foreclosures and poc brief

8/8/2019 Foreclosures and Poc Brief

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issue brief | august 2009

PEOPLEOF COLORHARDEST HITBYTHEFORECLOSURE CRISISBlacks and Latinos Were Unfairly Steered to the Subprime Market, and are More Likely to Have Higher

Foreclosure and Loan Delinquency Rates

Christian Gonzlez-Rivera

Research Manager

Introduction

Th e f o r e c l o s u r e c r i s i s h a s

disproportionally affected African

American and Latino communities,

exacerbating existing economic inequality.

African American and Latino subprime

borrower losses due to foreclosure represent

46%oftotallossestoforeclosure,evenasthese

two groups represent only 27.9% of the

populationof

the

United

States.

The

loss

of

wealthAfricanAmericanandLatinosubprime

borrowers due to foreclosure is estimated at

$213.1 billion, compared to a loss of $462.2

billion for subprime borrowers as a whole.

(Rivera,etal.,2008)

Considering that the median household of

color has $0.15 for every dollar of White

householdwealth,thelossofwealthcausedby

the subprime mortgage crisis represents a

significantportionoftotalwealthinLatinoandAfricanAmericanhouseholds.

Steered into Subprime While Eligible forPrime

LatinosandBlacksweredisproportionatelythe

recipients of subprime loans, even when

controlling for income and credit score.

Among borrowers with the highest FICO

scores (720 or higher), 13.5% of Latino a

12.8%ofAfricanAmericansreceivedhighc

loans, compared to 2.6% ofWhiteborrow

with the same credit scores. (FederalRese

BankofSanFrancisco,2009)

Additionally, 45.2% of Latino and 42.9%

African American borrowers received th

loans from nonfederally regula

independent

mortgage

companies,

compato29.2%ofWhites. (FederalReserveBank

San Francisco, 2009) Independe

unregulated mortgage companies

responsible for 75% of all subprime lo

originated since 2000. (TestimonyofMich

S.Barr,2008)

Slipping out of the Middle Class

Thepresentforeclosurecrisishasnotonlyl

bare the unjust racial foundations of

mortgageindustry,

but

has

also

exacerba

existingdisparitiesbetweenWhites and th

fellowLatinoandAfricanAmericancitizen

terms of wealth creation. As of 2001,

medianWhiteAmerican had financial ass

of $38,500,while themedian person of co

hadmedianassetsof$7,200. Accordingly,

median home price owned by a Wh

householdwas $130,000, versus a median

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Contactchristian gonzlez-rivera

Research ManagerT: 510-898-0507

E: [email protected]

T H E G R E E N L I N I N G I N S T I T U T E


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S U M M A R Y O F F I N D I N G S

Latinos and Blacks were Steered

Disproportionately into the Subprime

Market...

LatinosandAfricanAmericansreceived

highcostloansataratetwotothreetimes

thatofWhites.

AmongborrowerswiththehighestFICO

scores(>720),13.5%ofLatinoand12.8%of

AfricanAmericansreceivedhighcostloans,

comparedto2.6%ofWhiteborrowerswith

FICOscoresabove720.

45.2%ofLatinoand42.9%ofAfrican

Americanborrowersreceivedtheirloans

fromindependent,nonfederallyregulated

mortgagecompanies,comparedto29.2%of

Whites.

ThemajorityofLatinoandAfricanAmerican

householdswhosehomeswereforeclosed

weremiddleclass,earning$60,000to

$120,000.

...Even when Controlling for Income.

Middleandupperincome(MUI)African

Americansand

Latinos

are

actually

more

likelythanlowerandmoderate(LMI)income

AfricanAmericansandLatinostoreceive

subprimeloans

MUIAfricanAmericansweretwiceaslikelyas

MUIWhitestoreceiveasubprimeloan71.4%

ofthemajormetropolitanareasintheUS

LMIAfricanAmericansweretwiceaslikelyas

LMIWhitestoreceiveasubprimeloan47.3%

ofthe

major

metropolitan

areas

in

the

US

MUILatinosweretwiceaslikelyasMUI

Whitestoreceiveasubprimeloan22.5%of

themajormetropolitanareasintheUS

LMILatinosweretwiceaslikelyasLMI

Whitestoreceiveasubprimeloan4.85%of

themajormetropolitanareasintheUS

PEOPLEOF COLORHIT HARDESTBYTHE FORECLOSURE CRISIS | PAGE 2

$92,000forahomeownedbyaLatinoorAfricanAmerican

household. (Aizcorbe,etal.,2003)

As of 2006, 33% of middleincome African American

households and 41% ofmiddleincomeLatino households

wereatriskofslippingoutofthemiddleclass,comparedto

25%ofthegeneralpopulation. (Demos,2007)

Income is No Shield...

