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The Effect of the Foreclosure Crisis on Asset-Building in Minority Communities

Paul LeonardNovember 13, 2008

Insight Center for Community Economic Development Webinar

http://www.responsiblelending.org 2

About CRL

Nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.

Affiliated with Self-Help, one of the nation’s largest community development financial institutions.


Overview

African Americans and Latinos have disproportionately received riskiest loans and foreclosures concentrated in communities of color

Systemic failures at all points of the mortgage process.

Dramatic need for stronger policy intervention to increase modifications


African Americans and Latinos Disproportionately Harmed by Subprime

Lending and Foreclosures


Background: Race, Ethnicity and the Subprime Market

African-American and Latinos disproportionately receive high-cost loans

Subprime as a Proportion of All Mortgages by Race/Ethnicity, 2005-2007

49%

37%

20%

0%

10%

20%

30%

40%

50%

60%

African-American Latino non-Latino, white


CRL’s “Unfair Lending” Report:

- Disparities cannot be explained by legitimate risk characteristics

- Borrowers of color about 30% more likely to receive higher cost loans than similarly-risky white borrowers

Possible Causes of Price Disparities:

- Traditional “discrimination”

- Market segmentation (e.g. marketing, targeting of high-cost vs low-cost lenders)

Background: Race, Ethnicity and the Subprime Market


Neighborhood Demographics and Foreclosure

What is the difference in the likelihood of foreclosure for loans in neighborhoods with high concentrations of minorities versus white neighborhoods?

All Loans With Subprime Control

High Minority 62% 33%

High African-American

176% 100%

High Latino 35% 12%

Increased Odds of Foreclosure by Neighborhood Type:


Subprime Foreclosures

2005-2007 Subprime

Loans

Number of Originations

Estimated # of Foreclosures

(as of 6/08)

Estimated Foreclosure Rate

Total 6,126,750 989,368 16.1%

Neighborhood Category

Low Minority (<10%) 1,607,803 219,373 13.6%

Mod-Low (10-25%) 1,461,226 209,521 14.3%

Mod-High (25-50%) 1,284,757 219,954 17.1%

High (50%+) 1,749,313 337,171 19.3%

Specific High Categories

High AA (50%+ AA) 513,182 119,734 23.3%

High Latino (50%+ Latino) 456,636 74,815 16.4%Source: CRL Calculations based on McDash and HMDA


Cleveland Foreclosures Concentrated in African-American Neighborhoods


Estimated Total Foreclosures

2005-2007 Loans

(Prime and Subprime)

Number of Originations

# of Foreclosures

(as of 6/08)

Estimated Foreclosure Rate

Total 23,944,153 1,666,248 7.0%

Neighborhood Category

Low Minority (<10%) 7,566,204 391,228 5.2%

Mod-Low (10-25%) 6,886,619 370,289 5.4%

Mod-High (25-50%) 4,828,205 377,087 7.8%

High (50%+) 4,663,125 527,645 11.3%

Specific High Categories

High AA (50%+ AA) 1,015,216 175,252 17.3%

High Latino (50%+ Latino) 1,202,449 123,442 10.3%Source: CRL Calculations based on McDash and HMDA


Foreclosures in CA, April 2008


Overall Impact

CRL estimates 2.2 million subprime foreclosures

40.6 million surrounding homes will lose value as a result of proximity to foreclosures

Total $352 billion in lost wealth to families

Disproportionate impact on African-American and Latino families and communities


Causes of the Subprime Mess


It Wasn’t CRA


CRA-Related Higher-Priced Lending, 2006

Banking institutions and affiliates

Higher-pricedWithin CRA

assessment area(%)

Outside CRAassessment area

(%)

Independentmortgagecompany

(%)

Total(%)

Non-lower-income 7 23 27 57

Lower- income 6 18 20 44

Total 13 41 47 100

Only 6% of Subprime Loans Made by CRA Lenders in their Assessment Areas

Source Federal Reserve analsysis of HMDA data


Current Market StructureLacks Accountability

Brokers Lenders Wall Street Ratings Agencies Investors Servicers


Regulations Haven’t Kept Pace with Market Changes

Federal 1994: Weak Federal HOEPA law. Regulators: strong capacity but limited will.

States: Some states have stronger laws

BUT Regulators are understaffed


What about the bailout?

Bailout proposals ignore fundamental cause of crisis, i.e. foreclosures and falling housing prices

Need for bankruptcy reform and systematic loan modifications

Need to drastically improve borrower protections going forward


Nationally, Loan Mods Dwarfed By Foreclosures & Delinquencies


Increase Mods through TARP

Require mandatory formulaic mods for loans owned by any bank that gets cash infusion

Use TARP to guarantee modified loans conditioned on sustainability standard

Buy loan servicing rights to break logjam Purchase 2nd mortgages Set goals & issue detailed reporting


Other Strategies to Increase Mods

Change rules governing trusts so Treasury can purchase whole loans

Amend TARP to give protections to servicers that modify loans

Provide monetary incentives for servicers to modify loans

Enact mandatory loss mitigation requirement Amend tax law so that homeowners don’t get

taxed for loan mods


Loan Mods in Bankruptcy

Bankruptcy judges can modify all loans (incl. for yachts, vacation homes, and for subprime lenders in bankruptcy) but not for primary residences

Zero cost to taxpayers Could help 600,000 families keep their homes Narrowly targeted; limited judicial discretion Incentive to servicers to modify outside

bankruptcy


Don’t Throw the Homeownership Baby Out with the Foreclosure Bathwater

$34,799

$26,565

$22,239

$32,503

$21,653

$14,747

$9,228

$3,980

-$945 -$1,006

-$5,000

$5,000

$15,000

$25,000

$35,000

$45,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Loan Origination Year

Median Total Change in Equity: CAP Homes Purchased Between 1998 & 2007


Contact

Paul Leonard

California Director

Center for Responsible Lending

[email protected]

510-379-5500

www.responsiblelending.org

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