Note: Shannon beat me to posting the link to the article that inspired this post. I read the hard copy of this article in the Wall Street Journal. It’s long and fairly involved, but I think it points to an alarming trend that we need to continue to watch and fight against.
The Wall Street Journal (hey! shaddup! I have to read it for my job) had an article about how subprime lending has pretty much gutted a middle-class Black neighborhood in Detroit. It’s pretty chilling.
The article at first flirts with the idea that we have a choice between either redlining or giving anyone and their dog all sorts of high-priced credit. They finally come to the sensible conclusion that this is not the case.
Minority-dominated communities attracted more than their fair share of subprime loans, which carry higher interest rates than traditional mortgages. A 2006 study by the Center for Responsible Lending found that African-Americans were between 6% and 29% more likely to get higher-rate loans than white borrowers with the same credit quality.
Subprime mortgages accounted for more than half of all loans made from 2002 though 2006 in the 48235 ZIP Code, which includes the 5100 block of West Outer Drive, according to estimates from First American LoanPerformance. Over that period, the total volume of subprime lending in the ZIP Code amounted to more than half a billion dollars — mostly in the form of adjustable-rate mortgages, the payments on which are fixed for an initial period then rise and fall with short-term interest rates.
“A lot of people were steered into subprime loans because of the area they were in, even though they could have qualified for something better,” says John Bettis, president of broker Urban Mortgage in Detroit. He says a broker’s commission on a $100,000 subprime loan could easily reach $5,000, while the commission on a similar prime loan typically wouldn’t exceed $3,000. [Bold mine.]
It wasn’t so much Give us redlining or give us subprime! It is a another form of redlining, and it’s insidious.
The Wall Street Journal mentioned a study done by the Center for Responsible Lending. You can access the study here. Here’s the summary:
African-Americans and Latinos get high-priced subprime mortgages far more frequently than whites — even when they are equally qualified, according to a groundbreaking new study from CRL.
Lenders say they charge more because African-Americans and Latinos on average have shakier credit histories, which makes lending to them riskier. But that explanation is simply wrong.
In the most extensive study of its kind, CRL found that African-Americans and Latinos are commonly almost a third more likely to get a high-priced loan than white borrowers with the same credit scores. The study examined 50,000 subprime loans.
The more research that’s done, the more obvious it is that there’s a surcharge for being dark. More from the CRL:
On September 13, 2005, the Federal Reserve released Home Mortgage Disclosure Act statistics on mortgage lending showing once again that African-Americans and Latinos pay more for home loans than comparable white borrowers. Lenders claim that weaker credit records explain the disparities, but the industry opposed collecting any information in the HMDA data that would shed light on borrowers’ creditworthiness. Only lenders have access to the information that would prove their point – and they’re not sharing it.
Research Shows People of Color Pay More to BrokersA common industry practice affords too much discretion to mortgage brokers and encourages steering minorities into high-cost mortgages. Kickbacks to brokers, known as yield spread premiums (YSPs), give brokers a strong incentive to steer borrowers into higher-cost loans when they could qualify for a less expensive loan.
This, along with pre-payment penalties (so much for promoting financial responsibility–pay off your loan? Pay us more money!) is something reserved mainly for people of color.
Banks used to look at your credit report, your salary, and determine how much you could afford to pay. It was in their best interest to ensure that you had a loan that you could pay back; they didn’t want any foreclosures. When I entered the housing market nine years ago, I was struck by how much the bank decided I could afford to pay every month (and they verified my salary and credit history)–it was huge, and completely impractical. This only would have been possible if I eschewed food, electricity, gas, clothing, and holiday and birthday gifts, and any kind of a social life, not to mention savings. (Don’t choke–$180K-$250K is about the price range of a condo in eastern Massachusetts, no joke. It is ridiculously expensive here, and I’m blaming subprime lenders for a lot of this, but more of that in a bit.) Needless to say, I bought way under what the bank said I could afford, and I could do it then, before the market went insane. (If I waited a couple of years, the market would have outpaced my ability to buy in.)
This struck me as odd because banks were traditionally happy to play the heavy and err on the side of caution, since they’d rather you be able to make your mortgage payments.
