Kirwan Update
May 2010
S p e c i a l E d i t i o n Fair Credit and Fair Housing in the Wake of the Subprime Lending and Foreclosure Crisis: Findings from the Kirwan Institute Initiative Introduction Christy Rogers Senior Research Associate, Kirwan Institute
This special edition of Update is dedicated to sharing extensive research on fair credit and fair housing developed by the Kirwan Institute and its partner organizations in recent months. This work is part of our ongoing research on the subprime lending and foreclosure crisis and the government response to the ensuing economic recession. Please Christy Rogers visit kirwaninstitute.org/research/ projects/future-offair-housing.php and fairrecovery.org/ for updated research and advocacy tools. In autumn 2007, the Kirwan Institute launched a comprehensive research initiative on the emerging subprime lending and foreclosure crisis and its impact on communities of color across the nation. In October 2008, a month after the failure of Lehman Brothers, Kirwan held a national conference to explore the roots of the crisis and to better arm advocates and policymakers with effective, strategic responses. In early 2009, the Kirwan Institute proposed a follow-up initiative that deepened our understanding of the crisis, and that also focused on creating an advocacy platform and identifying key federal reforms. We also wanted to
better understand how the foreclosure and credit crisis was unfolding across the country, and how communities were responding. Thanks to a timely grant from the W.K. Kellogg Foundation, we pursued this work in the latter half of 2009. Fair Credit and Fair Housing in the Wake of the Subprime Lending and Foreclosure Crisis: Findings from the Kirwan Institute Initiative reflects conversations with 25 diverse advisory board members, 14 indepth commissioned works by leading academics and practitioners, and an in-person look at the fair housing and fair credit landscape in distinctly different regions across the country. In partnership with fair housing and civil rights advocates, Kirwan co-hosted policy and advocacy strategy sessions in Washington, D.C. (with the Poverty Race and Research Action Council, the Center for Responsible Lending, the National Council of La Raza, the National Community Reinvestment Corporation, and the National Fair Housing Alliance) and in Oakland, California (with PolicyLink). In addition, Kirwan co-hosted presentations and feedback sessions with advocacy partners in Seattle, Washington (with the Northwest Justice Project); Austin, Texas (with Green Doors); Detroit, Michigan (with the Michigan Roundtable); and New Orleans, Louisiana (with the Greater New Orleans Fair Housing Advocacy Center). Kirwan also sponsored and gave a (continued on page 3)
INSIDE: The Imprint of History • Assessing Government Response • TARP Money • Credit Scoring • Local Focus: Cleveland • Remittances • Financial Justice
Executive Notes Welcome to this special edition of Kirwan Update, which highlights the effects of the foreclosure crisis and the continuing challenges for fair housing and fair credit. In addition to some of the john a. powell challenges highlighted by our contributing guest authors, we are concerned that some tectonic shifts in banking and finance are going largely unnoticed by civil rights advocates. For example, the new model that banks have developed to serve lower-income and lower-wealth customers depends largely on fees. Mortgage companies first shifted from interest to fee-based income by originating loans to sell, not hold; then banks followed suit with other products. What’s significant about this shift—one that, unsurprisingly, disproportionately burdens people of color—is that it actually worsens the financial outlook for most families. Subprime mortgage pre-payment penalties, credit card fees, insufficient funds fees, and remittance fees are all costs that dig people deeper into debt. We must widen the view of racial justice advocates to include participation in the global and national conversations around banking, finance, and responsible lending, and vice versa. The future of the GSEs (GovernmentSponsored Entities, formerly known as Fannie Mae and Freddie Mac) is about to take center stage. While the debate may get deep into detailed and complex arguments, we must keep in mind that the financial system is a system. Fannie (continued on page 2)
Executive Notes
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and Freddie were not exclusively responsible for the subprime crisis, and their restructuring alone will not ease the crisis without broader financial reform. Getting families into sustainable homeownership is about much more than just “turning on the spigot” of credit. Access to credit is important, but increasingly important are the terms of that credit—both the financial terms of the credit instrument (interest rate adjustments, pre-payment fees, etc.) and the geography of the housing that people can access with their credit. Only both careful targeting of fair financial products and homeownership opportunities in healthy neighborhoods together can advance equitable housing opportunity. The shifts in banking and finance and the uncertain role of Fannie and Freddie point to the need for more education and capacity-building for advocates who work on behalf of marginalized communities. Advocates for economic reform should also better understand the unequal access to credit and housing by marginalized groups, and could embrace a systems-thinking approach to understanding the systemic failures we have suffered and the particular vulnerability of some communities. Lastly, policy advocacy capacity-building (such as connecting national networks; conducting communications and framing campaigns; and linking state-level civil rights, fair housing, and financial reform groups) needs to be supported. On the local level, support for banking, credit, and housing alternatives is urgently needed.
