Commentary | Economic Growth

Subprime loan debacle intensified segregation

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This commentary originally appeared in the San Francisco Chronicle and is based on the EPI report A comment on Bank of America/Countrywide’s discriminatory mortgage lending and its implications for racial segregation.

African American and Hispanic families are more likely today to live in high-poverty neighborhoods than a decade ago. More low-income black families now live mostly among other low-income black families; income segregation among Hispanics has also increased.

Why? Partly, it reflects the growing economic inequality in every area of American life. But subprime lending, which precipitated a worldwide financial crisis, has also exacerbated the economic suffering of minority families and intensified both economic and racial segregation in the United States. Foreclosures on homes financed or re-financed with subprime loans have led to the displacement of many minority families from more stable communities, forcing their return to more racially isolated and poorer neighborhoods.

Bank of America agreed in December to pay $335 million to discrimination victims of its Countrywide mortgage subsidiary. The agreement settled an Obama administration lawsuit alleging that the bank had charged 200,000 black and Latino homeowners higher rates than similarly qualified whites. It’s a step, but there’s a long way to go before the damage is undone.

California victims were mostly of Mexican origin; many others were African American. Many lost homes to foreclosure when they couldn’t meet harsh repayment terms to which they had unwittingly agreed. Loans typically had high closing costs and prepayment penalties, with low initial “teaser” rates that skyrocketed once borrowers were committed.

Countrywide offered kickbacks (called “yield spread premiums”) to brokers for tricking borrowers into accepting higher-than-standard rates. Widespread in the industry, such “premiums” were banned by the 2010 Dodd-Frank reform act, but borrowers deceived earlier had no recourse.

The government charged that correlations between race and loan terms were so stark that Countrywide officials were aware of the discrimination yet did nothing. The settlement failed to note that Bank of America officers, in their investigation prior to purchasing Countrywide in 2008, should have noticed the discrimination and remedied it.

Other litigation has exposed discriminatory, even racially explicit, industry practices. Wells Fargo employees’ affidavits state that they called subprime mortgages “ghetto loans” and were instructed by their supervisors to solicit in heavily African American areas where residents “weren’t savvy enough” to understand their exploitation. Wells Fargo even established a unit to recruit subprime borrowers at black churches. By 2006, 54 percent of African American, 47 percent of Hispanic and 18 percent of white mortgage holders had subprime loans; 61 percent of homeowners holding subprime loans were actually eligible for conventional loans with lower rates.

The Justice Department concluded that the “more segregated a community of color is, the more likely it is that homeowners will face foreclosure because the lenders who peddled the most toxic loans targeted those communities.” Shaun Donovan, secretary of Housing and Urban Development, asserted last year that because of Countrywide’s and other lenders’ practices, “between 2005 and 2009, fully two-thirds of median household wealth in Hispanic families was wiped out. From Jamaica, Queens, N.Y., to Oakland, Calif., strong, middle-class African American neighborhoods saw nearly two decades of gains reversed in a matter of not years – but months.”

The government historically turned a blind eye, or worse, to segregation. Well into the 1950s, the Federal Housing Administration denied mortgage insurance to blacks wanting to move to white neighborhoods and insured few loans in black neighborhoods, records show. Even as states adopted fair housing laws, the FHA commissioner insisted in a 1961 hearing that he would not enforce an antidiscrimination policy. In that hearing, the comptroller of the currency (responsible for regulating banks) testified that his office maintained no policy regarding racial discrimination.

The chairman of the Federal Deposit Insurance Corporation asserted that banks he supervised should deny loans to African Americans because black neighbors would make whites’ property values fall. And the Federal Reserve Board chairman testified that if a bank won’t lend to blacks, “forces of competition” will ensure that another bank does so. With authority to regulate banks nationwide, and with all banks practicing similar discrimination, the Fed Chairman William McChesney Martin must have known his claim was false.

When regulators chartered banks and thrifts whose avowed policy was race-based lending, they violated the constitutional right to be free of officially sponsored racial discrimination. A recent court decision pinpointed this government role. In 2008, Cleveland sued Bank of America, Washington Mutual and other institutions over lending in low-income black neighborhoods. A federal judge concluded that banks were hardly the culprit – because they are so heavily regulated, “there is no question that subprime lending was conduct which ‘the law sanctions.’ ”

The Countrywide settlement – averaging less than $2,000 per victim – will not return borrowers to homes and will not reverse the spread of slum-like conditions to middle-class African American and Hispanic neighborhoods with foreclosure epidemics.

Median black family net worth plummeted to about $6,000 in 2009, according to the Pew Research Center, less than half its value before the housing bubble burst, equal to only 5 percent of median white wealth. Excluding home equity, median black liquid wealth is now only $1,000, the center found.

The subprime debacle demonstrates that segregation has intensified from conduct that “the law sanctions.” The Obama administration’s more aggressive efforts to reverse that sanction is important, but minority families will not soon return in substantial numbers to the home-buying market.


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