That doesn’t seem to be the way it works anymore, if my experience was any indication, and that was a “typical” loan. Forget about the alternative loans. Subprime lenders couldn’t care less if you default–they get their commissions, their interest, their fees, and then sell the debt to collectors. They don’t verify your income. They don’t check your ability to pay. They aren’t honest about the fees, the interest rate, and what you’re up against. They don’t consider the fact that the loans they’re pushing may not be right for their customers. They don’t care. They are true parasites, eating their way through neighborhoods and communities.
They go out of their way to entice people with deceptive deals. Get a $150K refinance loan for only $500 a month! Wow! That’s less than what I pay for my much lower mortgage, people think, and then find that either 1) the “great deal” evaporates at the table, but you’re in it now and you need to consolidate your debt or 2) it’s a new style of mortgage that will screw you to the wall. It’s either an adjustable-rate mortgage, where you pay a very low rate for several years and then watch it shoot through the roof, or it’s interest-only, which means you pay money and get zero equity. They also try to push piggyback loans–also known as no money down loans. One bank provides the eighty percent financing, and the other bank provides a loan for the twenty percent downpayment. You, of course, are in hock to your hairline and are completely screwed when something else hurts you financially.
Another thing some mortgage companies do is a “Stated Income Loan” or a “liar’s loan”–they either tell you to lie, or fill in the blanks about income and grossly inflate it. These loans were originally meant for self-employed people, but have been used by subprime lenders to get huge mortgage credit to people who just can’t afford it. Nudge, nudge, wink, wink. The banks are very rarely penalized for this, and when they are, it’s not anything to cause them panic. No matter that they continue to lay communities to waste
More from the Wall Street Journal:
For many who already owned their homes, offers of easy credit came at a time when a severe economic downturn had left them in need of money to maintain middle-class lifestyles. Since the year 2000, the decline of the auto industry has cost the Detroit metropolitan area about 20,000 jobs a year, helping turn the shopping areas near West Outer Drive into scenes of defunct businesses, payday lenders and liquor stores. According to the latest data from the Internal Revenue Service, households in the 48235 ZIP Code reported an average adjusted gross income of $32,902 in 2004, up slightly from $32,817 in 2001 but down 6% in inflation-adjusted terms.
What’s also interesting is how hard some finance gurus and bankers have pushed the idea of homes as nest eggs or investment vehicles. It’s little wonder that people take equity loans out against their homes given this rhetorical onslaught, and it makes the finger wagging at their supposed irresponsibility all the more disingenuous. Look, you can’t go around espousing a home equity line of credit as a wonderful way to get an emergency fund, or advise people to “tap into the equity” of their homes, and then suddenly wonder why people are doing just that. It’s a bit like doctors telling people that cigarettes are good for you and then telling them it’s their own damn fault they have cancer. This isn’t just irresponsible people willfully believing the lies spouted by lenders (who, up until about twenty years ago, were pretty strict about how they’d lend money–their reputation has just started to catch up with reality). Enough already.
I would love to see more people become homeowners. Unfortunately, these loan sharks in suits are hurting people’s chances to do this.
First of all, these wacked-out loans (politely known as Alternative Mortgage Products, or AMP’s) drove prices through the roof. Someone who “qualified” for a $400K interest only or ARM mortgage could outbid someone who did the traditional mortgage route. The assessed value of the house goes up. Housing values in general go up. This means that taxes go up, and some fixed and low income people who were able to buy years ago may not be able to stay. It also means that if you sell, there’s no place for you to go.
These mortgages are destroying entire communities. They have actually reduced, through foreclosures, the number of homeowners and destroyed their financial security. These AMP’s have created serious payment shock for people who thought that the banks operated the way they used to; they wouldn’t loan the money to people who couldn’t afford it.
Because AMP borrowers can defer repayment of principal, and sometimes part of the interest, for several years, they may eventually face payment increases large enough to be described as “payment shock.” Mortgage statistics show that lenders offered AMPs to less creditworthy and less wealthy borrowers than in the past. Some of these recent borrowers may have more difficulty refinancing or selling their homes to avoid higher monthly payments, particularly if interest rates have risen or if the equity in their homes fell because they were making only minimum monthly payments or home values did not increase.