In retrospect, this research initiative, like all engaging research and advocacy projects, opened more doors than it closed, and we faced a few unexpected challenges. We realized late in our study of fair housing and fair credit that we needed to know more about credit scoring—both the nuts and bolts of the process and its increasing application in other domains, like employment screening. We have not fully explored the intersections of race, class, and gender in a changing 21st-century economy, and the implications for homeownership and wealth building. We realized we knew little about an enormous segregated market—the remittance market—and did not know enough about the challenges to full financial and economic inclusion for immigrants. On the credit front, the disproportionate number of people of color who either lack a bank account entirely or who supplement their banking with high-cost fringe services indicates that a fractured and unfair credit market is still at work. And we’re growing increasingly concerned about the extraction of wealth that is occurring as a result of the crisis. As people lose equity, savings, retirement accounts, and children’s college funds, they raid assets to try to hold on to a home often purchased with an unfair and unsustainable loan. Look for our continuing efforts on these and other fronts, including how to advocate for effective government economic stimulus and recovery policies, on kirwaninstitute. org and fairrecovery.org, and read related short pieces on race-talk.org.
john a. powell, Executive Director
The Kirwan Update is produced by the Kirwan Institute for the Study of Race and Ethnicity at The Ohio State University, 433 Mendenhall Lab, 125 South Oval Mall, Columbus, OH 43210. For questions or comments about this publication, please contact Kirwan Update editor Angela Stanley at (614) 247-6329 or stanley.140@osu.edu.
Contributing Staff Editors Kathy Baird, Director of Communications Philip Kim, Assistant Editor Christy Rogers, Senior Research Associate
kirwaninstitute.org 2
ABOUT THE INSTITUTE The Kirwan Institute for the Study of Race and Ethnicity is a university-wide interdisciplinary research institute. Its goal is to deepen our understanding of the causes of and solutions to racial and ethnic disparities and hierarchies. This includes an explicit focus not only on Ohio and the United States, but also on the Americas and our larger global community. Our primary focus is to increase general understanding that, despite many differences, human destinies are intertwined. Thus, the institute explores and illustrates both our diversity and common humanity in real terms. The institute brings together a diverse and creative group of scholars and researchers from various disciplines to focus on the histories, present conditions, and the future prospects of racially and ethnically marginalized people. Informed by realworld needs, its work strives to meaningfully influence policies and practices. The institute also focuses on the interrelatedness of race and ethnicity with other factors, such as gender, class, and culture, and how these are embedded in structures and systems. Collaboration with other institutions and organizations around the world and ongoing relationships with real people, real communities, and real issues are a vital part of its work. The institute employs many approaches to fulfilling its mission: original research, publications, comparative analyses, surveys, convenings, and conferences. It is part of a rich intellectual community and draws upon the insight and energy of the faculty and students at Ohio State. While the institute focuses on marginalized racial and ethnic communities, it understands that these communities exist in relation to other communities and that fostering these relationships deepens the possibility of change. It is the sincere hope and goal of all of us that the institute gives transformative meaning to both our diversity and our common humanity.
Introduction
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presentation for the Connecticut Housing Coalition’s Annual Conference. These meetings drew representatives who ranged from students to fair lending and community reinvestment advocates, local service providers, legal aid attorneys, community advocates, bankers, and members of the Federal Reserve community affairs offices. We thank all of our partner hosts for contributing so generously of their time and expertise and drawing together such passionate and engaged participants.
Key Findings
First, the convenings revealed that the delivery of fair credit and fair housing, even in this age of globalization (and in a world of de-personalized, web-based services), is about local relationships, particular places, and their histories. People at every meeting pointed out that distrust, racism, shameful histories of exclusion, and the withdrawal of relationship banking were negatively affecting mainstream financial inclusion. Each region has different paths to fair credit and fair housing, depending on local political will, the strength of the local economy, the local presence (or lack of) fair housing and fair credit choices, the presence and cooperation of diverse advocacy groups, and the face-to-face relationships that characterize (or used to characterize) relationship banking and the housing search. Second, local efforts should be supported by a federal platform of consumer protections and a federal commitment to affirmatively promote fair credit and fair housing for all citizens. Each convening, while reflecting local priorities, resources, resistance points, and targets, demonstrated that we have suffered a systemic failure. This failure is reflected by a lack of meaningful credit and neighborhood choices for people of color; a basic lack of jobs, income, and wealth for marginalized people and communities; and a lack of consumer protections. As dedicated as they are, local groups cannot go at it alone, particularly when the deck is stacked against them.
