Leadership 500 Summit - Scottsdale, AZ
While I was growing up in Philadelphia, some members of my community owned their homes free and clear of any debt. Many of my neighbors were retirees, who often sat out on their front porches looking after the young children playing in the street. Others in the community were renters who dreamed of one day becoming homeowners. Many of the renters struggled to make ends meet, at times living paycheck to paycheck, but they all worked hard to provide a better future for themselves and their children.
These days my childhood neighborhood makes me think of the many communities throughout the nation where subprime lenders love to do business.
For years, people of color have been concerned with getting fair access to credit, particularly home loans. In 1977 , Congress enacted the Community Reinvestment Act (CRA) specifically to make home loans more available to people underserved by traditional banking institutions—women, African-Americans, Latinos, rural residents, and low-wealth families. At that time, no one could have foreseen the growth and development of the subprime industry, which did not begin in any significant way until 20 years later.
Now members of our communities have access to credit, but most of it is abusive and does not lend itself to creating sustainable homeownership.
Subprime home loans are aggressively marketed to people with weak or limited credit, and there is strong evidence that lenders also target people of color, regardless of their credit history. The subprime market grew rapidly during the last decade, expanding from $35 billion in 1994 to $640 billion in 2006, and it now accounts for over 20 percent of the mortgage market. Yet, until recently, subprime lending operated in relative obscurity and was the subject of very little oversight or regulation, especially in Washington.
These days the subprime market has a much higher profile, as headlines explode all over the world about the biggest foreclosure disaster in modern U.S. history. My organization, the Center for Responsible Lending, has conducted research showing that 2.2 million subprime home loans made in recent years have already failed or will end in foreclosure. Yet, even now, the benefits of the subprime market are controversial.
Theoretically, the subprime market could serve to expand ownership and bring greater prosperity to underserved communities. For borrowers with limited or impaired credit histories, a subprime loan could act as a bridge to prime financing. In reality, subprime lenders have made it difficult for families with subprime loans to improve their financial position. Today the subprime market is poised to bring about the greatest drain of wealth the African-American community has ever experienced.
Predatory mortgage lending is a blanket term for a variety of lending practices that strip wealth or income from borrowers. Characteristics of predatory loans may include, but are not limited to these types of lending practices:
Predatory mortgage lending emerged as a serious problem as the subprime market began to grow and expand during the late 1990s. Back then, the major problem was equity stripping, as unscrupulous lenders targeted borrower with certain characteristics—seniors, women, and racial and ethnic minorities—for abusive refinanced mortgages. These lenders packed on excessive and unnecessary fees that would drain away all of the borrower’s equity.
Today we are experiencing a second wave of predatory mortgage lending practices. In a quest to keep pushing sales up, unscrupulous lenders moved beyond equity stripping to new, dangerous loan products: hybrid adjustable-rate mortgages (HARMs), known as “2/28s” or “3/27s.” These loans begin with a fixed interest rate, but a steep increase becomes effective after two or three years, with payments that continue to rise every six months.
Lenders marketed HARMs as “affordability” products, based on the relatively low initial interest rate. However, the cost of these loans was scheduled to shoot up by 30, 40 or even 50 percent. When the loan becomes unaffordable, subprime lenders are standing by, eager to refinance the borrower into another bad loan. For far too many homeowners, the end result is foreclosure.
Subprime HARMs are totally unsuitable for credit-strapped borrowers, yet in 2005, HARMS made up the overwhelming majority—about 80 percent—of all home loans offered through the subprime market. These loans, in conjunction with poor business practices, have been a driving force behind the foreclosure epidemic we are witnessing today.
Until HARMs dominated the market, it was possible to believe that predatory lending tainted only a portion of the subprime market. Today, because HARMs and other abusive practices (for example, not setting up escrow accounts for taxes and insurance, which is routinely done in the prime market) are the rule rather than the exception on subprime loans, predatory lending has become almost synonymous with subprime mortgage lending.