My neighbors upstairs moved quite suddenly one day. It took them two hours. Their home is going into foreclosure. Ironically, they were the best people to live there–they were quiet (unlike the past two dolts who thought that doing sound check or doing renovations at 10:00 p.m. was just dandy), they were pleasant, they were hardworking. They are also gone because they couldn’t afford the payments. I don’t know what kind of a loan they got, but if their situation is consistent with the studies and trends, it was probably a non-traditional, sub-prime loan. They were working-class and Latino, and that’s probably what they got steered into.
Even if you believe that anyone who faces foreclosure deserves it and has only themselves to blame (and I’m not talking about idiots like Casey Serin), foreclosures hurt entire communities. Neighborhoods are abandoned. No one wants to buy in places with a high foreclosure rate. People’s savings are lost (oh, that magical equity), their financial security is toast, and they are left adrift and possibly new additions to the working poor. This does not make for strong communities. It also says something about us as a nation and a culture–you can work hard and save, and still get screwed if you’re brown or poor. You’ve got a surcharge, and the suits win, no matter what.
We cannot promote home ownership through smoke-and-mirrors loans. It’s living wages, commutable towns and better public services, better health care access (remember, many people who declared bankruptcy were driven to it through unforeseen medical expenses), saner tuition (student loan debt is not the way to start out) and community reinvestment and empowerment, among other things. Certainly, allowing predatory companies to indulge in economic racism and loan-sharking is not the way to promote a healthy, stable economy.
Regulation, of course, would help. But that got eroded years ago, and now the banks and financial institutions are lining our their Senators’ and Representatives’ pockets with money. The Bankruptcy Bill was just one accomplishment. There has been a long and storied history of financial institutions chipping away at the protections we instituted after the Depression.
I know that when I post these things, some folks complain that I don’t give them something they can do. Well, here are some resources for you to check out:
The Center for Responsible Lending.
Association of Community Organizations for Reform Now (ACORN) Acorn is an especially cool organization–it does grassroots organizing, education, and advocacy, and has some real boots-on-the ground immediate help and empowerment actions for low-income families, including housing. It focuses on a wide range of issues facing the poor and people of color.
American Mortgage Educators/Coalition of Consumer Advocates.
54 Responses to “Banks or bloodsuckers?”
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Great post.
A couple of my new colleagues come from this industry. Between the pair of them they’ve been laid off 4 times since Jan. 2007. I have been a very good boy and not spent hours screaming at them about what bloodsuckers they’ve been…
At the same time, I have another new colleague who worked as a retail banker for a year. Apparently these guys make more money by charging overdraft fees than they do by making loans! Anyone want to guess on whether it’s the rich or poor who are charged said fees?
In the past couple of months, 4 homes out of 60 in our subdivision have gone into foreclosure, with another 1-2 possibly to follow.
I blame the “new style” mortgages–we were heavily, heavily pressured to take an ARM when we wanted a 30-year fixed traditional. We actually had to threaten to walk away and find another bank to get our 30 year fixed. We weren’t high risk/bad credit: we were putting in excess of 30% down on our new house and had a history of almost 7 years payment on our old house. Our only real risk was the sale falling through on the old house, which did almost happen due to the various suckitude of the buyer’s various representatives. (His mortgage broker had been out of town on vacation, and his mortgage was WRITTEN during the closing; we only got our money because a rep from the bank walked it over to a different branch of the same closing office.) But we were also set up to handle that–some of our down payment was liquid already, and we were prepared to draw on a line of credit (in the “new style”).
Thanks for drawing attention to this issue.
