redeveloping sustainable communities the nexus of race, class, and credit
TRANSCRIPT
REDEVELOPING SUSTAINABLE COMMUNITIES
THE NEXUS OF RACE, CLASS, AND CREDIT
The National Vacant Properties CampaignJune 2nd 2009 Louisville KY
john a. powellExecutive Director
INEQUALITY HAS A RACIAL FOOTPRINT
FROM REDLINING TO “REVERSE REDLINING”
FAIR AND SUSTAINABLE CREDIT
COMMUNITIES OF OPPORTUNITY
2
From Wyly, Moos, Foxcroft & Kabahizi, “Subprime Mortgage Segmentation in the American Urban System” which identifies 30 metro areas with the highest prevalence of subprime lending and 3 out of 10 loan requests are denied.
“This is today’s home-financing legacy of the Black Belt that was created across the U.S. South in the Reconstruction era” – Wyly et. al.
4Source: ARC Report, Race and Recession: How Inequity Rigged the Economy and How to Change the Rules. Download at http://www.arc.org/recession/
REDLINING MAP OF PHILADELPHIA
5
From Redlining to Reverse Redlining:A historical view of redlining zones in
Philadelphia and areas of foreclosure in
minority communities.
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TWIN CITIES (MINNESOTA)
10
Source: IRP Report, “Communities in Crisis” http://www.irpumn.org/uls/resources/projects/IRP_mortgage_study_Feb._11th.pdf
1110 0 10 20 Miles
N
EW
S
Population Changein Wayne County
1970-2000
Legend:
Population Change 1970-2000Population Loss0 - 500 Pop. Growth500 - 1000 Pop. Growth1000 - 2000 Pop. Growth2,000 or More Pop. Growth
CountiesHighwaysCity of Detroit
128 0 8 16 Miles
N
EW
S
Growth of Vacant Housing in Detroit 1970-2000(% Vacant Housing in 1970 and 2000)
% Vacant 1970
% Vacant 2000
% of Homes Vacant0 - 33 - 1010 - 1515 - 2020 - 57.6
CountiesHighwaysCity of Detroit
Prepared by: Kirwan InstituteSource Data: U.S. Census Bureau
Legend:
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#
Detroit
.-,75
.-, 96
.-, 94
.-, 75
.-,94
(/23
(/23
.-,275
.-, 96
.-,696
OaklandCounty
WashtenawCounty
WayneCounty
MacombCounty
6 0 6 12 Miles
N
EW
S
Vacant Homes in the Detroit Area in 2000
Counties
Highways
City of Detroit
1 Dot = 5 Vacant Homes
Legend:
#S
Prepared by: Kirwan Institute, OSUDate: March 23, 2004
Source: U.S. Census Bureau
14
Source: ARC Report, Race and Recession: How Inequity Rigged the Economy and How to Change the Rules. Download at http://www.arc.org/recession/
15
LOUISVILLE RACE & FORECLOSURE
16
Source: U.S. Census Bureau, HUD User
17
THE IMPACT OF CONCENTRATED FORECLOSURES IN A NEIGHBORHOOD
African American and Latino homeowners are expected to lose between $164 - $213 BILLION in assets
Individuals strip personal savings (i.e. raid their 401(K)s to try and save the home
Widespread displacement which disrupts the neighborhood’s social fabric and creates instability for children
The growth of vacant property encourages crime, disinvestment and public safety risks
…Challenges which eventually ensnare all neighborhood residents
18
19
COMMUNITY REINVESTMENT MODERNIZATION
U.S. House Resolution 1479, being sponsored by Eddie Bernice Johnson of Texas, 30th District.
Bolster the accountability of banks to all communities by requiring CRA exams in the great majority of geographical areas banks serve
Address racial disparities in lending by requiring CRA exams to explicitly consider lending and services to minorities in addition to low- to moderate-income communities.
Penalize banks that engage in predatory and abusive lending practices and securitization activities by assigning these banks lower CRA ratings.
Hold banks accountable by providing more publicly available bank ratings so that the general public can clearly discern disparities in bank performance
Further enhance accountability through improved data disclosure by: 1) Requiring that small business loan data include the race and gender of the small business owner; 2) making data on deposit accounts by neighborhood publicly available; and 3) linking the Home Mortgage Disclosure Act to a new loan performance database tracking foreclosures and loan modifications.