The negative effects of subprime lending have fallen hardest on people of color. According to the most recent Home Mortgage Disclosure Act data released by the Federal Reserve Bank:
In research published in May 2006, the Center for Responsible Lending showed that the above disparities exist even after controlling for credit scores, borrower traits, equity and other factors. Moreover, borrower income does not eliminate the abuses. In 2000, the Department on Housing and Urban Development found that African-American families living in upper income neighborhoods were more likely to receive subprime loans than white families. Again in 2005, this premise was proven to be true, a recent study of predatory mortgage lending in the Boston area by the Massachusetts Community Banking Council shows that high income African-Americans and Latinos were six to seven times more likely to have a higher rate mortgage than high-income whites.
These disparities are even more disturbing when you take into account the rates at which subprime borrowers typically refinance from one subprime loan to another, and the fact that each subsequent subprime refinancing increases the probability of foreclosure. When one considers foreclosures in terms of the experience of borrowers rather than the results on any individual loan, the probability of foreclosure rises even higher, up to one-third of subprime borrowers. As African-Americans and Latinos are grossly overrepresented in the subprime mortgage, we predict that foreclosures can affect approximately eight percent of Latino borrowers that received subprime loans in recent years, and 10 percent of African-American borrowers.
The high rates of subprime foreclosures will have a devastating impact on people of color. Owning a home is the best chance most families have of building wealth and prosperity, but subprime loans are directly undermining that opportunity. This is happening in multiple ways, but to cite only one example: For years, subprime lenders have charged high fees, called “prepayment penalties,” to borrowers who wanted to refinance their subprime loan. According to the Leadership Conference on Civil Rights, for a family that has a $150,000 loan with an interest rate of 10 percent, “a typical prepayment penalty imposes a fee of $6,000 for an early payoff- an amount greater than the entire net worth of the median African-American family.”
Rather than moving a family forward financially, these loans are only resulting in temporary ownership, and causes financial hardship that sets them back. As one illustration, take a look at a recent map of Cuyahoga County, Ohio (Cleveland), shown in a figure here. This map provides a vivid example of how foreclosures are dramatically clustered in areas with a high portion of racial and ethnic minority residents. [Insert Map]
Because of the impact of the surge in subprime foreclosures and the fact that predatory lending is making homeownership more costly for people of color, many in the civil rights community are taking action. We (NAACP, LCCR, CRL, NCLR, and NFHA) have called for a six-month moratorium on all subprime foreclosures to allow a real assessment of the impact.
In the interim, lenders and servicers should create workouts and loan modifications for existing borrowers to help them avoid foreclosure. Servicers are empowered to create loan modifications where there is a reasonable likelihood of foreclosure, and these modifications must be offered without unnecessary fees.
We are also urging the banking regulators to finalize their proposed guidance on subprime lending without weakening it. This guidance would require lenders affiliated with banks, who originate roughly half of all subprime loans, to consider the monthly payment that a HARM is scheduled to adjust to when determining whether the borrower can afford to pay it. Making sure someone can afford to repay a loan would sound like common sense, but it is extremely uncommon in today’s subprime market. It also discourages the practice of charging borrowers higher rates by not verifying income, and of not escrowing for taxes and insurance; both practices are not common in the prime market and dramatically increase the risk of foreclosure for subprime loans.
The subprime mortgage lending industry has failed to police itself. Thus, federal regulators must exercise proper oversight to protect all future borrowers from abusive products and practices. Moreover, Wall Street, too, must take responsibility for its profiteering from these abusive products. Investors benefited from purchasing pools of mortgages that were backed by HARMs, so they must meet at the table and be apart of the solution.
The Federal Reserve Board must issue rules for all lenders under the Homeownership Equity Protection Act of 1994 (HOEPA) to protect borrowers. The Fed has been required since HOEPA was passed in 1994 to issue rules to address unfair and deceptive lending practices, but has failed to do so even as HARMs have devastated neighborhoods.
Finally, Congress must act.