Third, we must compellingly communicate what a fair and just 21st-century economic system looks like, and what kind of financial system can support it (see Manuel Pastor, Rhonda Ortiz, and Vanessa Carter, Sustainable Advocacy for Fair Credit and Fair Banking). We must not focus solely on how to “fix” the mortgage system or salvage individual homes (although mortgage lending regulation and foreclosure relief is important), but we must also take aim at the wider set of conditions that allowed systemic failure to occur. The subprime lending and foreclosure fiasco is a manifestation of global inequality and unfair access to banking and financial services, not an isolated anomaly or the fault of a handful of fraudulent lenders and borrowers. As Pastor, Ortiz, and Carter write: Our point is simple. While we do need a new policy package, such advocacy also needs to be embedded in a broader social movement for financial justice. The focus should not simply be on foreclosure relief, but on a new financial frame that has at its heart the restoration of opportunity for all. The federal response has largely triaged the economic damage wrought by the crisis, but without addressing its underlying causes. Policy responses have focused on salvaging the existing monopolistic banking landscape—Wall Street profits and bonuses snapped back into place in record time— while policies created to protect consumers, extend credit to underserved populations, and stabilize neighborhoods are receding from view. Meanwhile, entire neighborhoods and even entire communities, like post-Big 3 Detroit and post-Katrina New Orleans, stand on the edge of a complete unraveling of homeownership and asset-building opportunity, of continuing economic marginalization and deterioration, and erosion of fair housing opportunities. Extraordinary people are coming together in these communities to dream of a reinvigorated future and a new
The Fair Credit and Fair Housing Study was made possible by the W.K. Kellogg Foundation. We thank the foundation for its generous support.
way of working, saving, borrowing, and supporting collaborative and participatory neighborhood planning. However, they feel undercut by the lack of federal enforcement of existing fair housing and fair credit laws, the saturation and complexity of predatory financial tools, and the lack of (or limited scale of) alternative financial institutions such as mission-driven credit unions. The consequences of our unfair credit and housing markets and our lack of consumer protections have been devastating. Community stability, social mobility, family health, and individuals’ ability to retire, invest, pay for medical bills, and send kids to college are all at risk. Nothing short of our collective future is in jeopardy, and nothing short of a long-term, multi-faceted effort to affirmatively promote integration into opportunity for all of our people is required. The full report and the commissioned papers are all online at kirwaninstitute.org/ research/projects/future-of-fair-housing. php. With this special issue of Kirwan Update, we hope to whet your appetite to read more. We chose to include seven short pieces, ranging from the effects on particular communities to critiques of the federal response. We thank our contributing authors for their submissions, and we especially thank the W.K. Kellogg foundation for making all of our efforts possible. 3
The Imprint of History
Connecting Residential Segregation, Mortgage Redlining, and the Housing Crisis Jesus Hernandez Doctoral candidate, University of California, Davis
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inancial institutions should be held accountable for the social and financial damage created by the default of high-interest mortgages. To do so first requires identification of the specific market practices that made racially segregated communities vulnerable to predatory lending. Connecting these historical practices of racial inequities to subprime lending is surprisingly very simple, but it is easily overlooked because this link developed over decades through the formative years of the modern real estate and mortgage industry. More often, the link is simply explained away as a byproduct of competitive supply and demand markets. The link can be summarized as follows. During the early 1900s, community builders and the National Association of Real Estate Boards (NAREB) actively promoted the use of racially restrictive covenants that limited the purchase of newly constructed homes to whites. The covenants were used to create value and demand for new suburban residential developments. The NAREB also guided the development of appraisal techniques and practices that significantly influenced property values based upon the racial characteristics of neighborhood residents. When NAREB members were appointed to draft Federal Housing Administration underwriting guidelines for New Deal home financing programs, racial restrictions became a formal condition of mortgage credit and fueled the formation of the homogeneous residential suburbs during the post-war housing boom. New Deal FHA guidelines also prohibited, or “redlined,” access to credit for non-white neighborhoods. The subsequent decline in redlined property values made inner-city neighborhoods vulnerable to urban redevelopment programs, which gathered devalued properties for transfer to commercial developers. Between 1950 and 1980, the forced exodus of non-white residents from redevelopment zones to areas without racially restricted
Jesus Hernandez
covenants created new racial boundaries for residency, and led to a second wave of mortgage redlining. By this time, race-based residential boundaries were firmly embedded in the social and physical landscapes of our cities. Federal urban policy, and private implementation of those policies by the real estate industry, effectively redirected the flow of capital towards predominantly white suburban residential development. These race-based market interventions shaped segregated communities and created credit-starved neighborhoods that were vulnerable to subprime and predatory lending. Intensive bank deregulation shifted the risk traditionally associated with lending in segregated communities to Wall Street via securitization, and the rush was on. Data from the Home Mortgage Disclosure Act (HMDA) between 2003 and 2006 revealed an intense concentration of unsustainable subprime loans in previously redlined areas, a market phenomenon now referred to as “reverse redlining.” To no one’s surprise, mortgage default and foreclosure rates also mirror subprime loan concentrations in redlined neighborhoods. Accordingly, race remains a salient factor in understanding the current housing crisis and the central role it played in triggering the wave of foreclosures that eventually froze Wall Street credit markets.
