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African-Americans Are Still Being Victimized by the Mortgage Market

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Ta-Nehisi Coates’ brilliant essay, “The Case for Reparations,” recounts centuries of ongoing and persistent racism in America. The sprawling article incorporates slavery, Jim Crow laws, sharecropper abuse, lynching, and many other forms of oppression. But Coates in large part illustrates formal racism by looking at housing policy, specifically in the Chicago neighborhood of Lawndale in the 1960s.

Housing is an appropriate lens. The most direct way for the American middle class to acquire wealth in the postwar era has been through their homes. And as Coates points out, African-Americans were simply cut off from that opportunity, broadening a racial wealth gap that exists to this day. From the 1930s to the 1960s, a period when homeownership rates doubled, the Federal Housing Administration refused to insure houses in African-American neighborhoods, specifically shaded on maps in red. Restrictive covenants in mortgage documents prevented homeowners in white neighborhoods from re-selling to black Americans, lest they lower property values. As a result, a generation of African-Americans were “red-lined” into segregated spaces.

As banks wouldn’t lend to the black community, this service was left to contract sellers—speculators who bought up homes on the cheap (often by scaring whites out of the neighborhood by telling them black families were moving in, a practice known as “block-busting”) and re-sold them to African-Americans at a markup. They would not issue a mortgage to allow the home occupiers to build equity. “The seller kept the deed until the contract was paid in full,” Coates writes. One missed payment would cause not only eviction, but also a forfeiture of the original down payment. Contract sellers used all sorts of tricks to recapture the home, and sell it back to another unsuspecting family. These speculators preyed on vulnerable people, and stripped them of their wealth and opportunity.

That last sentence should sound familiar, because the nation just went through virtually the same experience with the housing bubble and eventual foreclosure crisis. That doesn’t normally get labeled as a racist policy, but it certainly could. As Coates points out in a five-paragraph coda at the end of his article, modern-day predatory lenders also targeted black communities, deliberately concentrated in neighborhoods by decades of government-sanctioned segregation, and steered them toward subprime loans. “Plunder in the past made plunder in the present efficient,” Coates writes.

It’s worse than he describes. The Fair Housing Act of 1968 ended government redlining and segregation, allowing black families to accumulate wealth through homeownership. For subprime lenders, this was quickly seen as a prime opportunity: a largely low-income community struggling with stagnant wages and a rising cost of living, whom they could persuade to use their homes like an ATM.. As far back as 1993, African-Americans were five to eight times more likely to hold subprime loans than whites. Even homeowners in high-income black communities were twice as likely to have subprime loans as homeowners in low-income white communities. And these loans were typically cash-out refinances (loans taken out for more than the home is worth, so the borrower can pocket the remainder cash) and lines of credit for homeowners with substantial equity —attempts by the lenders to get at the meager wealth created by black families, and expropriate it.

But there is a key difference between the housing policies of the past and the present: the lenders themselves. In 1960s Chicago, contract sellers were the only people African-Americans could turn to if they wanted to purchase a home. But these days, banks pride themselves on lending to African-Americans; in fact, just last week their trade group, the Mortgage Bankers Association, charged government mortgage policies as racist.

Indeed, the key subprime loans in the 2000s were either originated by or funded by our biggest banks. Coates recognizes this, pointing out that the Justice Department successfully sued not fly-by-night originators, but Wells Fargo and Bank of America, over housing discrimination. Loan officers at Wells Fargo, the leading originator of home loans to ethnic minorities, referred to black customers as “mud people” and their offerings as “ghetto loans.” The problem in the 1960s was that black people couldn’t get loans from the banks; the problem in the present is that they can too easily.

