We all know that foreclosure rates are skyrocketing all across the country, due mainly to declining property values and the increase of interest for adjustable rate mortgages. But just what kinds of families are prone to gain caught in this mess? Although this is a recent and ongoing problem for lower-class families, multiple studies have advance to the same conclusion: Minorities are more at risk than their Caucasian counterparts. The incidence, prevalence, and types of households affected all unfavorably lean toward not unbiased lower-class families, but lower-class minority families. Most of these families will not savor the holidays from inside their own homes. Even worse, lenders have been taking advantage of these people for years.
A itsy-bitsy background is critical to fully understand the situation, especially dealing with subprime lending. Ben Bernanke, Federal Reserve Chairman, describes subprime lending as “loans made to borrowers who are perceived to have high credit risk, often because they lack a strong credit history or have other characteristics that are associated with high probabilities of default” (Bernanke, page 1). Borrowers could choose between either a fixed-rate loan, where the interest rate stays the same throughout the time of the loan; or an adjustable-rate loan, which can fluctuate up or down. The adjustable-rate loans have peaked in popularity since 2005, when the housing market was booming and prices for homes were up. Consumers with lower incomes, struggling to save whatever money they could, went with the adjustable-rate loans, which had a crude introductory “teaser” rate (Economist, Group Therapy, page 1). Unfortunately, the housing market has changed course since then, with the market steadily declining. This decline in housing prices has caused both fixed-rate and adjustable-rate loans to increase, but the consumers affected are the ones who went for the adjustable-rate mortgage. Overdue payments on U.S. subprime mortgages rose to the highest level since 2002 during 2007, according to the Mortgage Bankers Association. Because of this, investors who buy mortgages are more reluctant to allege, therefore effectively driving down home prices and decreasing the overall profit of home lenders.
According to the National Delinquency Survey, foreclosure filings with subprime adjustable-rate mortgages have increased 90% since the 2nd quarter of 2005. 7.2 million Americans have a subprime mortgage, and as of October 2007, almost 15% of them are in default (Center for Responsible Lending statistics, page 2). The United States is averaging two foreclosures every minute this year. Clearly this is not a good situation for homeowners with adjustable-rate mortgages.
The next step is to ogle at these mortgages and find out who the prevalent victims are. The results might surprise you. Out of all subprime loans offered in 2006, 52.44% were offered to African Americans, compared to 40.66% of Latinos. The percent offered to Caucasians? 22.2%(Center for Responsible Lending statistics, page 3). These are all families that generally have about the same incomes, and yet African Americans are over twice as likely to get stuck with a subprime loan. According to another study, in which 2007 data was gathered from lenders under the Home Mortgage Disclosure Act, 24% of White families earning $125,000-150,000 took out a subprime mortgage, compared with 52% of Hispanics and 63% of African Americans (Fernandez, page 1).
Because of these statistics, many are quick to blame lenders for discrimination. As a result of the failing housing market and the rate of foreclosures, nine different subprime lenders have filed for bankruptcy, with others falling fast. The National Association for the Advancement of Colored People (N.A.A.C.P.) has filed a lawsuit against twelve mortgage lenders, accusing them of unfairly directing African Americans toward subprime loans while not doing so to Whites of the same income level (N.A.A.C.P., Page 1). “It’s almost as if subprime lenders put a circle around neighborhoods of color and say, ‘This is where we’re going to do our thing,'” Robert Stroup, a lawyer and the director of the economic justice program at the NAACP Factual Defense and Educational Fund Inc., was quoted as saying (Fernandez, page 1).
Another study done by the Association of Community Organizations for Reform Now (ACORN) shows that African American borrowers were 2.7 times more likely to be issued a high cost loan than Whites, with Latinos 2.3 times more likely to receive one (ACORN Fair Housing, page 5). The ACORN study found that high foreclosure rates cause higher rates of crime, lower tax revenue and, as we are currently seeing, lower property values. The study also showed that between one third and one half of all borrowers issued subprime loans could have qualified for a lower-cost loan. What’s worse is that many borrowers interviewed by ACORN said they were not even offered a fixed-rate loan (ACORN Fair Housing, page 11).