Require federal regulatory agencies to hold more public hearings and meetings when banks merge.
Require HMDA-like data for insurance companies and securities firms so that the general public, community organizations, and federal agencies can assess the availability of their products to borrowers and communities by race, gender, and income levels.
Apply CRA to a variety of non-bank institutions including independent mortgage companies, mainstream credit unions, mortgage company affiliates of banks, insurance companies, and securities firms.
Apply CRA more broadly throughout the financial services' industry.
BUT IS IT ENOUGH?
A February 2009 joint publication of the Federal Reserve Banks of Boston and San Francisco noted three approaches to CRA modernization Reform existing regulations and exam process Extend the CRA to other types of financial
institutions “take a completely fresh look at the 21st century
financial and credit markets and the financial services needed to promote strong families and neighborhoods. To start anew in this fashion would call on all stakeholders to take a more systemic, holistic approach to the entire financial services industry…”
“Revisiting the CRA: Perspectives on the Future of the CRA” http://www.frbsf.org/publications/community/cra/index.html
20
From Wyly, Moos, Foxcroft & Kabahizi, “Subprime Mortgage Segmentation in the American Urban System” which identifies 30 metro areas with the highest prevalence of subprime lending and 3 out of 10 loan requests are denied.
RECALL WHAT MADE SUBPRIME LENDING POSSIBLE…
REDLINING MAP OF PHILADELPHIA
22
23Source: ARC Report, Race and Recession: How Inequity Rigged the Economy and How to Change the Rules. Download at http://www.arc.org/recession/
CREDIT FINANCE UNDERWENT A GLOBAL CHANGE…
The Post Depression FHA Era: The Three Party Mortgage Market
Pre Depression: The Two Party Housing Market
Homebuyer
Party 1
Seller (and/or)
Lending Institution
Party 2
Homebuyer
Party 1
LendingInstitution
Party 2
Government Sponsored Institution
purchases, insures or underwrites loan
Party 3
24
Based on research by Chris Peterson, University of Utah Law School
Created by Chris Peterson, University of Utah Law School
The web of actors and institutions involved in the sub-prime lending market
A TRANSFORMATIVE GLOBAL CAPITAL MARKETS CHANGE…
WHAT IS OUR TRANSFORMATIVE RESPONSE?WHO MAKES DECISIONS? WHO GETS HELP?
BEYOND THE CRA
FANNIE AND FREDDIE
OPPORTUNITIES FOR VACANT PROPERTIES
26
MOVING BEYOND REACTIONARY RECOVERY Recovery fund investments must be marked by full
transparency and accountability Families and communities hit hardest by the economic crisis
merit focused attention in the recovery process Investments must be designed and made to promote equity
and expand opportunity for all.
AN OPPORTUNITY BASED MODEL OF SOCIAL JUSTICE
Everyone should have fair access to the critical opportunity structures needed to succeed in life
Low Opportunity neighborhoods limit the development of human capital
A Community of Opportunity approach can develop pathways that result in increased social and economic health, benefiting everyone
28
ACCESSING OPPORTUNITY THROUGH FORECLOSURE
Example: The Baltimore-DC region has experienced over 25,000 foreclosures in “high opportunity” areas between the beginning of 2007 and the middle of 2008.
HUD could target these areas in order to help access opportunity.
29
Source: U.S. Census Bureau, HUD User
QUESTIONS FOR DISCUSSION:
What role should the new Administration and Congress play in providing equitable credit and housing in a systematic way?
How can the government’s role in Fannie and Freddie lead to community transformation?
How should Title VIII of the 1968 Civil Rights Act be viewed in the current context?
What collective platform of reform measures and interventions could be adopted by the broader advocacy community?
How can we apply equitable investment measures, like the C.R.A., to the entire real estate market?
30
31
QUESTIONS OR COMMENTS? FOR MORE INFORMATION VISIT US ON-LINE:
WWW.KIRWANINSTITUTE.ORG
APPENDIX•MORE DATA, MORE BETTER•SUBPRIME CRISIS ORIGINS •DISCRIMINATORY CREDIT•RETHINKING CREDIT
32
APPENDIXDATA ON RISING INEQUALITY33
HAVE WE ACHIEVED FAIR HOUSING?
