OPPORTUNITY BASED HOUSING: CHALLENGES AND OPPORTUNITIES IN THE WAKE OF THE SUBPRIME LENDING CRISIS

GCAA 2010 SOUTHEASTERN COLLOQUIUMjohn a. powell, Executive Director

Christy Rogers, Senior Research Associate

The Kirwan Institute for the Study of Race and Ethnicity at the Ohio State University

TODAY’S PRESENTATION

What is home? What is a house? What do you mean by “opportunity”? What is an “opportunity map”? Focus area: home as wealth building asset –

but not for everyone Denial…segregation….exclusion Predation…foreclosure…asset stripping

What’s on the horizon? Unfair (and fair) housing and credit are entwined

Hearings on housing finance start March 2, 2010 Fee structures…debt…leverage…wealth extraction What is a fair and just economic & financial

system?

WHAT IS A HOUSE?WHAT IS OPPORTUNITY?

WHAT IS HOME?

It’s not just your house – it’s your family, your friends, your neighbors, your local school, your doctor, your favorite grocery store…and all these things shape lives, especially kids’ lives.

Housing

ChildcareEmployment

Education

Health

Transportation

Effective Participation

“HOME” IS AN OPPORTUNITY ANCHOR

OPPORTUNITY MATTERS

Opportunity structures are critical to opening pathways to success:High-quality educationHealthy and safe environmentStable housingSustainable employmentPolitical empowermentOutlets for wealth-buildingPositive social networks

SOCIAL SCIENCE CONFIRMS…

Neighborhoods don’t determine lives, but they shape and affect lives

Living in a disadvantaged neighborhood as a child is the equivalent of losing a year of school

Source: Sampson, R. J., P. Sharkey, et al. (2008). "Durable effects of concentrated disadvantage on verbal ability among African-American children." Proceedings of the National Academy of Sciences (PNAS) 105(3): 845-852.

LIVING IN LOW OPPORTUNITY…

… generates unhealthy levels of stress hormones in children, which impairs their neural development

… correlates with children having levels of lead in their blood 9 times above average; linked to ADD and irreversible loss of cognitive functioning

… links to higher levels of violent offending among juveniles

… is highly correlated with childhood aggression and social maladjustment

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• In 1960, African-American families in poverty were 3.8 times more likely to be concentrated in high-poverty neighborhoods than poor whites.

• In 2000, they were 7.3 times more likely.

OPPORTUNITY IS RACIALIZED

CONSEQUENCES FOR SEGREGATED NEIGHBORHOODS

Lack of low-cost credit options Few preventative care doctors High-cost grocery stores that lack fresh

produce Concentrated poverty schools Policies need to both

bring more sustainable choices to neighborhoods and allow people more choices on where they and their families live

RESISTANCE AND RESILIENCE

Informal economies Extended family networks Politicization and organization Community associations

Policies must leverage resilient and effective community & neighborhood organizations

WHAT IS AN OPPORTUNITY MAP?ATLANTA EXAMPLE

OPPORTUNITY COMMUNITIES PROGRAM

ATLANTA OPPORTUNITY INDICATORS EDUCATION

Educational attainment for total population School poverty for neighborhood schools Test scores (Math) for neighborhood schools Test scores (Reading) for neighborhood schools Teacher qualifications for neighborhood schools (or

certified teachers)

ECONOMIC OPPORTUNITY AND MOBILITY Unemployment Rates Population on Public Assistance Proximity to employment (jobs within 5 miles) Employment competition (within 5 miles) Economic Climate (change in no. of jobs from 2000-2005

w/in 5 miles) Economic Climate (business creation from 2000 to 2005

within 5 miles)  

ATLANTA OPPORTUNITY INDICATORS CON’T HOUSING AND NEIGHBORHOODS

Property Values Property appreciation and tax base Housing Vacancy Rates Housing Cost Burden Crime Rates Poverty Rates Population Change 1990-2000 Projected population change 2000 to 2005 Foreclosures Housing starts Home Ownership Proximity to toxic waste release sites

TRANSPORTATION AND MOBILITY Mean Commute Time Public transit access

FOCUS AREA: HOME AS WEALTH BUILDING ASSET…BUT NOT FOR EVERYONE: THE STORY OF UNFAIR HOUSING AND CREDIT MARKETS

A HOUSE IS ALSO AN ASSET

For every $1 in assets held by African Americans, Whites hold $9

This disparity is primarily due to differences in home equity

Source: “Net Worth and Asset Ownership 1998-2000”. Household Economic Studies. U.S. Census Bureau (2003)

LET’S TALK ABOUT HISTORY…

Why bother? It’s the past!

