[Vision2020] For black Americans, financial damage from subprime implosion is likely to last

[Art Deco]

------------------------------
   For black Americans, financial damage from subprime implosion is likely
to last By Ylan Q.
Mui<http://www.washingtonpost.com/ylan-q-mui/2011/03/09/ABTPHIQ_page.html>,
Published: July 8

The implosion of the subprime lending market has left a scar on the
finances of black
Americans<http://www.washingtonpost.com/business/economy/for-some-black-women-economy-and-willingness-to-aid-family-strains-finances/2012/01/24/gIQAGIWksQ_story.html>—
one that not only has wiped out a generation of economic progress but
could leave them at a financial disadvantage for decades.

At issue are the largely invisible but profoundly influential three-digit
credit scores that help determine who can buy a car, finance a college
education or own a home. The scores are based on consumers’ financial
history and suffer when they fall behind on their bills.

For blacks, the picture since the recession has been particularly grim.
They disproportionately held subprime mortgages during the housing boom and
are facing foreclosure in outsize numbers. That is raising fears among
consumer advocates, academics and federal regulators that the credit scores
of black Americans have been systematically damaged, haunting their
financial futures.

The private companies that calculate credit scores say they do not consider
race in their formulas. Lenders also say it is not a factor when deciding
who qualifies for a loan; federal laws prohibit the practice. Still,
studies have shown a persistent gap between the credit scores of white and
black Americans, and many worry that it is only getting wider.

Chicago resident Ida Mae Whitley, 62, used to have stellar credit.

That was before the African American laid eyes on her dream home in
Chicago’s Scottsdale neighborhood, where she and her husband hoped to
retire — before she said she was steered into a mortgage with more fees and
a higher interest rate, putting her in danger of losing her home.

Now, Whitley said, her credit score has tanked, along with her hopes for a
comfortable retirement. She can’t even get approved for an auto loan. Her
daughter had to delay her education to help support her parents.

“I had number-one credit before this happened,” Whitley said. “I don’t know
whether I’ll ever be able to rebuild.”

Groups such as the NAACP and the National Urban League worry that stories
such as Whitley’s are signs that the nation’s financial crisis has ushered
in a new era of de facto economic segregation. Some community leaders are
calling the rebuilding of
wealth<http://www.washingtonpost.com/business/economy/fed-americans-wealth-dropped-40-percent/2012/06/11/gJQAlIsCVV_story.html>in
black communities the next frontier for civil rights.

“Folks are going to have to work longer and work harder to even try to
maintain a standard of living,” said Kendrick Curry, pastor at Pennsylvania
Avenue Baptist Church in the District. “It really speaks to a backward
movement.”

*Credit scores*

The Federal Reserve is collecting data on how the recession has affected
credit scores by race, in what is expected to be significant research on
the issue. But the widespread belief among economists, consumer advocates
and community leaders is that black Americans are falling behind.

Credit scores summarize consumers’ financial past and help project their
future behavior. A critical factor in deciding who qualifies for a loan,
they are designed to give lenders a quick way to assess the risk of a
customer. FICO<http://washpost.bloomberg.com/marketnews/stockdetail/?symbol=FICO>and
VantageScore are the two primary companies that generate the scores.

For most people, credit is the key to accessing the trappings of the
American Dream, such as higher education and homeownership. That makes the
scores, and the detailed personal financial reports that accompany them,
one of the most important factors in determining financial opportunity.

And for black Americans, that means they are starting at a disadvantage.
Even near the height of the country’s economic boom, blacks had lower
credit scores than whites. Data collected by the Federal Reserve from 2003
— in the most comprehensive study on race and credit scoring to
date<http://wweb.uta.edu/economics/workshop/Credit%20Scoring%20Paper%201%20for%20UTA.pdf>—
showed that less than a quarter of blacks had prime credit scores.
Meanwhile, about 65 percent of whites were in this top tier.

The gap got wider as black and white Americans grew older, the Fed found.
By age 75, the average black consumer’s credit score still had not reached
the national average.