34
30.035.040.045.050.055.060.065.070.075.0
1983 1985 1987 1989 1991 1993 1995
U.S. Home Ownership by Race
White Black Hispanic
Source: U.S. Census Bureau, HUD User
35
NATIONAL TRENDS: HOME OWNERSHIP
36
Source: U.S. Census Bureau
0%
20%
40%
60%
80%
100%
White Black
1990 Home Tenure Share by Race
Renter Occupied Owner Occupied
NATIONAL TRENDS: HOME OWNERSHIP
37
Source: American Community Survey
0%
20%
40%
60%
80%
100%
White Black
2007 Home Tenure Share by Race
Renter Occupied Owner Occupied
RACIAL DISPARITY IN HOUSEHOLDS IMPACTED BY HOUSING PROBLEMS: NEW YORK STATE 2000
30.2%
47.7%
58.1%54.6%
20.0%25.0%30.0%35.0%40.0%45.0%50.0%55.0%60.0%65.0%
White Black Latino Asian
% with Housing Problems in 200038
Source: US Dept. of Housing & Urban Development
African American homeownership gains were reversed after 2004; they have reverted to 2000 levels.
Austin, Algernon. “Reversal of Fortune.” EPI Briefing Paper #220 18 Sept. 2008.
39
APPENDIXSUBPRIME CRISIS ORIGINS 40
SUBPRIME LOAN CRISIS
Subprime origination fees were higher than prime fees
Mortgage-backed securities had higher yields than Treasury bonds (capital rushed to MBS)
Opened up new credit markets – previously underserved communities
Lack of transparency, accountability, and underwriting standards
New financial technologies (i.e. money market funds, securitization)
Move from government regulation to market orientation (deregulation)
World-wide decline in interest rates
Incentives Global context
41See Green & Wachter, “The Housing Finance Revolution (8/31/2007) for the Federal Research Bank of Kansas City http://www.kc.frb.org/publicat/sympos/2007/PDF/2007.08.21.WachterandGreen.pdf
THE FORECLOSURE CRISIS
Deregulation: In the 1980s, federal deregulation removed state caps and limits on mortgage lending, preempting, in many cases, state laws
Rise in Real Estate Values: The rise in real estate values in the 1980s created much new wealth. This led to “asset-based” lending, loans based on the value of the security rather than the borrower’s ability to repay. This was a crucial change that led to the subprime market
42
THE FORECLOSURE CRISIS
Securitization and Capital Markets: Because mortgages were viewed as safe collateral and increasingly profitable, Investment Bankers became hungry for mortgages for use as collateral in the sale of mortgage backed securities to investors
Wall Street’s hunger for mortgages led to asset-based lending, which fueled the subprime market.
This phenomenon took off in 1994 when $10 billion worth of subprime home equity loans were securitized By the end of 2005, the volume of securitized loans
leaped to $507 billion43
REVERSE REDLINING Reverse Redlining – “practice of targeting
residents in certain geographic areas for credit on unfair terms due to the racial or ethnic composition of the area.”
Unlike redlining, which is denying prime credit to those communities, reverse redlining is targeting an area for deceptive, predatory, or otherwise unfair lending practices. Reverse redlining has repeatedly been held to violate the Fair Housing Act.
Reverse redlining requires the condition of residential segregation, often a product of twentieth century federal government, mortgage lender, and real estate industry practices.
44
SUBPRIME LENDING: THE MINER’S CANARY
The “Miner’s Canary” metaphor
Disparities facing communities of color are indicators of larger impending societal challenges
Community groups have been trying to sound the alarm for ten years
45
46
Capital Market ‘Credit crunch’
Affected neighborhoods are being reduced to ‘ghost towns’
Reduced spending and retail flight
Families lose their homes, wealth and safety
Banks, police and courts saddled with foreclosures
We didn’t care about the canary...
