Subprime Mortgage Crisis: Nightmare of the “American Dream” for Black and Latino People
Ozell and J.W. McBee, a retired Black couple, had lived with their three grandchildren in their South Side Chicago home since 1999. In 2006, they received a call from a “mortgage consulting” company offering to re-finance them into a mortgage with a monthly payment $100 lower than the $700 a month they were paying. But to get that lower rate, the McBees were told, they would first have to be refinanced into a mortgage with payments of $1,400 for two months. Ozell and J.W. signed up, and they borrowed money on their credit cards to make the two $1,400 payments.
But then the mortgage company refused to refinance them into the lower monthly payments. According to the Chicago Sun-Times
, “Ozell, 86, a retired nurse’s assistant, and J.W., 67, a retired janitor, couldn’t meet the increased payments, fell behind, the house was foreclosed and they were evicted.” They, along with two of the grandkids and a 21-month-old great-grandchild, had to move into an apartment, paying $975 a month in rent that they can hardly afford. “I can’t sleep at night,” Ozell said. “I’ve just been so worried it’s making me sick.”
Heartbreaking stories like this are being repeated across the U.S. because of the subprime mortgage crisis that could lead to an estimated 2.2 million homeowners in the U.S. losing their homes to foreclosures in the next couple of years. In 2007 alone, “almost 1.3 million properties, or one for every 97 households in the U.S….had some type of foreclosure action taken against them.
”1 And this crisis is hitting Black and Latino people with particularly devastating force.
A recent report titled “State of the Dream 2008: FORECLOSED” by United for a Fair Economy
2 situates the subprime crisis within “a long tradition of economic, and more specifically, housing discrimination in the U.S.” The report documents how mortgage companies and banks targeted people of oppressed nationalities with predatory subprime loans, and how foreclosures have severely affected Black and Latino communities in the last ten years. The report summarizes that “the subprime lending debacle has caused the greatest loss of wealth to people of color in modern U.S. history…between $164 billion and $213 billion for loans taken during the past eight years.”
Subprime mortgages are a relatively recent development that began in the early 1990s and then expanded greatly during the past few years. These loans have much higher interest rates as well as higher fees and penalties than conventional mortgages. Because people who don’t qualify for traditional mortgages (due to their income or credit history) could get subprime loans, these loans were billed as enabling many more people to buy into the “American Dream” of homeownership. But the higher interest rates and other costs have driven many families who got subprime mortgages into situations where they were forced to give up their houses.
By 2006 more than one-fifth of all mortgages in the U.S. were subprime. The banks and mortgage companies went after middle-class families who had accumulated too much debt to qualify for a conventional mortgage, as well as low-income families who wanted to buy a home in the inflated housing market. In 2007, 11 percent of all subprime loans went to first-time buyers. The rest of subprime loans, 89 percent, went to borrowers who were talked into refinancing their homes, for anything from paying off credit card debt, to dealing with devastating health care costs, to surviving a period of unemployment.
The mortgage industry developed a number of methods to make these subprime loans squeeze the most out of the families who were the most vulnerable economically. These include:
• Prepayment penalties against paying the loan off early, so borrowers were stuck with high-interest loans once they were lured into them (70 percent of subprime loans have prepayment penalties).
• “Exploding” adjustable rate mortgages (ARMs), which come with a relatively low “teaser” rate for the first two or three years. After that initial period, the interest rate increases substantially, by a third or more. Through mid-2006, such ARMs made up 81 percent of subprime loans. Between now and 2009, when 1.8 million ARMs are due to be reset at a higher interest rate, many more people will be unable to make the payments and be forced to give up their houses.
While the subprime crisis affects people of all nationalities, the predatory loans were deliberately targeted at Black and Latino people in particular. More than half of all loans made to Black people in 2005-2007 were subprime.
3 The figure for Latino people is two out of five.
4 This has to do with the fact that because of the history of systematic national oppression in this country, Black and Latino people on average are poorer than white people. In 2005, the per capita income for whites in the U.S. was $28,946 compared to $16,874 for Blacks. The United for a Fair Economy report points out, “Thus, if subprime loans were meant to target households whose income was not high enough to qualify for conventional loans, this meant a majority of households of color.”
The current crisis also highlights a related aspect of the tremendous economic gap that exists between whites and Black people in the U.S.—the fact that the net worth of an average white family is 14 times greater than that of an average Black family.
5 When you consider that homeownership and home equity is the primary, even sole, asset of many Black and Latino families, this focuses up even more sharply the devastating effect of the subprime crisis on Black and Latino communities.
It is not just low-income Blacks and Latinos who have been victimized. In a practice known as “steering,” mortgage brokers push higher-cost subprime loans on middle-income families that qualify for conventional loans. In 2005, Black homeowners earning more than $100,000 a year were more likely to get high-cost loans than white homeowners earning less than $35,000.
The subprime crisis is hitting Black and Latino communities that were already hard-hit by the recession of 2000-2001, when Blacks and Latinos lost 27% of their net worth.
6 And there is a “spillover effect” from the increasing number of foreclosures: whole communities where houses stand vacant, stores and businesses close, the value of the remaining houses goes down, and the tax base that pays for schools and city services shrinks. The mayor of Cleveland recently said that the city can’t afford to board up all the houses that have been foreclosed. Baltimore is suing Wells Fargo Bank, “contending that the bank’s lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.” The mayor of Trenton, New Jersey, called the subprime crisis “an economic tsunami that is hitting our cities.”
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For decades, the financial institutions of U.S. capitalism carried out “redlining”—systematically denying mortgages, business loans, and other services to people living in minority neighborhoods. This was a conscious discriminatory policy as well as part of the deindustrialization and other aspects of the profit-driven workings of capitalism that have devastated the inner-city communities of oppressed people.
The exponential growth of subprime mortgages in recent years has been a perverse sort of redlining in reverse. Instead of being denied loans, certain sections of Black and Latino people have been flooded with predatory loans and promises of a piece of the “American Dream”—even as the poorest strata of those communities have been hit hard with the gutting of public housing and other government social programs. Now, as the subprime crisis hits, a nightmarish “economic tsunami” is further devastating the oppressed communities of America.
