhammad, a senior organizer and research associate at the Institute for Policy Studies and co-author of the report.