On the losing end: from the subprime mortgage crisis to the subsequent credit crunch, minorities are feeling the heat

Diverse Issues in Higher Education, May 1, 2008 by Michelle J. Nealy

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How well a particular industry fares during any given time has an impact on countless other industries and consumers. Case in point--rising gas prices are affecting everything from airfares to the price of getting a pizza delivered. A similar situation is happening with the wave of home foreclosures as the subprime mortgage crisis has fueled an impending calamity on the student loan industry. And minority borrowers, like minority homeowners, stand to emerge as the biggest losers.

There is speculation that the subprime crisis will result in the greatest loss of wealth for people of color in American history, according to United for a Fair Economy's (UFE) recent study, "Foreclosed: State of the Dream 2008."

Disproportionately targeted by predatory lenders, minority communities have naturally been affected disproportionately. Despite similar credit scores and income levels, Black and Hispanic borrowers were more than three times as likely to acquire high-interest loans than White borrowers in cities such as Boston, Chicago and Los Angeles just to name a few, even though the majority of subprime borrowers would have qualified for a conventional prime rate loan, according to a report from the Center for Responsible Lending (CRL).

Nearly 55 percent of subprime borrowers had credit scores worthy of a conventional prime mortgage in 2005. Nevertheless, CRL reports that 2005 data show that high-cost loans, which according to the CRL, "are a proxy for subprime loans," account for more than half of the loans to African-American borrowers, around 40 percent to Hispanics, compared with only 17 percent of such loans to Whites. Therefore, says the CRL report, "This implies that subprime foreclosures will affect 8 percent of recent Latino borrowers and 10 percent of recent African-American borrowers. By comparison, subprime foreclosures will likely occur among only about 4 percent of recent White borrowers."

UFE asserts that if adjustable rate mortgage loans had been distributed equitably, Whites would lose more wealth than minority communities. But that has not been the case.

It's a disturbing reversal of fortunes since Black homeownership reached record levels in the late 1990s. In 1998, homeownership rates of Blacks and Hispanics grew nearly twice that of Whites, according to the U.S. Census Bureau.

"In 2004, Black homeownership was at 49 percent," says Dr. William Spriggs, chair of Howard University's department of economics. "Last year it dropped to 46.3 percent. That's huge, and we will continue to see declines. It would not be inconceivable to see Black homeownership drop down to 44 percent. A decades' worth of work lost in a matter of years."

It is particularly disturbing, notes Dr. Wilhelmina Leigh, senior research associate for the Joint Center for Political and Economic Studies, considering how long it's taken African-Americans to significantly increase their homeownership rates.

In 1940, the homeownership rate for White Americans was 45.6 percent. In 2000, the African-American homeownership rate was 46.3 percent.

"It took African-Americans 60 years to get to the homeownership rate of Whites in the 1940s," says Leigh, author of "African Americans and Homeownership: Separate and Unequal, 1940 to 2006."

In 2002, the Bush administration set a goal to close the minority homeownership gap by adding 5.5 million new minority homeowners by 2010 through a variety of initiatives, many of which aimed to assist low-income buyers.

"If we are going to have any kind of growth in the very near future, it's going require a tremendous amount of government intervention," says Leigh.

Earlier this year, President Bush signed an economic stimulus bill to increase the size of the loans that the Federal Housing Administration can insure, while allowing Fannie Mae and Freddie Mac, the two government-sponsored mortgage companies to purchase larger mortgages from lenders and guarantee or hold as investments.

In March, the administration eliminated restrictions on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios.

Most recently, the Senate passed a bipartisan package of tax breaks and other steps designed to help businesses and homeowners weather the housing crisis. The plan, titled the Foreclosure Prevention Act, combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.

"The long-term impact of this crisis is the recovery period. Once you've been foreclosed, there is a blemish on your credit report. You are out of the housing market for the next seven years," says Spriggs, noting that foreclosures lead to declines in property value for neighboring homes and lackluster educational facilities in minority communities.

A 2002 study conducted by the Institute for Policy Studies at Johns Hopkins University concluded that homeownership improves children's educational outcomes. The most obvious way, of course, is in the form of funding.