Making the connection between financially vulnerable segregated communities and today’s predatory lending practices exposes the inadequacies of federal financial monitoring policies that were designed to keep discriminatory mortgage lending practices in check. The Community Reinvestment Act (CRA) and the HMDA are the watchdogs for lenders. The CRA discourages redlining with assessments of a financial institution’s record for helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods; the HMDA requires lenders to report data regarding loan originations, loan pricing, loan purchases, and applicant demographics. Because these monitoring practices failed to detect the disparate lending practices seen today in segregated neighborhoods, connecting the history of housing discrimination to the current wave of foreclosures occurring in non-white communities becomes the starting point for justifying changes to federal monitoring policy. Housing advocates must now push for changes to federal monitoring that can improve access to fair credit and fair housing. Federal mortgage reporting requirements should include all financial institutions and their affiliates that generate loans for securitization and eventual sale on Wall Street. Reporting should include data on borrower interest rates, credit scores, loan reset periods, balloon payments, adjustable rate mortgage margins and indices, and loan product underwriting (e.g. stated income or low-documentation loans). This information will help identify racial and spatial concentrations of dangerous credit products that strip away home equity and cause financial instability. Finally, housing advocates should push for transparency and enforcement of loan modification reporting requirements imposed by federal bailout programs. Loan adjustments are critical to stabilizing neighborhoods experiencing stress from concentrated subprime lending and mortgage foreclosures. (continued on page 11)
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Assessing Government Response
Bending Toward Justice: A Critique of the Government’s Response to the Foreclosure Crisis Mark Ireland Supervising Attorney, Foreclosure Relief Law Project—a program of the Housing Preservation Project
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rince, a former North Minneapolis resident, illustrated the current state of affairs in his former stomping grounds with a simple verse in the song “Ol’ Skool Company”: “Fat cats on Wall Street, they got a bailout, think it was the AIG…but my old neighborhood, ain’t nothing changed but me.” North Minneapolis is similar to a lot of communities Mark Ireland of color around the country. It was among the first neighborhoods to be saturated with toxic-lending products and reckless underwriting practices, and it was one of the first to experience a dramatic spike in foreclosure rates. Now, North Minneapolis has a record number of vacant and abandoned properties. Our study of the government’s response to the foreclosure crisis found that many of the federal programs developed to prevent foreclosures were either too late to substantially help neighborhoods like North Minneapolis, or simply misunderstood the nature of the crisis in urban communities. For example, the federal foreclosure prevention programs specifically excluded from any relief non-owner occupied rental property. Superficially this decision makes sense—government programs should not reward speculators—but at a practical level it didn’t really punish speculators; it punished the renters who lived in these properties. A University of Minnesota study found that 61% of the foreclosed properties in North Minneapolis were rentals, and these properties also had a disproportionate number
of school-aged children. Of the foreclosed addresses, almost 40% were households with children in the Minneapolis public schools, which is two-and-a-half times higher than the 16% of Minneapolis households in the general population with children in public schools, according to census statistics. The study also found that 60 percent of the children in the foreclosed households were African American. The day-to-day impact on the quality of life in these neighborhoods has been dramatic. Our study of foreclosures from 2006 found that these properties typically lost half their value (undermining the value of the surrounding, non-foreclosed properties), and that 83% of the foreclosed properties had 911 calls. The average number of 911 calls per property was eight, a scenario that plays out around the country.
So, what’s to be done?
Community leaders, government agencies, and politicians need to stop creating haphazard, hodgepodge programs and initiatives. Although neighborhoods share a commonality of issues affected by the crisis, differences remain. What’s needed is a grassroots, organizing framework to move forward for recovery. Perhaps the best framework can be based upon Dr. Martin Luther King’s last book, Where Do We Go from Here: Chaos or Community? and his address to the Tenth Anniversary Convention of the S.C.L.C. in Atlanta, Georgia, on August 16, 1967, of the same name. Historically, 1967 was a time of war, questioning, and political uncertainty, much like today is; and this environment was a formidable backdrop when Dr. King gave that important address and published his final book.
then he demanded that persons of color “massively assert our dignity and worth.” Next, he said the community should identify the basic challenges it faced, and then he implored a commitment to a path of nonviolence. The “whole structure must be changed,” he said, and then he concluded with the following: When our days become dreary with low hovering clouds of despair, and when our nights become darker than a thousand midnights, let us remember that there is a creative force in this universe, working to pull down the gigantic mountains of evil, a power that is able to make a way out of no way and transform dark yesterdays into bright tomorrows. Let us realize the arc of the moral universe is long, but it bends toward justice. Isn’t that the framework that we must adopt in the wake of the foreclosure and economic crisis? This crisis undermined, in many cases, decades of work and progress toward a more equal society, created a plight that depleted the wealth of communities of color, and created a predicament that undermined neighborhoods and displaced thousands of families. We need to define where we are as a nation, not just where we are in North Minneapolis. Doesn’t the largest financial crisis in modern history deserve its own government commission to hold up a mirror to ourselves, and to help spark a national conversation? We need to assert our common dignity and worth. And then, together, we will begin steps two and three—actually bending the arc of the moral universe toward justice.