In other words, the plausible deniability of the financial industry’s role in racist housing policies has now withered. Coates writes that there used to be two housing markets—one legitimate and one lawless. Now there’s just one, but it’s largely lawless, backed by the government and controlled by our largest financial institutions. Government’s laissez-faire attitude toward regulating the subprime sector allowed this transformation from exploitation by individual contract sellers to a formal Wall Street moneymaking scheme. The housing discrimination lawsuits, like most of the attempts at accountability for the predatory practices of the foreclosure crisis, resulted in a pittance compared to the actual impact. Restitution for banks deceiving borrowers with loans they couldn’t afford and taking away their homes illegally was as low as $300.

Virtually all of the '60s-era contract seller tactics that Coates describes have analogies today. Contract sellers loading up borrowers with payments they cannot meet? That’s a good description of an adjustable-rate mortgage, which resets to unsustainable levels. The story of one woman who had an insurance bill added to her payment without her knowledge? There’s a modern-day scam called force-placed insurance, where banks install high-cost junk insurance policies on borrowers whose homeowner’s insurance has lapsed. Contract sellers lying about building code compliance? There’s a long record of appraisal fraud that put buyers into homes at inflated prices.

I correspond with homeowners abused by the system on an almost daily basis. The majority of them are black or Hispanic. Many have tried to fight back exactly in the manner that the Contract Buyers League, the collection of black homeowners in Chicago, did in the 1960s. They have gone to the homes of bank executives and embarrassed them in front of their neighbors. They have filed class-action lawsuits alleging deliberate abuse. Like the Contract Buyers League, these actions unfortunately amounted to little.

Subprime abuse devastated African-American communities, eroding generations of wealth creation and progress. Research by Atif Mian and Amir Sufi shows higher unemployment rates in communities with the biggest decline in housing prices and the most foreclosures, and persistent, long-term unemployment affects lifetime earning potential. Additional research shows that foreclosures increase suicide rates, create health problems for the affected families and lead to public health crises. The pain heaped on foreclosure-ridden black communities goes well beyond the surface.

But Coates does not identify one important contributor to the stripping of black wealth: the cultural factor of mythologizing homeownership. Coates, in fact, falls into this trap. He calls homeownership “the emblem of American citizenship” and describes the home as Americans’ “most sacred possession.” This concept, fed by persistent propagandizing from both the government and Wall Street, leads vulnerable people to sink their savings into inherently unstable assets. In fact, the government grants huge benefits, in the form of the mortgage interest deduction, on families who reach to buy a home. Renters are implicitly seen as less than full citizens; witness this 32-year-old man with a roommate openly wondering if he’s normal.

We don’t have to live with this reality. Homeownership makes sense for some people, but not those on the poorest rungs of the ladder, who already spend 40 percent their income on housing. We can redesign our housing and savings policies so people don’t have to fall prey to unscrupulous lenders and play dangerous games with debt just to acquire wealth in America. We can create housing personal savings accounts to benefit first-time renters as well as homeowners who make larger down payments, and we can give many other inducements to savings, including higher wages, to reduce reliance on housing as a wealth-creation tool. We can redesign the 30-year mortgage so payments rise and fall with home prices, lowering the chance for a disastrous foreclosure crisis and subsequent recession. We can use government to stabilize communities disproportionately affected by downturns. And we can eliminate the stigma against renting that leads people to make bad choices with the biggest purchase of their lives.

Sadly, we’re moving in the opposite direction. Mel Watt, an African-American from North Carolina, is arguably the most important person in housing policy today. As head of the Federal Housing Finance Agency, Watt oversees mortgage giants Fannie Mae and Freddie Mac, which currently own or guarantee 90 percent of all new home loans. And his first action at the FHFA was to loosen mortgage standards, making credit more available, but also making families more vulnerable to the same predatory lenders that abused them before. Re-inflating the housing bubble, not reimagining the housing market in general, seems to be the priority.

Black communities have clearly been decimated by the lending industry, in a variety of forms, for centuries. They deserve restitution for this theft, or at least a Truth and Reconciliation Commission to make plain, in Coates’ words, “our collective biography and its consequences.” But part of that restitution must include an alteration of the cultural biases that set up African-Americans, and actually many other would-be homeowners, for failure.