Transcript Document

The Effect of the Foreclosure Crisis on
Asset-Building in Minority Communities
Insight Center for
Community Economic Development Webinar
Paul Leonard
November 13, 2008
http://www.responsiblelending.org
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.
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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African Americans and Latinos
Disproportionately Harmed by Subprime
Lending and Foreclosures
http://www.responsiblelending.org
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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
60%
50%
49%
37%
40%
30%
20%
20%
10%
0%
African-American
Latino
http://www.responsiblelending.org
non-Latino, white
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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)
http://www.responsiblelending.org
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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:
All Loans
With Subprime
Control
High Minority
62%
33%
High AfricanAmerican
High Latino
176%
100%
35%
12%
http://www.responsiblelending.org
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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%
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%
119,734
23.3%
74,815
16.4%
Neighborhood Category
Specific High Categories
High AA (50%+ AA) 513,182
High Latino (50%+ Latino) 456,636
Source: CRL Calculations based on McDash and HMDA
http://www.responsiblelending.org
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Cleveland Foreclosures Concentrated in
African-American Neighborhoods
http://www.responsiblelending.org
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Estimated Total Foreclosures
Number of
2005-2007 Loans
Originations
(Prime and Subprime)
# of Foreclosures Estimated
Foreclosure
(as of 6/08)
Rate
Total
1,666,248
7.0%
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%
High AA (50%+ AA) 1,015,216
175,252
17.3%
High Latino (50%+ Latino) 1,202,449
123,442
10.3%
23,944,153
Neighborhood Category
Specific High Categories
Source: CRL Calculations based on McDash and HMDA
http://www.responsiblelending.org
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Foreclosures in CA, April 2008
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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Causes of the Subprime Mess
http://www.responsiblelending.org
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It Wasn’t CRA
http://www.responsiblelending.org
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Only 6% of Subprime Loans Made by CRA
Lenders in their Assessment Areas
CRA-Related Higher-Priced Lending, 2006
Banking institutions and affiliates
Within CRA
assessment area
(%)
Outside CRA
assessment area
(%)
Non-lowerincome
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Lowerincome
Higher-priced
Total
Independent
mortgage
company
(%)
Total
(%)
23
27
57
6
18
20
44
13
41
47
100
Source Federal Reserve analsysis of HMDA data
http://www.responsiblelending.org
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Current Market Structure
Lacks Accountability
 Brokers
 Lenders
 Wall Street
 Ratings Agencies
 Investors
 Servicers
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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Nationally, Loan Mods Dwarfed By
Foreclosures & Delinquencies
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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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
http://www.responsiblelending.org
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Don’t Throw the Homeownership Baby Out
with the Foreclosure Bathwater
Median Total Change in Equity:
CAP Homes Purchased Between 1998 & 2007
$45,000
$35,000
$34,799
$32,503
$26,565
$25,000
$22,239
$21,653
$14,747
$15,000
$9,228
$3,980
$5,000
-$945
-$1,006
-$5,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Loan Origination Year
http://www.responsiblelending.org
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Contact
Paul Leonard
California Director
Center for Responsible Lending
[email protected]
510-379-5500
www.responsiblelending.org
http://www.responsiblelending.org
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