In the speech, Dr. King described a framework for renewal and progress. First, he called for us to identify “where we are,” and
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TARP Money
Fair Housing and the Troubled Asset Relief Program: How TARP Funds Could (and Should) Be Used to Improve Our Neighborhoods Deidre Swesnik Director of Public Policy and Communications, National Fair Housing Alliance
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he financial crisis is arguably the biggest civil rights issue facing our nation today. Although this crisis has spread throughout all sectors of the economy, stripping jobs from America’s middle class and leaving the giants of Wall Street “bankrupt, bought, or bailed out,” it has its roots in the housing market. Mortgage lenders and mortgage brokers made predatory loans destined for foreclosure and often illegally steered that lending toward African Americans, Latinos, and others. The federal government has developed a number of programs designed to mitigate the effects of the financial crisis, but many of those measures are focused on restoring the same institutions that enabled the crisis. Federal law requires that programs aimed toward addressing the crisis go further. The federal Fair Housing Act—passed in 1968—has the dual mission to both eliminate housing discrimination and promote residential integration. In order to promote integration, the act requires that government agencies spend funds dedicated to housing and community development in a manner that “affirmatively furthers fair housing.” This obligation is not limited to the Department of Housing and Urban Development; rather, it applies broadly and means that government agencies spending housing and community development funds—and recipients of government grants—must use that money in a way that helps create integrated, healthy neighborhoods. As America struggles to emerge from its current economic difficulties, the requirement to affirmatively promote fair housing is as important as ever. Government efforts to jumpstart the economy have involved massive spending on housing and community development. For example, the Troubled Asset Relief Program (TARP), the
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efforts; and financing fair economic development opportunities. Advocates play an important role in this equation—they must remind the federal government of the importance of actively promoting fair housing, use publicly available information to evaluate the performance of TARP recipients, challenge those recipients who are neglecting their responsibilities, and partner with willing TARP beneficiaries to provide meaningful opportunities for the American public. single largest measure in place to address the economic crisis, has recapitalized banks with the intention of restoring their ability to lend. TARP also has worked to provide homeowners on the brink of foreclosure with opportunities to modify their loans before it is too late. Since the recession hit communities of color the hardest, and as the recession began in part because of failed discriminatory mortgage loans made in those communities, any attempt to ease the recession must involve explicit plans to increase residential and economic opportunities for the residents of those neighborhoods. If TARP funds are to be administered in a way that affirmatively fosters fair housing, the federal government must: (1) analyze its own programs for racially disparate impacts and adjust programs to eliminate those impacts, (2) identify ways in which grantees and recipients of its funds can hasten the development of fair housing and evaluate their performance based upon this criteria, and (3) allocate funds to community groups with experience connecting people to economic and residential opportunities. The financial services industry can also take specific steps to meet its fair housing obligations by: offering responsible loans that enable community choice; assuring fair marketing of properties; sponsoring non-discriminatory foreclosure prevention
If America and its economy are to remain healthy and competitive in the global market, we must build healthy, prosperous communities that eliminate the structural barriers that have created these gaps, and it is up to federal agencies and recipients of federal funds to promote these communities. These agencies and beneficiaries fell down on the job of fighting discrimination, which led to more people of color getting bad loans and more communities failing as a result. The foreclosure crisis will cost taxpayers approximately $9.7 trillion. Much of the cost was from TARP and other federal programs designed to help the economy rebound. The foreclosure crisis primarily stripped equity from communities of color; programs meant to restore the economy must take these costs of equity loss into account and strive to close these gaps. National Fair Housing Alliance (nationalfairhousing.org) – Founded in 1988, the National Fair Housing Alliance is a consortium of more than 220 private, nonprofit fair housing organizations, state and local civil rights groups, and individuals from 37 states and the District of Columbia. Headquartered in Washington, D.C., NFHA, through comprehensive education, advocacy, and enforcement programs, provides equal access to housing for millions of people.
Credit Scoring
Access to Consumer Credit Post Foreclosure Jessica LeVeen Farr Federal Reserve Bank of Atlanta, Nashville Branch
The comments in this paper are those of the author alone and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
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he financial implications of foreclosure are enormous, especially for lower-income households. The immediate loss of the home and the corresponding decrease in household net worth are life-altering events. Foreclosure also damages a consumer’s credit, and due to the rising importance of credit and credit scores in all areas of our lives, the financial impact of such action can be harmful for many years.
Since 2007, nearly six million foreclosures have been initiated, according to the Center for Responsible Lending. The problem shows no signs Jessica LeVeen Farr of abating, as nearly one out of every seven homeowners is currently delinquent on his or her mortgage. The effect of a foreclosure on a consumer’s credit varies, but in all instances it is considered a negative event that will adversely impact a consumer’s credit score. Given the magnitude of the foreclosure crisis and the number of homeowners still struggling to make mortgage payments, it’s clear that we are facing a significant problem for the foreseeable future in terms of the number of individuals in this country with impaired credit.
Why does this matter?
