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

The Effect of the Foreclosure Crisis on Asset-Building in Minority Communities . Insight Center for Community Economic Development Webinar. Paul Leonard November 13, 2008. About CRL.

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

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  1. The Effect of the Foreclosure Crisis on Asset-Building in Minority Communities Insight Center for Community Economic Development Webinar Paul Leonard November 13, 2008

  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.

  3. 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

  4. African Americans and Latinos Disproportionately Harmed by Subprime Lending and Foreclosures

  5. Background: Race, Ethnicity and the Subprime Market • African-American and Latinos disproportionately receive high-cost loans

  6. Background: Race, Ethnicity and the Subprime Market • 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)

  7. 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? Increased Odds of Foreclosure by Neighborhood Type:

  8. Subprime Foreclosures Source: CRL Calculations based on McDash and HMDA

  9. Cleveland Foreclosures Concentrated in African-American Neighborhoods

  10. Estimated Total Foreclosures Source: CRL Calculations based on McDash and HMDA

  11. Foreclosures in CA, April 2008

  12. 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

  13. Causes of the Subprime Mess

  14. It Wasn’t CRA

  15. CRA-Related Higher-Priced Lending, 2006 Only 6% of Subprime Loans Made by CRA Lenders in their Assessment Areas Source Federal Reserve analsysis of HMDA data

  16. Current Market StructureLacks Accountability • Brokers • Lenders • Wall Street • Ratings Agencies • Investors • Servicers

  17. 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

  18. 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

  19. Nationally, Loan Mods Dwarfed By Foreclosures & Delinquencies

  20. 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

  21. 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

  22. 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

  23. Don’t Throw the Homeownership Baby Out with the Foreclosure Bathwater Median Total Change in Equity: CAP Homes Purchased Between 1998 & 2007

  24. Contact Paul Leonard California Director Center for Responsible Lending Paul.Leonard@responsiblelending.org 510-379-5500 www.responsiblelending.org

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