Fine…what happens to money over time?

Post New Deal:The Three Party

Mortgage Market

Pre-Depression: The Two Party

Housing Market

MORTGAGE FINANCE EVOLUTION

This becomes very big business, i.e. F/F $800 Billion EACH portfolio in 2009

FEDERAL INVESTMENT TO INCENTIVIZE LENDING…

Hoover Administration created 12 Federal Home Loan Banks (US gov’t loaned to them; eventually become member owned)

Roosevelt Administration 1933 HOLC: uses taxpayer $ to buy and refinance

troubled mortgages (uses infamous “grades”) 1934 FHA: (1) guaranteed insurance to lenders (2) sets

underwriting criteria for loans they would purchase 1938: FNMA (later becomes Fannie Mae) to purchase

FHA’s “non-conventional” loans [insured by federal gov’t]

1968: Fannie Mae splits into GNMA (Ginnie Mae) and “new” Fannie Mae (purchases conventional loans from private lenders; holds mortgages in portfolio)

1970: Freddie Mac (similar to Fannie)

TOOLS OF DISCRIMINATION: HOLC GRADES

1933 Home Owners Loan Act had a neighborhood ranking system for credit-worthiness of housing it financed: (1) New, homogenous, all-white neighborhoods (2) Outlying Jewish and white working class

neighborhoods (3) Neighborhoods near an African-American

neighborhood (4) African-American neighborhoods (regardless

of income of residents or age of dwellings)

HOLC REDLINING MAP OF PHILADELPHIA

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TOOLS OF DISCRIMINATION: UNDERWRITING

“If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values.” –Excerpt from the 1947 FHA underwriting manual

J. Hernandez shows how areas in Sacramento with racially restrictive covenants in the past had the fewest loan denials today…shows where prime credit was steered.

TOOLS OF DISCRIMINATION: RACIALLY RESTRICTIVE COVENANTS

TOOLS OF DISCRIMINATION

The construction of segregated public housing Urban renewal, which displaced and scattered

families of color and their businesses

MEANWHILE, IN MORTGAGE FINANCE…

1970s: Fundamentally new way of getting funding for mortgage loans – securities GSE’s start issuing “mortgage backed securities”

Provided ‘guaranteed’ income to investors 1977 Private label mortgage backed securities

issued By 1990s, GSE’s losing market share to private

MBS After 1997, Fannie and Freddie buy more private

label MBS (1998: purchased $25 B…2007: $267 B) 2003 ff…purchase more private subprime & Alt-A Collapse hits private market and Fannie & Freddie

Though private MBS small % of holdings, big risk Note: GSE-issued prime securities performing fine

Source: Chris Peterson, U. of Utah Law School

AFTER SECURITIZATION

EXPLOITING UNDERSERVED MARKETS(REVERSE REDLINING)

DID YOU KNOW…?

CRL estimates that from 1998 – 2006, only 9% of all subprime loans went to first time homebuyers Majority were refinance loans Refinance loans disproportionately marketed to

African American neighborhoodsPhoto and story credit:Baltimore Finds Subprime Crisis Snags Women--New York Times 1/15/08

WEALTH LOSS….

Estimated cost of subprime lending to all homeowners: $2.7 trillion

Loss of accumulated wealth in home equity over generations…????

WHAT WILL THE EFFECTS BE ON ALREADY LOW OPPORTUNITY NEIGHBORHOODS?

2008 NATIONAL INITIATIVE ON SUBPRIME LENDING, FORECLOSURE AND RACE

RESEARCH TAKEAWAYS Unequal credit markets and segregated

housing happened together. Fair credit and fair housing will only happen

together. Global finance has evolved against – and plays

out in – racially and economically segregated neighborhoods. Advocates need to know more about banking and

finance Fair housing and fair credit is an issue for all of

us, but attention needs to be targeted to marginalized communities. Otherwise, policies miss key opportunities and

challenges and miss those most affected by the crisis.