Credit history and credit scores matter today more than ever and use of this information is more widespread than a simple evaluation of creditworthiness. Individuals with damaged credit pay more
for any type of consumer financing, if they can even obtain a loan. In addition, credit scores can influence price and terms for other services, such as insurance. Landlords may evaluate an individual’s credit prior to renting a home and some employers review the credit history of new hires. Furthermore, access to credit has become increasingly important for people at all income levels, as consumers now use credit for everything ranging from major purchases to basic goods. The rising number of households facing unemployment and foreclosures are also likely to face much greater difficulty in obtaining affordable credit at a time when their need for it has increased.
Is policy intervention needed?
Given the widespread problem of impaired consumer credit due to foreclosure, policy intervention may be needed to ensure individuals are not entirely shut out of the mainstream credit system and denied access to reasonably priced credit products, further exacerbating their financial hardship. In order to design appropriate policy interventions, we need a better understanding of the different types of foreclosure victims, the factors that led to their foreclosure, and their credit needs. Several research questions should be considered in order to develop effective policy interventions including: • What is the true cost of impaired credit due to foreclosure in terms of higher costs for lending and other services such as insurance?
policies? How will banks respond if these individuals are shut out due to existing policies? Will other types of financial service providers play a greater role in granting access to consumer credit? Can we encourage a more constructive role for banks? • Beyond credit scores, can alternate means be used to calculate creditworthiness and/or to evaluate individuals for renting a home or for future employment? How can we ensure that individuals with low credit scores are not denied access to the means of improving those scores (i.e., affordable rental housing, gainful employment, or the ability to restructure their other debt to make it more affordable)? • How will credit reporting bureaus respond to the foreclosure crisis? Will credit scoring models have to change? • Will new abusive lending practices emerge to provide credit to individuals who are denied by mainstream financial institutions? How can we prevent such practices?
• What is the current credit risk profile of foreclosure victims? How does that profile compare with current bank lending
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Local Focus: Cleveland
Subprime Lending in the City of Cleveland and Cuyahoga County Jeffrey D. Dillman Executive Director, Housing Research and Advocacy Center
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n examination of mortgage lending in the City of Cleveland and surrounding Cuyahoga County in recent years reveals evidence of persistent racial disparities when it comes to access and terms of credit, with the greatest inconsistencies showing up in denial rates for home purchase loans. The concept of “fair lending” encompasses two important elements: access to credit—whether lending is made available to groups in an equitable manner—and the terms of that credit—whether that lending is made on “fair” terms. In the City of Cleveland from 2005 through 2007, not only were African Americans denied home purchase loans more often than whites in comparable income groups, but upper-income African Americans were denied home purchase loans more often than lowincome whites. An examination of high-cost, subprime lending rates in both Cleveland and Cuyahoga County also reveal widespread racial disparities between whites and African Americans. In 2005, upper-income African Americans received high-cost home purchase loans at over one-and-one-half times the rate of low-income whites in the City of Cleveland, or 71.69% compared to 42.37%; in 2006, upper-income African Americans received highcost home purchase loans 73.74% of the time, compared to 31.03% for low-income whites; and in 2007, the rates were 52.91% to 27.27%, respectively. While the rate of high-cost lending for upper-income African Americans decreased significantly in 2007, it is disturbing that this group, with earnings of at least 120% of the area median income, wound up with high-cost loans at nearly twice the rate of whites who earned less than 50% of the median income. The effects of extremely high rates of subprime lending, as well as the racial disparities in mortgage lending in Cleveland and Cuyahoga County, can be felt throughout the region. During much of the past 10 years, Ohio has had one of the highest foreclosure rates in the nation. Economic changes, such as the decline in manufacturing, high unemployment, and the rise of poverty in the region—30.3% of Cleveland residents had below-poverty-level incomes in 2008—certainly played a part in foreclosure growth. Nonetheless, statewide and local data show that the number of foreclosures climbed regardless of changes in the unemployment rate for the past 15 years. Increased foreclosures, which create more vacant and abandoned properties, have contributed to a widespread decline in the quality of life in many Cleveland and Cuyahoga County neighborhoods. And the 10,000 vacant properties in Cleveland and 5,000 more in the rest of Cuyahoga County have been contributing factors for more crime and climbing social costs.
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A broad-based effort must be initiated to address racially disparate subprime lending and the resulting foreclosure crisis. The causes for the crisis are numerous, including actions at all levels of government and conduct by private individuals and institutions, such as mortgage brokers, lenders, institutions that service loans, and those involved in the Wall Street securitization process. But an underlying assumption of much of the mortgage lending industry in the past 30 years, and the economy more broadly, has been that the market is better than government in evaluating risk, offering financial products to consumers, and regulating itself. This assumption of self-regulation comes from a discourse initially promoted by conservatives in the 1980s, and often adopted by liberals. That dialogue focuses on government itself as the problem, further undercutting the legitimacy of the state to devise potential solutions to social problems. The belief that government could help bring about a more equitable society has been replaced by a narrative of individualism and laissez-faire capitalism, with the market as the solution. Thus, we are left to attempt to provide market incentives to reduce discrimination, to support integration, and to build accessible housing. Advocates must directly challenge this conservative narrative in order to come to grips with racial disparities in mortgage lending and the nation’s foreclosure crisis. In the wake of the global financial crisis, many in the public seem to intuitively grasp that “the market” failed. The response of the Obama administration, however, has been tepid, with some minor adjustments in policy but not fundamental challenges to the conservative narrative about government. Bringing housing discrimination and segregation to an end is inherently a radical act that threatens those who support and reap benefits from such conditions. Just as broad-based progressive activism yielded rewards in the civil rights and other social movements, challenging and ending housing discrimination and segregation will likewise require advocates to become activists.
