Race and The Subprime Mortgage Crisis
The scandalous, frequently fraudulent excesses of sub prime home mortgage lending are finally coming home to roost in the very coupes from which they originally escaped: money center banks and hedge fund portfolios. This is a market correction, the operation of Adam Smith’s “invisible hand”.
This administration believes in letting the invisible hand determine winners and losers. Except when it doesn't. For the moment, the Bush administration is unsure about letting unmodified market forces impose sanctions on major market players who made bad bets . It fears that this will unsettle the entire economy.
In case you have forgotten, the reckless subprime mortgages featured a rogue’s gallery of predatory provisions: no down payment, shaky credit histories, no income verification, and variable rate loans with deceptively low teaser rates at signing, premiums for brokers who could deliver. All of this topped off with steep penalties if you tried to refinance into a better loan. The predictions are that as many as 2-7 million borrowers will default on these reckless loans by the next time rates reset.
The human toll of the subprime mortgage crisis has reached deep into virtually every community. Homes are not widgets. People and families build their sense of well-being around the stability of the mortgage supporting their family’s kitchen table.
African American borrowers have been especially hard hit. Recent studies from New York University researchers, pro consumer non profits such as Acorn and the Center for Responsible Lending and the NYT analyses of mortgage data show that even at higher income levels, black borrowers throughout the country were far more likely than white borrowers with similar incomes and mortgage amounts to receive a subprime loan.
Even before the mortgage crisis, whites and blacks had a net wealth gap of $8000 to $800. The research of sociologists Melvin Oliver and Thomas Shapiro has drawn our attention to the importance of the racial wealth gap. Homes represent the single largest asset in middle class and working poor families’ portfolios. Oliver and Shapiro found that: “Forty three per cent of blacks owned homes in 1988, a rate 65% lower than that of whites... housing equity represents 43.3 percent of white wealth and 62.5 percent of black assets.”
Against this background of preexisting racial wealth disparities, the current subprime crisis promises to affect future generations. The size of the financial bootstrap, called “transformative assets” by Thomas Shapiro, that black parents will be able to pass on to their heirs will decline dramatically because of this round of foreclosures. This, in turn will increase the racial wealth gap in for generations to come.
On Tuesday, October 16th , Secretary Paulson in a speech in Washington, DC for the first time took a at least a rhetorical step back from the canon of “no government regulation” to stop consumer abuses because this might “hurt market innovation”. He announced support for several modest initiatives to encourage private lenders to workout the defaulted mortgages before foreclosing. This is welcome progress, but not nearly enough.
The Treasury department has the power, indeed the responsibility, to directly ban some of the worst practices: variable rate loans with deceptively low teaser rates at signing, premiums for brokers selling bad loan to borrowers without regard to longterm suitability, and steep penalties for refinancing into a more suitable fixed rate loan, if they can get one.
In the financial world, nothing is truly private. Homeowners deserve straight talk and direct action on the racial impact of the current subprime crisis. The evidence is mounting that black homeowners and latino homeowners, even those with high incomes have been disproportionately affected by the unregulated lending practices that started in minority communities and now threaten the entire economy.
If the problem has a racially disproportionate origin, the solution should include sensitive attention to the racial components of the proposed solution.
If the government had stepped in initially to protect borrowers when the problems were first spotted in minority communties, the general crisis, that now threatens the interdependent world economy, might not have grown to its current dimension. Creative government leadership is required. Adam Smith and private solutions will not protect the nation from the full racial impact of the snowballing subprime mortgage crisis.
