X. THE RECESSION AND REVERSE REDLINING
Blacks have been disproportionately affected by the recession. In May of 2011, the black unemployment rate was 16.2%; for whites the unemployment rate was 7.9%.
In 2010, 45.5% of black families owned their homes. This was down from 49.1% in 2005 and much lower than the 71.1% of white families that are homeowners. The decline in home ownership is attributable to the housing crisis which has disproportionately affected African Americans. Part of the problem is historic. For most of the twentieth century, redlining prevented African Americans from obtaining mortgage loans. A recent development, reverse redlining, is essentially the opposite; minority populations are targeted by lenders who provide mortgages with higher fees and costs than loans made to similarly situated white customers. The loans, many of which were made with insufficient regard for the borrowers' ability to make payments, have resulted in defaults, massive foreclosures, and the loss billions of dollars in home equity.
The products that created this problem are subprime mortgages. Prior to the emergence of subprime lending, most mortgage lenders made mainly prime loans to borrowers with incomes and credit histories that indicated they were unlikely to default on their obligations. In the early 1990s, technological advances in automated underwriting allowed lenders to predict with improved accuracy the likelihood that borrowers with blemished credit histories would repay loans. Lenders viewed subprime loans as an attractive product because they were able to charge higher interest rates as compensation for the increased risk of default.
With the introduction of mortgage-backed securities, banks could obtain more funding from outside investors. The process involved pooling financial assets, such as mortgage loans, and issuing securities representing interests in a pool of assets. Pooling prime and subprime mortgages allowed banks to obtain returns that were higher than other investments with similar risks. It was thought that the aggregation of large numbers of prime mortgages and subprime mortgages mitigated the risk of borrower defaults.
The growth in subprime lending began in the early 1990s. By the early 2000s lenders dramatically increased their marketing of these products. There were many types of exotic mortgage products. One example is the 2/28 ARM, which was shorthand for adjustable rate mortgages on which the interest rate was fixed for two years and reset to the interest rate index after the two year teaser rate expired. Borrowers hoped that when interest rates were reset, they could afford the new payments or refinance their existing mortgages based on rising home values.
From 2000 to 2005, housing prices rose dramatically so many borrowers viewed adjustable rate mortgages as a good bet. A steady rise in the value of homes fueled speculation in the nation's housing markets. Inflated housing prices sparked a building boom that rapidly increased the nation's housing supply. In 2006, home values started to decline and by 2008, the United States found itself in a housing crisis. Supply outstripped demand and home values declined for the first time in many decades.
In many cases, borrowers could handle the monthly payments at the teaser rate, but after the new interest rates went into effect, they could not afford the new payment. Declining home prices pushed a record number of borrowers under water, meaning the balances owed on their mortgages were higher than the market value of their homes. An oversupply of homes, declining home values, rising unemployment levels, and other problems significantly decreased the demand for homes. These conditions have resulted in a massive wave of defaults and foreclosures.
African Americans have been disproportionately affected by the housing crisis. In one study, researchers used regression analyses to measure foreclosures in the top one-hundred U.S. metropolitan markets on measures of black, Hispanic, and Asian segregation. They controlled for market conditions, including average creditworthiness, the extent of coverage under the Community Reinvestment Act, the degree of zoning regulation, and the overall rate of subprime lending. They found that black dissimilarity indexes and spatial isolation were powerful predictors of foreclosures across the nation's metropolitan housing markets. The researchers concluded that racial segregation was an important contributing cause of the foreclosure crisis, along with overbuilding, risky lending practices, lax regulation, and the decline in home values.
In Whiteness as Property: Predatory Lending and the Reproduction of Racialized Inequality, the authors examined 2004 data from the Home Mortgage Disclosure Act database to determine racial disparities in lending. They found that African Americans were less likely than whites to receive loans from regulated lenders. They also found that regardless of lender type and income level, African Americans were more likely than whites to receive higher priced loans.
Reverse redlining is at the center of a suit against one of the nation's largest banks. The City of Baltimore (Baltimore or the City) sued Wells Fargo Bank claiming it engaged in reverse redlining practices. The civil action claims, among other things, that a Wells Fargo loan in a predominantly African American neighborhood was nearly four times as likely to result in foreclosure as a Wells Fargo loan in a predominantly white neighborhood. The suit alleges that a disproportionately large percentage of Wells Fargo's high-cost loans in African American neighborhoods were refinance loans indicating a deceptive and predatory practice of encouraging minority borrowers who already had loans to refinance at excessive costs with little benefit. Baltimore contends that this practice increased the likelihood of foreclosure and has contributed to the disproportionately high rate of foreclosures in Baltimore's African American communities.
Baltimore also alleged that Wells Fargo's pricing practices had a disproportionate impact on African American borrowers. It claims that Wells Fargo's African American borrowers and borrowers residing in African American neighborhoods paid more than comparable white residents of predominately white communities. The City also claims that there was a significant disparity in the speed with which Wells Fargo loans in African American and white neighborhoods went into foreclosure. Black homeowners went into foreclosure much faster than whites. The City contends that the disparity in foreclosure timing showed that Wells Fargo engaged in irresponsible underwriting in African American communities.
The suit also alleges that a significant portion of the bank's foreclosures in African American neighborhoods involved unusually risky and deceptive loan products. Baltimore claims that Wells Fargo did not properly underwrite loans made to African Americans and did not adequately consider the borrowers' ability to repay the loans. The loans resulted in default and foreclosure for many African American borrowers, a result that should have been anticipated at the time the loans were made.
Baltimore also contends that the use of risky, adjustable rate mortgage products subjected African American borrowers to unfair and deceptive loan terms and has contributed significantly to the high rate of foreclosures in Baltimore's African American neighborhoods. If Baltimore prevails, the case will provide an example of one of the largest banks in America systematically discriminating against African Americans and other minorities.
The housing crisis has been devastating for African Americans. A PEW Research Center Report stated the median wealth of white households was twenty times that of black household, and this was the largest gap between the two groups in over twenty-five years. Researchers at the Center for Responsible Lending found that African Americans are 47% more likely to be facing foreclosure than whites. 11% of African American homeowners have already lost or are likely to lose their homes compared to 7% of whites. The researchers estimated that the lost equity resulting from lower property value will, between 2009 and 2012, cost African Americans $194 billion. The questionable lending practices were not limited to minorities. Millions of white homeowners were adversely affected. The scope of the damage is massive, and it inflicted injuries that threatened the entire American economy. It will likely take years for this sector of the nation's economy to recover.
