Rutgers University - Center for Race & Ethnicity, 191 College Ave.
March 2008 Volume 1 Issue 7
Center for Race and Ethnicity
Race, Ethnicity and the Subprime Mortgage Crisis
This event was featured in the Center for Race & Ethnicity's recent bulletin (Volume 1 Issue 7, March 2008). Click here to download.
IN THIS ISSUE:
Race, Ethnicity & Homeownership
A History of Predatory Lending
Potential Policy Solutions
The mortgage crisis has “lead to 200-300 billion dollars in financial losses and counting.” – David Listokin
“57,000 forceclosures are projected in NJ alone, yielding an
estimated 19.6 billion dollars in lost property value.” - Kathe
Newman
Many of these are due to subprime lending. Today, almost a
quarter of subprime loans are past due compared to 4 percent of all
loans. Critics refer to subprime loans as ‘predatory
lending’
Predatory lending is “not an attack on impoverished
neighborhoods… but instead, these policies actively impoverished
neigborhoods” – Beryl Satter
“Since places not just people are isolated from mainstream
credit, some individuals failed to secure prime loans even though they
were individually qualified.” – Kathe Newman
Homeownership Rates
Year All White Black
1985 64% 69% 44%
1990 64 69 43
1995 65 71 43
2000 67 73 47
2006 69 76 48
Homeownership
by Income (2006)
High Income – 85%
Low Income --53%
Median Household Assets by Race:
White Homeowners: $11000
Black Homeowners: $1600
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Mortgage lending practices have long been linked to the “American dream” of home ownership and also to differences in racial and ethnic opportunity. In a recent roundtable discussion, Rutgers experts described how their research illuminates the origins, meaning, and impact of the subprime mortgage crisis for business, banking, and opportunity in America
RACE, ETHNICITY AND HOMEOWNERSHIP
“The Federal government has long encouraged homeowner ship, with a variety of important incentives like the mortgage interest tax deduction.” – David Listokin
Racial covenants, redlining, and FHA policies have kept levels of home ownership among blacks and other minority groups much lower than the high levels of homeownership enjoyed by whites. In recent years, limited access to credit has retarded minority group homeownership.
THE CAUSES OF SUBPRIME CRISIS
“Ironically, increased access to credit, through subprime mortgages, helped create the current crisis.” – David Listokin
Billed as a “democratization of the credit market,” subprime loans extend credit to people with less than prime credit predominately in poor and minority markets and partly because these markets are cut off from mainstream credit.
“Since places not just people are isolated from mainstream credit, some of those with subprime loans were individually qualified for prime ones.” – Kathe Newman
Kathe Newman pointed out that many cite “irresponsible borrowers” as the cause of the mortgage crisis. However, this ignores, “the evolution of the mortgage banking industry and its role in creating the structural basis for the crisis.”
David Listokin argues that the “anything goes policies of the 1990s – like deregulation and lack of oversight led to higher interest rates, additional charges, and loose credit which together created a perfect storm that has imploded”
David Listokin also cited an emphasis of homeownership at all costs, the housing bubble, deregulation, greed, fraud, and discrimination that had lead to 200-300 billion dollars in financial losses and counting.
This “perfect storm” was not without warning signs. As Kathe Newman noted, “foreclosures are not a recent phenomenon in black neighborhood such as Irvington, New Jersey. Black communities have been facing this crisis for years before the media picked up on it.
A HISTORY OF PREDATORY LENDING
The current racial dimensions of the subprime crisis are not unique. Beryl Satter noted that “blacks have been a major target of predatory lending since Reconstruction.”
The debt peonage of black sharecroppers in the post-emancipation South is well known, but less well known are the exploitative credit practices that fleeced the millions of blacks who migrated North during the mid twentieth century.
The sale of housing “on contract” in Chicago, the subject of Satter’s forthcoming book, entitled Family Properties, is a prime example of the phenomenon.
“In the 1950s and 1960s, speculators took advantage of the restricted home buying opportunities of blacks, who had little or no access to credit due to redlining. Speculators swept into emerging black neighborhoods, bought homes vacated by whites and resold them on credit contracts that usually charged black buyers at least double their original purchase price.” – Beryl Satter
These creditors then could evict residents without paying them any equity.
“These tactics were not an attack on impoverished neighborhoods as the phrase predatory lending suggests, but instead, these policies actively impoverished neighborhoods” – Beryl Satter
”Predatory lending is about wealth extraction, primarily from those neighborhoods isolated from mainstream banks.” – Beryl Satter
Considering the wealth gap is the biggest and most significant gap between blacks and whites, the extraction of wealth from black communities and the denial of the opportunity to build wealth is the lynchpin of racial inequality.
POTENTIAL POLICY SOLUTIONS
Exploited as a major market for unregulated subprime mortgage loans, minority communities are filled with properties on sale for “cash.” As a result, residents have begun to organize in these communities.
“Perhaps this crisis will force us to rethink our mindless march to homeownership.” – David Listokin
Or perhaps we will rethink the financialization of our economy.
“With the decline of manufacturing in United States, banks have increasingly turned to the mortgage market a source of profit. We used to make things, now we make mortgages,” maintains Kathe Newman.