Remittances
Leveraging Remittances to Break Down Financial Barriers for Immigrants in the United States Benet Magnuson Harvard Law Skirnick Fellow, Appleseed Financial Access and Asset Building Program Annette LoVoi Director, Appleseed Financial Access and Asset Building Program
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mmigrants are one of the most financially excluded groups in America, five times more likely than native citizens to be without a bank account and nearly twice as likely to live below the poverty line. What does financial exclusion mean to immigrants in the United States? • For the one-third of immigrants who don’t have a bank account, it means risking violent crime every payday as they carry home cash from their paychecks. • For many of the 200,000 Haitian immigrants seeking Temporary Protected Status after the earthquake, it means either foregoing Protected Status or taking out an abusive payday or title loan to pay the $470 application fee. • For an immigrant who sends $300 abroad to cover necessities for family members—money saved from a monthly income that likely amounts to less than $1,500—it means losing almost 10 percent to transfer service fees. Immigrants in the United States often face race, class, and civic barriers, yet they must also overcome the violence, depressed wealth, and scams created by financial exclusion.
Benet Magnuson
Annette LoVoi
Appleseed surveyed immigrant communities in Texas who were experiencing a spike in cash-motivated violence to ask them about their most pressing financial needs. In those conversations, immigrants spoke about how important it is for them to send money to family abroad, and of the urgent need for more consumer protections in the money transfer industry. They reported high, undisclosed fees (often hidden in exchange-rate spreads), errors in transmission, and fraud by receipt-side agents. Even in the face of violent cash-motivated crimes, immigrants reported these concerns as their highest priority. It was a striking response, but it shouldn’t have been a surprise. Although immigrants in the United States send $47 billion to their families abroad each year, no federal law and only two state laws mandate consumer protections for these transactions.
This governmental inaction has, in turn, reinforced the failures of the market: Studies estimate that less than 10% of money transfers are sent through banks, an exclusion that costs immigrants access to other banking products, asset-building opportunities, and improved market competition. As the Texas surveys showed, immigrants in the United States—squeezed between governmental inaction on the one hand and exclusion from financial institutions on the other— know that more must be done to protect the money they send to their overseas families. Guided by those initial surveys, Appleseed has developed five promising areas to protect consumers who send money abroad and connect them with other financial tools to build wealth. These transactions are the largest interaction immigrants currently have with the financial sector in the United States, making remittance transactions the key to: • Stronger federal consumer protections. Every consumer who sends money to a foreign country should have the right to transparent and simple pre-transaction disclosures of all fees, including exchange-rate spreads, as well as access to quick remedies for any transmission errors or legal violations. Federal legislation, such as Section 4309 of HR 4173, which passed the House in December 2009, or similar legislation providing transparency and remedies, is urgently needed to ensure strong protections in this $47 billion-a-year industry. • Greater access to financial institutions. By best estimates, less than 10% of remittances are sent through banks, reflecting a broader exclusion of immigrants from the financial mainstream. Nearly 10 years after the first banks began accepting the matricula consular card as identification when Mexican immigrants opened an account, only 27% of banks nationwide report accepting the matricula now. Regulatory uncertainties at banks due to the Bank Secrecy Act and the Patriot Act have triggered similar account denials. Standardized and fair identification procedures will open the doors to financial empowerment. (continued on page 11)
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Financial Justice
Sustainable Advocacy for Fair Credit and Fair Banking Manuel Pastor Professor, Geography and American Studies and Ethnicity; Director, Program for Environmental and Regional Equity, University of Southern California Rhonda Ortiz Project Manager, Program for Environmental and Racial Equity, University of Southern California
Manuel Pastor
Vanessa Carter Data Analyst, Program for Environmental and Racial Equity, University of Southern California
T Rhonda Ortiz
Vanessa Carter
he foreclosure crisis has been a dynamic reminder that racial inequities continue to exist in America, and it has unmasked the power of the financial elite and their ability to exploit the most vulnerable among us. The patterns of foreclosures and predatory lending, after all, have had the most impact on people of color and those with lower incomes. If we are going to turn the financial service industry back into something that benefits the consumer, instead of the rich and powerful, we must shift the fundamental balance of power. If we organize, agitate, and follow in the great tradition of other American equity struggles, the scales can tilt. Social movements create a vehicle for bringing together allied interests, singling out the most blatant abuses of power, and slowly transferring leverage and dignity back into the hands of the people. For sustainable advocacy, we suggest “social movement regionalism” (Pastor, Benner, Matsuoka 2009). Practitioners of this school of thought have come to understand two things: First, that community-based efforts at “regional equity” are more likely to succeed, especially with a firm analysis of power and an explicit strategy for organizing; second, working at a regional level—face-to-face, race-to-race, and placeto-place—can add up to real change at the national level. Others working at the regional level—community development institutions (i.e., community development corporations) and policy entrepreneurs (i.e., think tanks)—are part of the ecology of social change, and these regional enterprises have a unique ability to challenge and transform systems of power in a long-term way. Their success is not tied to a set of relationships, but rather to their large constituencies, enabling them to challenge entrenched power. And while social movements take up issues, they are not defined by those issues. Challengers may take immediate issue with the rate of foreclosures,