APPENDIXDISCRIMINATORY CREDIT: IT’S NOT JUST DENIAL
47
DISCRIMINATORY/PREDATORY CREDIT
Discriminatory pricing (race, gender, age, geography)
Dysfunctional loan products Lack of consumer advocate
DISCRIMINATORY PRICING
A study by the Center for Responsible lending found that borrowers of color were more than 30 percent more likely to receive a higher-rate loan than white borrowers, even after accounting for differences in risk.*
In Newark’s North Ward and Ironbound neighborhoods, immigrant groups were targeted by mortgage brokers peddling high cost mortgages to families that could have qualified for conventional financing. Because less than half of immigrants use formal banking institutions, they are easy targets for high-cost mortgage products.**
*Debbie Gruenstein Bocian, Keith S. Ernst and Wei Li, “Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages.” Center for Responsible Lending, 2006. http://www.responsiblelending.org/issues/mortgage/research/page.jsp?itemID=29371010;
**Rick Cohen, “A Structural Racism Lens on Subprime Foreclosures and Vacant Properties,” paper commissioned for the Kirwan Institute for the Study of Race and Ethnicity’s National Convening on Subprime Lending, Foreclosure and Race, October 2-3, 2008. Page 7. 49
DYSFUNCTIONAL LOAN PRODUCTS A recent study shows that “mortgage default risk
may not be attributed to borrower credit risk only; the high default risk seems significantly associated with characteristics of loan products.”* “The broker-origination channel, the adjustable-rate terms, and
the prepayment penalty … seem to contribute substantially to the elevated default risk among subprime loans.”
When researchers compared subprime to CRA-regulated loans they found that the CRA-regulated loans were 70% less likely to default than a subprime loan.
When broker-originated subprimes had both an ARM and prepayment penalty, the default risk was between 4 and 5 times higher than the CRA-regulated loans.
*Source: “Risky Borrowers or Risky Mortgages? Disaggregating Effects Using Propensity Score Models” Lei Ding, Roberto G. Quercia, Janneke Ratcliffe, at the Center for Community Capital at The University of North Carolina. And Wei Li at the Center for Responsible Lending. Working Paper October 2008. http://www.ccc.unc.edu/documents/RiskyBorrowers_RiskyMortgages_1008.pdf
50
DISCRIMINATORY PRICING
A study by the Center for Responsible lending found that borrowers of color were more than 30 percent more likely to receive a higher-rate loan than white borrowers, even after accounting for differences in risk.*
In Newark’s North Ward and Ironbound neighborhoods, immigrant groups were targeted by mortgage brokers peddling high cost mortgages to families that could have qualified for conventional financing. Because less than half of immigrants use formal banking institutions, they are easy targets for high-cost mortgage products.**
*Debbie Gruenstein Bocian, Keith S. Ernst and Wei Li, “Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages.” Center for Responsible Lending, 2006. http://www.responsiblelending.org/issues/mortgage/research/page.jsp?itemID=29371010;
**Rick Cohen, “A Structural Racism Lens on Subprime Foreclosures and Vacant Properties,” paper commissioned for the Kirwan Institute for the Study of Race and Ethnicity’s National Convening on Subprime Lending, Foreclosure and Race, October 2-3, 2008. Page 7. 51
DYSFUNCTIONAL LOAN PRODUCTS A recent study shows that “mortgage default risk
may not be attributed to borrower credit risk only; the high default risk seems significantly associated with characteristics of loan products.”* “The broker-origination channel, the adjustable-rate terms, and
the prepayment penalty … seem to contribute substantially to the elevated default risk among subprime loans.”
When researchers compared subprime to CRA-regulated loans they found that the CRA-regulated loans were 70% less likely to default than a subprime loan.
When broker-originated subprimes had both an ARM and prepayment penalty, the default risk was between 4 and 5 times higher than the CRA-regulated loans.
*Source: “Risky Borrowers or Risky Mortgages? Disaggregating Effects Using Propensity Score Models” Lei Ding, Roberto G. Quercia, Janneke Ratcliffe, at the Center for Community Capital at The University of North Carolina. And Wei Li at the Center for Responsible Lending. Working Paper October 2008. http://www.ccc.unc.edu/documents/RiskyBorrowers_RiskyMortgages_1008.pdf
52
LACK OF CONSUMER ADVOCATEFederal and state consumer protection laws were
written before the establishment of privately securitized mortgages, and are therefore not suited to regulate the subprime market.*
For instance, the Truth and Lending Act promotes useful and accurate disclosure of credit prices, but does not preside over the business or individual (such as mortgage broker) that actually speaks to a mortgage applicant.