Obviously, the studies that are being done show that lenders are behaving in a way that is not fine to any minority group. But with incoming scrutiny from the N.A.A.S.P. lawsuit, as well as many published studies coming out, they will be more likely to change their tune in the near future. According to a publishing by the Attorney General of the State of Fresh York, Countrywide Home Loans (the largest mortgage firm in the U.S.) has agreed to comply with the Fair Housing Act, as well as develop a comprehensive Consumer Education Program, which will inform customers about the mortgage application process and assist them resolve the best type of loan (Attorney General of the Position of New York, page 4). This will help borrowers who have been victimized by a simple lack of information from their mortgage lender.
But now, on the complete other side of things, is another important fact. More than 2/3 of subprime loans are made as refinances-made to people who have already purchased one home (ACORN Fair Housing, page 11). According to the Economist, those who took out mortgages in 2006 tended to borrow as much as they could-which in many cases was well beyond what they could hope to repay. They were either hoping to flip the properties for a quick profit or to refinance within a couple of years. But with house prices falling, the first option is not open to them. As improper “teaser” rates are starting to expire, they are unable either to refinance (thanks to tighter lending standards) or to afford the higher monthly payments (Economist, Roller Coaster, page 1).
That statistic alone should not undermine this problem, however. Even if 2/3 of foreclosures due to subprime lending were to people not in concern of losing their houses, there still will be plenty forced onto the streets.
Our neighbors to the north have figured out a way to keep this widespread U.S. dilemma from occurring. Canadian banking laws enforce a policy that says loans worth more than 80% must be insured, meaning that if a consumer defaults on payments, they will not lose their home. Even if that were not the case, Canada would not be facing this subprime lending disaster; only 5% of their mortgages are subprime, compared to a lofty 21% of U.S. mortgages (Holloway, page 2).
The foreclosure fiasco that the United States is seeing should not be taken lightly, and it’s not about to end anytime soon. Around 1.8 million subprime adjustable-rate mortgages are scheduled for an interest rate reset during this year, valued at an estimated $450 billion (Center for Responsible Lending statistics, page 2). The U.S. may need to follow Canada’s lead and start requiring the insurance of loans, and lenders need to start discouraging adjustable-rate mortgages at least until the housing market recovers from this recession.
I would inquire of to see the Federal government go after some of these lenders for what they have been pulling on borrowers. They have been picking on the lowest-class (and to some extent, the least educated) members of our society, making them think that ownership of a house is within their arrive with a subprime adjustable-rate mortgage, only to then jack up the rates when the housing market starts to drop like it has. Because of what they have done, whole communities have crumbled, millions have had their homes taken from them, and the whole American economy has suffered. According to ACORN, families are facing foreclosure because they were offered loans that a responsible lender would have known would not be affordable later on. Over half of loans made in 2006 were “stated income” loans where lenders did not have to verify the borrowers’ income; brokers and lenders then exaggerated their incomes to cessation the loan and collect the fees. 80% of teaser rates started adjustable-rate mortgages at as little as 1% before steadily climbing (ACORN Glorious Housing, pages 11-12).
Taking advantage of these people is what lenders have been doing for years, and something needs to be done to ensure it will cessation happening. The Federal government needs to put its foot down and show that it is taking this sigh seriously. With the impact foreclosures have had on our economy, jail time would be a fitting punishment for some of these CEO’s.
“Foreclosure Exposure.” Association of Community Organizations for Reform Now 05 Sep 2007 01 Dec 2007 .
“In the Matter of: Countrywide Home Loans.” Attorney General of the State of New York Civil Rights Bureau 02 Dec 2007 .
Bernanke, Ben. “The Subprime Mortgage Market.” Board of Governors of the Federal Reserve System 17 05 2007
01 Dec 2007 .
“A Snapshot of the Subprime Market.” Center for Responsible Lending Oct 2007
01 Dec 2007 .
“Roller Coaster.” The Economist 04 Nov 2007
01 Dec 2007 .
“Group Therapy.” The Economist 29 Nov 2007
02 Dec 2007 .
Fernandez, Manny. “Study Finds Disparity in Mortgage by Race.” The New York Times 15 Oct 2007 02 Dec 2007 .
Holloway, Andy. “Another Man’s Pain.” Canadian Business 22 Oct 2007 02 Dec 2007 .
“The NAACP Filed A Historic Lawsuit Against Mortgage Lenders Alleging Racial Discrimination.” National Association for the Advancement of Colored People 07 Jul 2007
02 Dec 2007 .