The vast majority of households experiencing foreclosure

aremiddle income, earningbetween $60,000 and $120,000

annually. (FederalReserveBankofSanFrancisco,2009 In

addition, middle and upper income (MUI) African

AmericansandLatinoswereactuallymorelikelythanlower

andmoderateincome(LMI)AfricanAmericansandLatinos

to receive subprime loans in a majority of metropolitan

areas. (NCRC,2008)

Specifically,middleandupperincomeAfricanAmericanswere twice as likelyasMUIWhites to receive a subprime

loanin71.4%ofthemajormetropolitanareasintheUS,and

MUILatinosweretwiceaslikelyasMUIWhitestoreceivea

subprime loan in22.5%of themajormetropolitanareas in

theUS.

In contrast, lowandmoderateincomeAfricanAmericans

were twice as likely asLMIWhites to receive a subprime

loan47.3%of themajormetropolitanareas in theUS,and

LMILatinosweretwiceaslikelyasLMIWhitestoreceivea

subprimeloan4.85%ofthemajormetropolitanareasinthe

US. (NCRC,2008)

Notably,aNewYorkTimesanalysisofmortgage lending in

NewYorkCityfoundthatBlackhouseholdsmakingmore

than$68,000ayearwerenearlyfive timesas likelytohold

highinterest subprime mortgages as whites of similar or

evenlowerincomes. (NYT,2009)

Did CRA Force Banks to Make Bad Loans?

The

Community

Reinvestment

Act

(CRA)

rates

largefinancialinstitutionsbasedonthreepractices: theirlending,

their investments,and theirservices. Financial institutions

mustdemonstrate toregulators that itsactivities ineachof

these threesectorsareadequatelyserving thecommunities

inwhichtheyhavemarketpresence.

Analysisof federalmortgage records shows thatonly25%

of the subprime mortgages that are now causing the


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collapse of the creditmarketswere originatedbyCRA

regulated institutions,which include all institutions also

regulated under the FDIC. The remaining 75% of

subprime mortgages were originated by independent

mortgage brokers or by unregulated subsidiaries of

regulatedbanks. (Barr,2008)

Overall, CRAregulated banks were 66% less likely to

originate highcost loans than unregulatedbanks. The

sameholdstrueforlow andmoderateincomeborrowers;

CRAregulated banks were 58% less likely to originate

highcost loans to suchborrowers. (Traiger&Hinckley,

2008)

Whatthisfactuncoversisthatthesubprimecrisisisnota

result of too much regulation, but rather the result of

nonexistent regulation over the activitiesof independent

mortgage brokers. In fact, the lack of regulation over

independentmortgage

companies

created

an

uneven

market, in which the independent companies undercut

pricesformortgageloans,therebystrippingmarketshare

fromCRAregulatedbanks.

CRAregulatedbanks held only 22.8% of the mortgage

marketinthe15mostpopulousmetropolitanareasinthe

country. In addition, CRAregulated banks held only

9.2% of themarket for highcost loans,defined as those

loans where the rate spread with the Treasury yield is

threepercentagepointsorgreater. (Traiger&Hinckley,

2008)

Oneof themost importantrolesofCRA is toensurethat

banks are operating branches and offering services in

lowerincomecommunities. Thirtyoneyears forwardof

thepassingofCRA, lowerincomecommunitiesareoften

stillbankingdeserts. A2008studydoneatCaseWestern

Reserve University demonstrated that that loans

originatedbyfinancial institutionswithouta localbranch

had foreclosure rates of 19.08 percent compared to only

2.43percent for loansoriginatedby localbanks. (FedSF,

2008)

Conclusion

The disproportionately negative effect of the foreclosure

crisisonwealthincommunitiesofcolorwillonlyincrease

the alreadyexisting gulf between White wealth and

minority wealth, as well as lower credit scores in

communitiesofcolor. Thesecommunitiesnowfaceeven

greater and multiple obstacles to increasing and

maintainingthewealththeyneedtoriseoutofpoverty.

First, and perhaps worst of all, continual tightening of

creditand increasedrelianceoncreditscoresby financial

institutions to obtain access to lines of credit is likely to

handicap the communitys ability to access wealth

building credit for many years to come, hindering a

recoveryheremorethananywhereelse.

Highervacancyratesduetoforeclosureinneighborhoods

where people of color are the majority represent yet

another way in which these communities are leaching

wealth. Neighborhoodswithhighvacancy rates exhibit

increased danger from looters and intruders into

abandonedproperty and lossofneighborhood cohesion,

resulting in plummeting property values. In addition,

homessoldthroughforeclosureauctionsataconsiderable

discountwill

further

depress

values

of

surrounding

properties.