From my recently-completed thesis on the political economy of Katrina (i took out the parenthetical citations), some supporting evidence:
Another element of planning that has historical racial significance is the lack of market-rate loans available to members of low- and middle-income neighborhoods, especially areas of concentrated poverty. Small business development can only occur when owners are able to receive development loans, regardless of the income level of the neighborhood. Even though redlining has been outlawed since Congress passed the Strengthened Community Reinvestment Act (CRA) in 1977, many studies have been undertaken that show that banks continue to ignore low-income business and homeowners, often at the expense of their own profit (Taylor and Silver 2006, 235). Subprime lending is often the only option for these communities. For example, in the metro New Orleans area for 2004, blacks made up 34 percent of the population, and whites 63 percent. However, blacks received only 15 percent of market rate loans and 47 percent of subprime loans. Whites received 81 percent of market rate loans, and only 51 percent of subprime loans. Blacks receive less market rate loans and more subprime loans given their share of the population, and the situation is exactly reversed for metro New Orleans whites
.
The National Community Reinvestment Coalition (NCRC) estimates that if banks had made loans to blacks in the same proportion to their share of the population, they would have made an additional $458 million in loans. These disparities in lending occur in almost the exact same pattern in regards to the income level of borrowers – while lower income and higher income borrowers receive less and more of their share of market rate loans, respectively, they receive shares of subprime loans identical to their share of the population. NCRC data analysis reveals similar situations when examining lending to small businesses based on racial makeup of neighborhoods, as well as income characteristics. In addition, according to Taylor and Silver (2006), at least four different studies have shown that by increasing bank branching, especially into lower income and minority neighborhoods, small business loans increase and investment in those neighborhoods rises (241-42). New Orleans in particular suffers from great disparities in bank branching – the majority poor black neighborhoods of St. Claude and the Lower 9th have only one branch, despite housing a substantial number of the city’s residents. These issues with lending have significant impacts on the rebuilding process. By denying loans to applicants of lower income or minority status, no one wins. Banks lose out on assets and communities lose out on businesses. Katrina made it even more difficult for small businesses to recover, and if the private sector bankers are unwilling to follow fair lending practices, entire neighborhoods will continue to suffer – and they won’t be the rich, white neighborhoods near the river.
Sheelzebub, you shouldn’t ever apologize/feel defensive about reading the WSJ. There’s some excellent reporting in that paper. It’s just the editorial pages that are noxious.
It sounds like they’re on to something. The either-or situation—Give us redlining or give us subprime, as you phrased it—is indeed a false dichotomy. This was demonstrated dramatically in Chicago last year, when the state legislature passed a ham-handed attempt to “help” consumers in low-income areas (meaning, of course, predominately black and Hispanic) by mandating credit counseling. The legislators meant well, but the purported beneficiaries resented this as paternalistic and insulting.
The only real way to help people out is to stop the “soft redlining” you describe, whereby consumers in less-affluent neighborhoods get shunted into subprime loans, even when their credit qualifies them for something better. And the only way to do that is through enforcement. Specifically, the kind of undercover operations that have been used to enforce other kinds of fair-housing rules, where “testers” submit applications and keep track of who gets what kind of offer.
Of course, that takes time and effort. It also takes political will, which has been eroded by the massive campaign contributions of the subprime lending industry. Much easier to just wag your fingers at people who can’t get the loan they want and say it’s their fault.
The link to Shannon’s site has an extra space in the URL, so the link is broken.
Your post pretty much confirms what I’d already figured out. Banks have lost their damn minds. When I was a kid, having a credit card was a big deal. This was the 70s, and I remember my mom and dad sweating the credit issue for a long time. Bankruptcy was punitive, and loans were hard.
Fast forward twenty years, and I found myself, newly divorced and in grad school, with credit cards with lines of credit that exceeded my annual income. Not combined–one card had a limit higher than my annual income, and then I had others with smaller limits. That wouldn’t have happened twenty years earlier.
Fast forward to today. My g/f and I live in a market similar to Boston, though it’s currently tanking hard. We saw a house we were interested in a month ago, and even though we both have massive student loans in deferral and no money to put down, we had mortgage companies lined up to write us “creative” loans. We walked away because we knew we couldn’t handle it. Why didn’t the mortgage companies see that?
D’oh, not a space, a quotation mark.
Somehow, I lost my point.
