The Subprime American Dream Unravels
At the height of the subprime loan market, brokers pushed loans that in many cases were fraudulent, and lenders responded to growing competition by lowering underwriting standards and creating incentives to sell problematic option Adjustable Rate Mortgage (ARM) and stated income loans. These flawed products were then packaged and fed to Wall Street securitizers and investors who chose not to screen out the problematic products and were not compelled to do so by the so-called regulators. As more and more borrowers like the Gonzales family and Ms. Washington began to default on their unaffordable loan payments, subprime lenders started to go out of business by the hundreds. But the very risky loans they made remained in our neighborhoods and exploded into foreclosures that continue to harm communities.
An analysis by the California Reinvestment Coalition (CRC) and allies showed that neighborhoods of color in seven metropolitan areas throughout the country were much more likely to be saturated with loans made by subprime lenders who went out of business for making too many bad loans. In Los Angeles, the market share of these high-risk lenders was 9.5 times higher in neighborhoods of color than white neighborhoods.
Subprime Loans = Repackaged Redlining
Study after study has shown that people of color are far more likely to get stuck with higher priced subprime home loans than whites. In 2006, over 45 percent of loans to African Americans and over 43 percent of loans to Latinos in CaliforniaCalifornia were higher-priced subprime loans, compared with only 19 percent to whites. Overall, neighborhoods of color in were 2.7 times as likely to be stuck with subprime loans as white neighborhoods.
The CRC estimates that borrowers of color in California (many of whom could have qualified for prime loans) have lost billions of dollars of equity in their homes because of subprime loans.
Containing the Crisis: A Modest Proposal
There are ways to alleviate the devastating impacts of foreclosures, and policymakers must act quickly to pursue solutions that match the magnitude of the problem, including:
- Imposing a 180-day moratorium on all foreclosures to allow time for workouts to take place.
- Requiring loan servicers to offer long term, affordable loan modifications to borrowers trying to stay in their homes, including reform of the Bankruptcy Code.
- Imposing checks on loan servicers to ensure that they are truly working to keep borrowers in their homes for the long term, including requiring them to report data that show whether they are helping people or not.
- Enforcing consumer protection, the Community Reinvestment Act, and fair lending laws to ensure that low-income and neighborhoods of color are neither targeted for abusive products, nor ignored by mainstream financial institutions.
- Prohibiting predatory lending practices.
At their testimony, the Gonzales family and Ms. Washington hoped that the laws would change soon enough to help homeowners struggling to keep their homes. Two years and millions of foreclosures later, so do we.
Kevin Stein is the associate director of the California Reinvestment Coalition. To view a short documentary about the foreclosure crisis, and for more information, visit www.calreinvest.org