For Minorities, Home Ownership may be fleeting
Home ownership is a sign of economic health and social stability. As the old saying goes: whoever washed a rented car? Increases in minority home ownership have been heralded, rightly, as signs of improving economic status. Unfortunately, the story behind the story reveals that much of this increase in minority home ownership has been fueled by sub-prime lending. Sub-prime lenders price their mortgages so that it's easy to buy, but hard to hold onto the new home.
As the NYTimes reports here, the consequences of sub-prime lending are especially severe for minorities.
Minorities are twice as likely as whites to have taken out expensive sub-prime mortgages. Those mortgages have aggressive pricing structures that let the lenders sell them as cheap financing, but which result in big rate increases a few years after the happy new homeowner closes on her new house.
Hidden fees that make prepayment harder, interest rates higher than needed to cover the credit risk of the borrower, and other aspects of sub-prime can tip someone on the edge into foreclosure.
Prof. Warren (of the eponymous blog you're reading) has conducted research indicating that, while home ownership provides some defense against bankruptcy for whites, it actually seems to sink African- Americans. That is, for African- Africans, owning a home actually correlates with going into bankruptcy! That article is available at: Elizabeth Warren, The Economics of Race: When Making it to the Middle Isn’t Enough, 61 Washington & Lee Law Review 1771 (symposium issue 2005).
All borrowers, including minorities, deserve a fair shake from their lender. Home ownership should not be a bait and switch.
My humble opinion, home ownership is one of the few urban renewal and bad-crime-area- fighting techniques that really, really, really works.
I think Dems should make it an issue, but rather than blaming the sub-prime lending industry for developing something to fill a need that ends up improving society as a whole, they should get involved and make sure the whole thing works better, whether through regulation or offering more government loans.
I think that a really, really stupid tack to take would be to frame this story totally as predatory businesses preying on stupid uneducated minorities who shouldn't be owning homes, that it shouldn't be done at all. I suspect that someone like Charles Rangel would not take that route; he's one that knows what works.
February 22, 2006 1:20 PM | Reply | Permalink
The sub-prime lending industry came into being with the deregulation of the banking industry and the loosening of usury laws. We used to live without subprime lenders.
Subprime lenders do finance new home mortgages, but nearly all of their profits are made through loan flipping and equity stripping after the initial mortgage is signed. This doesn't contribute to society in any positive way, unless you consider fattening the bottom line of these companies to be a positive.
These are predatory businesses, and they are preying on minorities. These communities are purposely targeted through reverse redlining for these bad deals. Many of the victimized could have qualified for a prime loan, if one was offered, but it's the predators who work these neighborhoods, not the mainstream banks. Sometimes the predatory lenders are actually subsidiaries of mainstream banks.
You don't have to be stupid or uneducated to be taken advantage of by these deals, however; they are written deliberately to be confusing and deceptive, and for many of these folks, they are presented as the only game in town.
February 22, 2006 4:03 PM | Reply | Permalink
The reporting on this suggests that minorities get steered to subprime loans (such an innocuous term) in much the same way that they used to get redlined by conventional banks.
If regulatory agencies hadn't been captured by their targets, there'd be someone with the resources to attack this kind of discrimination. But when such a large chunk of the profits of consumer lending come from penalties, fees and punitive interest rates, the pressure against reform is tremendous.
February 23, 2006 8:05 AM | Reply | Permalink