Anyhow: so by the end of this summer, our little (middle to uppper middle class) neighborhood could be up at 10% foreclosures. If we’re that bad off, I have to think that other neighborhoods that went through a buying boom around the time that ours did (ours was new construction) may be as bad, or worse off. The end of this year and next year are going to be a disaster in the housing market I think; not one driven necessarily by the burst of the housing bubble but by the burst of the mortgage bubble.
It’s sad to see these empty houses sitting around; all four of them were actually left in fairly good condition but are degrading as time goes on. We had some pretty major storms this past week, which took out some of the landscaping in the backyard of one of them. I wandered down there to take a look at the carnage and thought that it was lucky that the two trees that had come down had missed the house. Because who knows who would have fixed it.
With all due respect, Your Infernal Majestiousness, calling banks and mortgage brokers ‘bloodsuckers’ is a dire insult to leeches, mosquitoes, and bedbugs everywhere.
They tried to do this to us when we were buying a car. Redlining is alive and well in the auto industry. Those ads on TV for the 0.9% loan for qualified buyers? Residency restrictions apply, which means that you live in the wrong neighborhood, you ain’t getting any 0.9% loan no matter how well you qualify for that loan. It’s not a racist thing just because those residency restrictions just happen to mostly consist of neighborhoods where brown people live.
The first dealership offered a 5-year loan at 18% interest. (And added over two thousand to the cost of the car with things that weren’t on the sticker.) We said no, and they seemed offended. The second dealership, with my grandmother (who has a net worth of well over a million and a very high income) cosigning the loan wouldn’t go below 13.5%. All this on a car with a $16,000 MSRP. With my grandmother’s help — she bought the car outright with a credit card and is acting as the financier — we managed to get it down to 4.9%.
You didn’t even get into the evil (sadly, more evil than even You can manage) that is mandatory arbitration. One of the papers they gave me to sign when I was buying was a mandatory arbitration agreement. “What happens if I don’t sign this?”
The man across the desk glared at me. “Nothing.”
“Okay, I’m not signing.” Glare glare glare.
They recommended something like $2,800 in extended warranty and other hoobajoob, to which I also said “No thank you.” More glaring.
Mr. Glare-y was not the salesguy. The salesguy is on my side, right? He’s not the one pressuring me to get the extended warranty and the LoJack and the Satan-resistant undercarriage coating.
In an honest world, these . . . people (and by ‘people’ I mean ‘The Faceless Minions of Evil’) would all be indicted under RICO. Instead, Congress gets down on its knees to lovingly blow the credit industry and begs for more when the industry shoots its come into Congress’s eye. Sorry for the visual there, but I can’t think of any other way to describe the appallingly misleadingly named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
No one seemed to care until vast numbers of people started to default on the sharks-are-envious loans that were pressed upon them. There’s no bankruptcy protection any more, but they can’t pay anyway? So what’s next? Indentured servitude? Poorhouses? Making defaulting on a loan a criminal act, not just a breach of civil contract?
Bring the Revolution. Eat the Landlords.
hp:
I think that “other neighborhoods” you mention might be what I call “the United States.”Yup. My parents think they are going to sell next year. I tell them “good luck.” They are not going to sell for what they refi-ed at in 2005.
But they also need a “designed to sell” team, or perhaps a “gut to sell” team.
I live in a lower-middle-class/working-class neighborhood, majority black and Latino, and we’ve had several foreclosures lately. We’ve been trying to get in touch with the banks who own the property and get them to cut the grass. (We being the HOA — which is what an HOA is good for.)
I got a 7/1 ARM on purpose because I’m in grad school, and am planning to sell within 7 years anyway, because I will have graduated and would be either moving elsewhere for a job, or moving closer to a job here (next place I live, I want to be able to walk and bike). If I was planning to stay in the house for the duration, I would’ve gotten a 30-year fixed. Sometimes I still panic and think “what if I’m trapped and can’t sell?” but I doubt that’ll really happen.
When we moved into our neighborhood three years ago, there were almost no vacant houses - it’s a desirable neighborhood in a great school district. Since then there have been three within a two block radius, and god only knows how many in the subdivision. The house next door to us went into foreclosure, deteriorated for over a year, then got bought, fixed up, and resold. The new neighbors are paying at least double what we are, maybe more, and I’m worried about what kind of loan they have. They’re a working-class family who’ve done well and are trying to move up. They don’t deserve to have that shot down.