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high interest rates, and discriminatory lending, but the real motivation is the unequal balance of power between the financial elite atop the pyramid and everyone else. To build a strong and lasting social movement, we suggest investing in 10 key elements that, in a previous paper, we grouped into three “buckets” (Pastor and Ortiz 2009). The first includes fundamental elements—strong movements need a clear vision or frame, a solid membership base, and a long-haul commitment. The second bucket is about execution and making the movement real—creation of a viable economic model, a clear understanding of governance and how it should look, research and communication to change the story, and a clear policy package to push the desired change. The third is about scale—expansion from a single problem to a broader movement requires a willingness to grow as an organization or set of organizations, a strategy to scale up from the region or down from the nation, and a means of networking various movements into a single river of change. We think the campaign is strong when the financial equity movement is analyzed through these elements, but a few areas need development. While the financial justice movement has largely defined its framing, much more must be accomplished to create a dominant force in the public imagination. Developing a viable economic model along with the accompanying pragmatic policies is urgently needed, and plenty of researchers associated with the movement can make that happen. Equally critical is intersecting this movement for financial justice with other movements for economic justice. Together, these efforts can develop a more powerful whole and more firmly situate finance within the logic of an alternative economic strategy for jobs, development, and sustainability. The old system has failed, the ideology is up for grabs, and new ideas and organization are welcome. The momentum created by the foreclosure—and broader economic—crisis may be what we need to dig into the knottier areas of the movement for financial equity. Financial equity plays a particular role in the long march for economic justice and it will require a whole new approach with a whole new set of skills and an entirely different balance of power. In this critical time, we all must work together to stretch thin budgets, step up our game, and continue to build the social movement organizations and vision that can help us work towards, and reach, a new financial and economic system.
The Imprint of History (continued from page 4)
Keeping an innovative global credit market accountable for abusive lending practices is a process that relies upon public scrutiny to be effective. Proper reporting of loan modification activities remains essential for monitoring the actions of loan providers who are unwilling to move quickly to adjust unsustainable loans. In addition, the tracking of loan modification applications and outcomes can help demonstrate disparate patterns of treatment by lenders. Improving the data available for fair housing practitioners can be a valuable
Remittances
(continued from page 9)
• Health insurance. Although sending money home is a central tool for providing for the daily needs of an immigrant’s family, these transfers are isolated from health insurance products, a critical tool for financial stability, as well as health. Appleseed is working with an international development organization to identify successful models and regulatory barriers to offering insurance products purchased during these transactions. • Credit scores. Immigrants in the United States are especially vulnerable to the thin-file credit score problem. Immigrants are denied access to credit, not because they are a risk, but because they have no reported borrowing history. A pilot program with credit scoring companies could determine that remittance history should be included in credit scoring models. • Immigration application loans. Secure immigration status is the gateway to fair financial services, jobs, insurance, housing, tax credits, and government benefits. But immigration applications carry high fees, an insurmountable barrier for many seeking citizenship, green cards, family unification, or temporary protected status. In contrast, an Appleseed pilot program showed that loans for
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strategy in revealing disparate credit practices, advancing fair credit and fair housing enforcement, and acting as a preemptive strike against dangerous profit-taking from financially vulnerable communities. These steps will go a long way toward reversing the effects of the new global financial infrastructure that now operates as a segregated credit market, which continues to separate and divide our communities.
immigration applications have a very low rate of default and open the door to assetbuilding opportunities. • Asset protection in the face of deportation. The risk of deportation creates unique and daunting challenges for immigrant families—often of mixed immigration status—who seek to protect and manage their assets. Appleseed recently released a manual for practitioners assisting these immigrant families, providing advice on protecting the family’s financial rights in the face of a family member’s deportation. Resources and reports on these financial issues facing immigrants in the United States can be viewed under the “Our Projects” tab at appleseednetwork.org. Immigrants come to the United States for the promise that hard work can create a better life. Currently, much of that hard work is going to waste, its potential drained by a lack of access to fair financial services. To recapture that potential, it is urgent that the United States act to protect the money that immigrants send to their families abroad and to connect that money to other financial tools.
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Fair Credit and Fair Housing in the Wake of the Subprime Lending and Foreclosure Crisis
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