Brokers have no long term interest in the performance of the loan, because the loan is purchased and re-sold on the secondary market. Further, brokers are compensated for getting borrowers to pay higher rates than those for which the borrower would qualify. This is known as the “yield spread premium.”
*See Peterson, Christopher L. “Subprime Lending, Foreclosure And Race: An Introduction To The Role Of Securitization In Residential Mortgage Finance.” Paper prepared for the for the Kirwan Institute for the Study of Race and Ethnicity’s National Convening on Subprime Lending, Foreclosure and Race, October 2-3, 2008.
53
APPENDIXRETHINKING FAIR CREDIT54
IncomeNeeds
Credit is a bridge between income and needs
WHAT IS CREDIT?
55
WHAT IS CREDIT?
Credit is also a means to build wealth, equity, skills Business loan Home mortgage equity Student loans for college
Illness or job loss
Interest rate reset
THE SUBPRIME CREDIT CRISIS
Predatory lending
Housing bubble
Declining wages
HOW DO WE MANAGE CREDIT BETTER?
Increase income Decrease needs Ensure that credit is
fair and sustainable “Mind the gap” Minimize depth of
exposure
IncomeNeeds
Make the bridge
sturdier & reduce the exposure
58
MINIMIZE DEPTH OF EXPOSURE
Decrease the cost of membership in a democratic society Current estimate for family of four: $48,778*
Over three times as many families fall below family budget thresholds as fall below the official poverty line
Decrease how far you fall (children in extreme poverty, skyrocketing bankruptcy rates, family homelessness?)
Work to ensure that all neighborhoods are neighborhoods of sustainable opportunity What are you financing? Is it just a house?
*James Lin and Jared Bernstein, What we need to get by. October 29, 2008 | EPI Briefing Paper #224
59
HOW CAN THE FHA HELP WITH FAIR CREDIT?
Title VIII has largely been tort approach Reactive Best hope: effective remedial action (i.e.
structured mobility) Meanwhile, fragmented regions with
decentralized housing markets support and structure a segregated landscape
Why not try to build differently? Stabilizing home equity by stabilizing
neighborhoods Carrots and sticks
Use housing and tax policies to affirmatively link people to opportunity
Remove tax benefits from segregated communities (Boger)
60
APPENDIX•MORE IDEAS…61
WE NEED NEW MODELS OF CAUSATION
Systems Thinking:
A D
C
B
E Causation is reciprocal, mutual, and cumulative
The Newtonian Perspective:
A B C D E
Linear causation
62
62
WE NEED NEW GLOBAL INTERMEDIARIES
The modernization and globalization of financial services and capital markets is here to stay
As flows of people, resources, ideas, and capital become more global, we need intermediary institutions
63
NEW MISSION FOR FANNIE AND FREDDIE
What is the new mission? How can Fannie and Freddie affirmatively further
fair housing? Is top-down restructuring enough?
how do we affirmatively further fair housing in the 21st Century, when opportunity is:
-- mediated
-- differential
…TARGETED UNIVERSALIM
64
HUD NEIGHBORHOOD STABILIZATION PROGRAM
Established for the purpose of stabilizing communities that have suffered from foreclosures and abandonment NSP1
Authorized under the Housing and Economic Recovery Act (HERA) of 2008.
$3.92 billion Formula-based, providing more aid to areas with higher
foreclosure rates. Has been allocated and is being used.
NSP2 $1.93 billion Competitive Application deadline is July 17, 2009
NSP-TA $50 million Competitive Application deadline is June 8, 2009
65
Source: HUD
THE FAIR HOUSING ACT: CAN WE GET PAST TORT?
Signed into law by President Johnson on April 11th 1968Direct result of the tremendous efforts of Dr.
Martin Luther King in opening up segregated communities (Bill passage tied directly to Dr. King’s assassination on April 4th)
Placed significant limitations on housing discrimination in the private market
Placed burden on the government to “affirmatively further fair housing”A critical provision in cases challenging the
actions of public housing authoritiesTort approach
66