FINDINGS FROM THE 2009 INITIATIVEAFTER THE SUBPRIME LENDING CRISIS…WHAT DO WE DO FROM HERE?

2009 FUTURE OF FAIR HOUSING AND FAIR CREDIT INITIATIVE

Summary Findings Fair housing and fair credit are about local

places, people, relationships, and histories

Federal policy must support (and not undercut) both anti-discrimination efforts and affirmative commitments to fair housing and fair credit

What is a fair and just 21st Century economic system, and what kind of financial system is needed to support it?

A. LOCAL DIFFERENCE: CREDIT EXAMPLE

LOCAL/REGIONAL RECOMMENDATIONS Recognize that the paths to fair credit and fair

housing will differ according to regional context and local history. Take local impediments to fair housing and fair credit – racially discriminatory history, proliferation of predatory credit, resistance to mainstream institutions – seriously.

Assist local and regional fair housing and community reinvestment activists in their efforts to organize, mobilize, and lobby.

Promote local, multi-partner pilot projects that are mission driven to affirmatively promote fair credit (like the National League of Cities’ “Bank On Cities” initiative).

Connect fair housing, fair lending, community reinvestment, civil rights and other advocacy groups (financial reform, faith-based, labor, etc.)

HOW SHOULD FEDERAL GOV’T SUPPORT LOCAL EFFORTS? Support the creation of a Consumer

Protection Financial Agency and give it adequate resources and enforcement power.

Promote regulatory reform of the product, rather than the institution.

Recognize and enforce the duty to affirmatively further fair housing in relevant federal agencies and programs.

Press for better and more comprehensive data for all federal spending programs, including stimulus funding. Expand HMDA data reporting requirements to include loan term information.

Enact a comprehensive, nationwide plan to protect renters from foreclosure.

MESSAGING AND ADVOCACY RECOMMENDATIONS

Contribute to a national communications effort around the danger of excluding a majority of American workers from a solid financial future.

Explore the potential for fundamental changes to regulation and financial incentives. Current incentives are perverse – they promote credit products inherently more likely to fail or result in punitive fees to those least able to manage them.

Support the national networks of fair housing, community reinvestment, fair lending and financial reform movements.

WHY DID BROKERS ORIGINATE ALL THOSE SUBPRIME LOANS? Most loans came from unregulated mortgage

brokers Mortgage brokers only originated the loans,

they did not hold them Therefore they did not care about the long-

term performance of the loans They made their money when they sold the

loan for a fee Mortgage servicers collect fees as well… The future isn’t plastics…it’s FEES

Short term transactions, not long term investments

Credit cards…insufficient funds…remittances

FEES: EMBARRASSING NSF FEE FACTS

Half of overdraft fees are from small ATM/debit purchases (the “$40 cup of coffee”)

Some banks include the overdraft allowance in the account balance shown at the ATM

In undercover visits, GAO officials often couldn’t get required disclosures detailing fees

A handful of consumers pay the lion’s share of fees (i.e. FDIC study showed that customers with 5 or more NSF transactions – 14% of customers -- accounted for 93.4% of total NSF fees)

FEES: CIVIL RIGHTS CONCERNS

People who overdraft repeatedly are more likely than the general population to be lower income, single, non-white, and renters Center for Responsible Lending. “Quick Facts on

Overdraft Loans.” April 9, 2009. http://www.responsiblelending.org/overdraft-loans/research-analysis/

Fees make things worse for people who are already behind

Incomes lag while housing, health care, and education costs skyrocket…more people get in more debt, but the picture is uneven.

Source: Pastor et. al, Program for Environmental and Regional Equity

“the whole financial system has been riggedagainst lower income communities in general and communities of color in particular”

BIG PICTURE

“our financial system has a distinctly racial character, one that requires a response rooted in racial and social justice”

“if we are going to turn the financial industry back into something that benefits the consumer … WE HAVE TO SHIFT THE UNDERLYING BALANCE OF POWER”

Source: Pastor et. al, Program for Environmental and Regional Equity

WHAT IS ECONOMIC AND FINANCIAL JUSTICE?

Need for social movements for financial equity

“… the focus should not be simply on foreclosure relief, but on a new financial frame that has at its heart the restoration of opportunity for all”

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March 11-13, 2010