Withthedestabilizingofhomeownershipcommunitiesof

coloralsocomesthelossofwealthtolocalbusinessesdue

to fewer customers. Particularly in majorityLatino

communities,over80%ofjobswithinthecommunityare

createdby localsmallbusinesses,andthesebusinesses in

turndrawthemajorityofcustomersfromtheirlocalareas.

Lossofbusinessdue toadecreasedcustomerbasehasa

rippleeffectintermsoflossofjobs,whichinturncanlead

toincreasedforeclosures.

Hence, even as market analysts predict the end of the

recession, recovery will still be a long way away for

Americasmostvulnerablecommunities.

PEOPLEOF COLORHIT HARDESTBYTHE FORECLOSURE CRISIS | PAGE 3


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ReferencesAizcorbe,AnaM.,ArthurB.Kennickell,andKevinB.Moore. RecentChangesinU.S.FamilyFinances:

Evidencefrom

the

1998

and

2001

Survey

of

Consumer

Finances.

Federal

Reserve

Bulletin,

January

2003.

CenterforResponsibleLending(CRL). LosingGround: ForeclosuresintheSubprimeMarketandTheir

CosttoHomeowners. EllenSchloemer,WeiLi,KeithErnst,andKathleenKeest,December2006.

Demos. ByaThread: TheNewExperienceofAmericasMiddleClass.JenniferWheary,ThomasM.

Shapiro,TamaraDraut,2007.

FederalReserveBankofSanFrancisco. LendinginLow andModerateIncomeNeighborhoodsinCalifornia: ThePerformanceofCRALendingDuringtheSubprimeMeltdown. ElizabethLaderman

andCarolinaReid,November2008.

FederalReserveBankofSanFrancisco. TheUntoldCostsofSubprimeLending: TheImpactsofForeclosureonCommunitiesofColorinCalifornia. CarolinaReid,2009.

NationalCommunityReinvestmentCoalition (NCRC). IncomeisNoShieldAgainstRacialDifferencesin

Lending: AComparisonofHighCostLendinginAmericasMetropolitanAreas. July2008.

Powell,Michael. BankAccusedofPushingMortgageDealsonBlacks. NewYorkTimes,June7,2009.

PreparedTestimonyofMichaelS.BarrProfessorofLaw,UniversityofMichiganLawSchoolBeforetheCommitteeonFinancialServicesU.S.HouseofRepresentativesHearingOn TheCommunity

ReinvestmentAct:ThirtyYearsofAccomplishments,ButChallengesRemain. February13,2008.

Rusk,David. The SegregationTax: TheCostofRacialSegregationtoBlackHomeowners, TheBrookings

Institution, 2001.

Traiger&HinckleyLLP,TheCommunityReinvestmentAct:AWelcomeAnomalyintheForeclosureCrisis.January7,2008.

UnitedforaFairEconomy. StateoftheDream2008: Foreclosed. AmaadRivera,BrendaCottoEscalera,

AnishaDesai,

Jeannette

Huezo,

Dedrick

Muhammad,

January

2008.

UnitedforaFairEconomy. StateoftheDream2009: TheSilentDepression. AmaadRivera.Jeannette

Huezo,ChristinaKasica,DedrickMuhammad,January2009.

Recommendations

1. Continuetoenactmeasurestoprotect

homeownerswhoarecurrentlyinorin

dangerofforeclosure,includingmoratoria.

2. FunnelHomeAffordableModification

Program(HAMP)fundsthrough

communityorganizationsalreadyworking

incommunities

of

color

to

modify

failed

mortgagesandprovidestable

homeownershipopportunities.

3. Supporta30year,governmentguaranteed

mortgageavailableforallfamiliesat120%

orbelowthemedianincome,witha

maximumfixedrateof4.5%. Theseloans

shouldbeavailableonlyforuptothe

medianregionalhomeprice.

4. Ensurethatthepropersafeguardsarein

placeduringthehomeappraisalprocess.

5. Developnewandcreativeproductsand

marketingtoserveandbuildtrustwiththe

unbanked,immigrants,andthepoor.

6. Providemortgagetermsinplainlanguage

toallborrowersbeforesigning.

7. Ensurethatfinancialinstitutionsuphold

theirfiduciarydutytoborrowerswith

eachmortgageorigination.

8. ExpandCRAtoallfinancialinstitutions.

THE GREENLINING INSTITU

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coal i t ions of grassroleaders that work togeto advance solutions to na t i on ' s mos t p res sproblems.

Our mission is to empocommunities of color other disadvantaged grothrough multi-ethnic econoand leadership developmcivil rights and anti-redliactivities.

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