Congress has the power to deal with this national subprime mortgage foreclosure crisis. First, Congress must amend the bankruptcy code so that families who are already in foreclosure have an ability to save their homes should they have to file for bankruptcy. Since the bankruptcy law was passed in 1978, a home loan for a primary residence has been the only loan that a bankruptcy court cannot modify. In an age when HARMs cause 40 percent payment shock after two years, and loan amounts often far exceed the house value, courts need the authority to modify loans to enable families to keep, or even sell, their homes.
Furthermore, Congress must impose tough standards on mortgage brokers that are offered in many states. Mortgage brokers must have a fiduciary duty to work in their clients’ best interest. Several states provide this protection through common law, and it must be applied at the federal level to extend to all mortgage brokers. Kickbacks from lenders to mortgage brokers also must be eliminated, these kickbacks give an incentive for mortgage brokers to place borrowers in more expensive loans and encourage discretionary pricing of loans. Subprime mortgage lenders must verify borrowers’ income and escrow for taxes and insurance. Finally, no loan should be made without considering the borrower’s repayment ability.
We are at a pivotal point in the history of subprime mortgage lending. We can either clean up the market or continue to allow people to grapple with illusory homeownership that ultimately sets them back. We can deliver on the true American dream of homeownership by ensuring that no door is closed because of abusive lending practices. At this time, all the appropriate people are at the table.
The Civil Rights Community has spoken loud and clear that abusive mortgage lending is hurting communities of color. For instance, the NAACP has called for an end to predatory mortgage lending practices for many years now, and in 2005, reissued a resolution denouncing the abusiveness of these practices. The National Urban League recently demanded a federal Homebuyer’s Bill of Rights, which calls for the right of people to be free from predatory lending. Rainbow Push Coalition, National Council of La Raza, and the Leadership Conference on Civil Rights, too, have called for an end to these same practices.
Others in our community also have spoken. In Tavis Smiley’s Covenant with Black America, Covenant VIII calls for an end to broker kickbacks and requests that any new federal anti-predatory lending law supplement, not eliminate, existing state laws that are providing valuable consumer protections. Finally, Bishop TD Jakes is educating homeowners and potential homeowners on how to avoid predatory lending in his new book titled Reposition Yourself: Living Life Without Limits. He outlines 10 rules of mortgage lending that every borrower should follow to avoid being sucked into an abusive lending situation.
The above-referenced organizations along with consumer advocates have taken this fight to Congress, and has called on it to enact responsible anti-predatory mortgage lending legislation at the federal level that that will end the abuses, while simultaneously allowing states to protect their citizens.
Currently, Senator Chris Dodd, who chairs the Senate Committee on Banking, Housing and Urban Development, and Senator Charles Schumer, with his Bill SB 1299, are leading the debate in the senate and seemed poised to ensure that borrowers are protected.
In the House of Representatives, Chairman Barney Frank of the Financial Services Committee is writing federal regulators to encourage them to use their legal authority to take strong actions to curb abusive lending practices.
On June 14th, the Federal Reserve is hosting a hearing to determine whether or not to strengthen the regulations under HOEPA. The Fed must do so.
With all the energy around this issue, we should be able to come to a resolution that will ensure that predatory mortgage lending practices will no longer keep people outside of the financial mainstream; instead, traditional banking institutions must step up their services to people traditionally underserved to end this American nightmare of financial apartheid.
Some defenders of the subprime market tout it as a tool for increasing homeownership, but, in fact, the subprime lending has been a net drain on ownership. From 1998 through 2006, the great majority of subprime loans were refinances. Less than 10% of subprime borrowers used subprime loans to purchase a home for the first time, while 20% or more
of borrowers who received loans during that period will end up losing their home.
Nikitra S. Bailey is the vice president of external affairs at the Center for Responsible Lending (CRL). CRL is a nonprofit, non-partisan research and policy advocacy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, a CDFI, which has provided over $5 billion in loans to African-Americans, Latinos, female-headed households, rural residents, and low-wealth families.
NAACP National Headquarters
4805 Mt. Hope Drive
Baltimore MD 21215
Toll Free:
(877) NAACP-98
Local:
(410) 580-5777
© 2006 NAACP
All Rights Reserved