“It’s one more way that credit scoring . . . sort of sets in stone income
and wealth disparities between minorities and whites,” said Chi Chi Wu, a
lawyer with the National Consumer Law Center. “The playing field was never
level.”

Banks and industry groups often cited low credit scores as one of the main
reasons black consumers were denied loans at higher rates than whites.
According to the 2000
Census<http://www.census.gov/hhes/www/housing/census/historic/ownershipbyrace.html>,
less than half of black households owned their homes, compared with nearly
three-quarters of whites. Consumer advocates said the lack of credit in
black neighborhoods was so pervasive it is dubbed “redlining.”

The housing boom helped change that. New financial instruments created by
Wall Street helped generate enormous pools of money for mortgage lenders to
distribute — and blacks were one of the largest untapped markets. Riskier
borrowers with lower credit scores qualified for mortgages, albeit with
higher interest rates and fees or unconventional terms.

At first, the shift was heralded as a way to help boost homeownership in
black neighborhoods. The move also dovetailed with federal initiatives to
promote fair lending. And the financial industry uncorked a lucrative new
market that created jobs and drove the economy.

“There was a loan for almost anybody who wanted a loan. It was just priced
differently based on credit,” Andrew Sandler, a lawyer for Wells
Fargo<http://washpost.bloomberg.com/marketnews/stockdetail/?symbol=WFC>,
said of the industry at the time.

But the movement backfired. Borrowers with the new breed of subprime loans
defaulted at alarming rates, sending the economy into a tailspin. Many of
those mortgages were made using false information or shoddy underwriting.
Instead of helping black communities build wealth, the lending boom
destroyed it.

A Pew Research Center
analysis<http://pewresearch.org/pubs/2069/housing-bubble-subprime-mortgages-hispanics-blacks-household-wealth-disparity>last
year found that the wealth of blacks plunged 53 percent during the
recession, driven by falling home prices. The average net worth of a black
household in 2009 was $5,677, according to the study, the lowest of any
racial group. After years of record prosperity, homeownership rates among
black Americans have plunged to the lowest level in 16 years. Unemployment
has reached levels not seen since the 1980s.

Baltimore resident Kevin Matthews has worked hard to stabilize his finances
after fighting off a wrongful foreclosure that drained his savings. He is
paying his bills and studying to become a medical lab tech or researcher,
but in the eyes of banks and lenders he is largely a three-digit number:
560.

That is Matthews’s credit score. It is 160 points lower than it was five
years ago. That means it will cost him more to get credit cards, pay for
his education or eventually move into another house — assuming he can
qualify for a loan. It means Matthews faces years of struggling to hold on
to the middle-class life he once thought was guaranteed.

According to FICO, a foreclosure can remain on a consumer’s credit report
for seven years. It can lower a score by 85 to 160
points<http://www.myfico.com/crediteducation/questions/Credit_Problem_Comparison.aspx>,
a hit second only to bankruptcy.

The company says that its scores are a snapshot of risk at a moment in time
— one that will change as consumers rebuild their finances. FICO said
borrowers can rebuild their scores in as little as two years if they remain
current on their other bills.

But for many, foreclosure is only the beginning of their financial woes.
“Everybody’s worried about their credit score,” Matthews said. “But,
unfortunately, I can only worry about one thing at a time right now.”

*The black middle class*

Civil rights groups say those personal anecdotes underscore a more
fundamental fear: that the country is headed toward a kind of financial
segregation.

During the recession, credit scores shifted downward for many consumers,
regardless of race. According to a FICO analysis
<http://bankinganalyticsblog.fico.com/2011/10/recession-causes-fico-score-swings.html>,
nearly 50 million people saw their scores fall by more than 20 points
during the height of the financial crisis. Lenders also tightened the
spigot of credit, with the total volume of loans to consumers falling 9
percent over 2009, according to government
data<http://research.stlouisfed.org/fred2/graph/?s[1][id]=CONSUMER>,
though lending has rebounded somewhat.

Research by VantageScore found that the two biggest contributors to
consumers’ deteriorating credit were the fall of home prices and
unemployment. Activists say the demographic that has borne the brunt of
those head winds are black Americans.

Groups such as the NAACP and the National Urban League say the black middle
class is shrinking as a result. Lisa Rice, vice president of the National
Fair Housing Alliance, says the country suffers from what she has dubbed
the “dual credit market.” Longtime civil rights attorney John Relman, who
has won millions of dollars from companies such as
Avis<http://washpost.bloomberg.com/marketnews/stockdetail/?symbol=CAR>and
Denny’s <http://washpost.bloomberg.com/marketnews/stockdetail/?symbol=DENN>in
discrimination lawsuits, has set his sights on the banks.

“Race and economic injustice always go together in this country,” Relman
said.

A month ago, the Justice Department reached a $21 million
settlement<http://www.justice.gov/opa/pr/2012/May/12-crt-695.html>with
SunTrust <http://washpost.bloomberg.com/marketnews/stockdetail/?symbol=STI>over
what it called a “racial surtax” on home loans. For instance, it said
black borrowers in Atlanta were charged $745 more in fees than white
borrowers with similar credit histories and qualifications.

“SunTrust’s African American and Latino borrowers had no idea they could
have gotten a better deal, no idea that white borrowers with similar credit
would pay less,” Assistant Attorney General Thomas Perez said. “That is
discrimination with a smile.”

The Justice Department also reached a $335 million
settlement<http://www.justice.gov/opa/pr/2011/December/11-ag-1694.html>with
Bank
of America<http://washpost.bloomberg.com/marketnews/stockdetail/?symbol=BAC>over
similar charges last year and is
investigating Wells
Fargo<http://www.washingtonpost.com/business/economy/former-wells-fargo-loan-officer-testifies-in-baltimore-mortgage-lawsuit/2012/06/12/gJQA6EGtXV_story.html>.
The banks have denied wrongdoing.

But some civil rights leaders say the settlements are dwarfed by the
long-lasting damage done to the black community.

“We’re talking about a 20-year financial recovery for some families,” said
the Rev. Anthony Evans, head of the National Black Church Initiative, who
has called for bank boycotts. “I think it’s very clear that we will call
this the downgrading of the black middle class.”

Ida Mae Whitley, the Chicago resident, was supposed to have her credit
restored and her loan modified after she sued her mortgage company in 2008.

The complaint alleged that the price of the home she purchased was
artificially inflated by an appraiser who was working in tandem with her
mortgage broker. It says the mortgage broker falsified her income to
qualify her for the loan, including listing Whitley as a white mechanic
making $81,600 a year. Instead, she is a black and earned $34,000 annually
as a garage attendant.

And though her credit score of 696 probably would have qualified her for a
prime mortgage, Whitley instead received a high-interest loan that she
quickly learned she could not afford.

When the lender tried to foreclose, Whitley took the company to court.
Eventually, she negotiated a settlement that would have repaired her
financial history and ended the nightmare.

But three weeks later, the company filed for bankruptcy. Her credit score
is now in the 500s.

“They trusted the real estate broker. They trusted the lender. They were
leaning on them for information and education, and then they got completely
taken advantage of,” said housing advocate Al Hofeld Jr., Whitley’s
attorney. “It makes it really difficult for them to be made whole.”

The fallout from the housing crisis can ripple across a community. Many
landlords require credit checks from tenants, which consumer advocates say
makes it tough for those who have lost their homes to find rentals in their
existing neighborhoods. In addition, foreclosures can dry up the wealth of
entire communities by depressing home values.

“Anybody who lived in a neighborhood where a lot of people had them were
similarly going to be adversely affected,” said Ira Goldstein, director of
policy solutions for the Reinvestment Fund in Philadelphia.

And some consequences are harder to pinpoint. They don’t show up in housing
data or economic research, but their toll is still keenly felt.

Kenna Whitley has been helping her parents pay their bills as they fight
foreclosure, raiding her own retirement savings and delaying plans to
return to school for her teacher’s certification. Her son also dropped out
of college to work after money for tuition dried up.

“I don’t really think there is such a thing as catching up,” she said.

* *




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://mailman.fsr.com/pipermail/vision2020/attachments/20120709/4cc49fb2/attachment-0001.html>