I can pretty much confirm everything that the article & sheelzebub mention here. I work in the real estate lending industry (though not as a loan officer and my own personal experience is that blacks & latinos get the shaft. I even had one friend actually quit his job as a loan officer because of the comapny’s predatory lending and “bait & switch” way of doing business (he was hired to deal directly w/latino customers because he speaks spanish).
Jack, thanks for the heads up. I’ve fixed the link.
Oops. forgot to close parentheses after “loan officer”. Bad. My mother would be ashamed.
I agree with most of the facts of Sheelzebub’s post, if not the rhetoric.
The fundamental shift was that banks no longer hold and service the loans as part of their portfolio; they sell them to investors to free up additional capital to lend. Thus, it is of no consequence to them if you default on the loan because it won’t be “their” loan by that time. Chances are someone in China owns it as part of a mortgage backed security. Thus, brokers will sell you whatever product is most profitable, which is usually sub-prime.
The thing is, these products are not “brand new”. Interest only and Negative Amortization loans go back at least 10 years. These sub-prime hybrid ARM’s that are being pooh-poohed here are some of the most popular loan products over the last 6-7 years.
There is no question to me that many lenders are predatory and do not have a client’s best interest at heart. However, the only issue I have with the anti-lender rhetoric is that if you had taken one of these loans to buy a home anytime up to 2002/2003 it was almost impossible to lose. If you take one after that, it is almost impossible to win. The behavior of the broker is the same in either case, its only the behavior of the market that turns him from your best friend to your worst enemy.
Two articles about the Vanguard of Predatory Lending Foreclosures, a.k.a Ohio:
from last fall, Alyssa Katz in Mother Jones and from March, Erik Eckholm in the NYT.
Both talk about the same issues that have been brought up here, in particular the geographic concentration of AMPs and the feedback loop that occurs when rates go up, a house forecloses, and it becomes harder to sell the remaining houses so more foreclose.
The MoJo article has a nice add-on about how increases in global metal prices lead to vacant foreclosed houses getting ganked for their siding.
This is why we need continually evolving regulation of the financial sector. Shooting them all in the face just once won’t work because they’ll just evolve bankers with no faces…
Seriously, though. Now that disclosure of annual percentage rates is mandatory no one should be surprised that credit-card and finance companies have turned to making most of their profits from points and penalties and fees and other nasty stuff they can hide in the fine print (including the “we can change the terms of this agreement whenever we want” clause). And sub-prime is way better for the banks than redlining, because instead of avoiding loss of money they make money and then sell the resulting packaged loans on the open market where some poor schmoe thousands of miles away can buy it for the high interest rate and then get blindsided. (Sometimes the schmoe is another financial institution, in which case you get lots of sudden pearl-wringing amid cries of outraged innocence, but it can as easily be regular investors who though this was just the right nest-egg for retirement.)
The fact that the mortgage broker (who claims to be working for the buyer) gets a higher (and often undisclosed) commission on the more predatory loans should be obviously criminal, but that would interfering with the free market. All hail interference with the free market.
You know, people on the wingnut side of the fence consider me some sort of a commie when I make comments about the good of the market being secondary to the good of society - but this looks like a perfect example.
Now THERE’s a smart ARM buyer. Well done, Caroline. Frankly, unless you’re like Caroline and are definitely planning to sell (or see interest rates actually declining over the adjustable period of your loan, a low-probablity prognostication of there ever was one), you’d have to be insane not to have taken a fixed-rate loan over the past decade.
Over the past 15 years, I’ve bought two homes and refi’ed twice. I never even considered an ARM, even though any number of them were dangled in front of me. One lender tried to hard-sell me an ARM and, when I told him no in no uncertain terms, he proposed to charge me an outrageous fee to loan me money. “Oh, that’s just the number the computer spits out,” he explained. My response: “You need a new computer.” Needless to say, we did not do business.
I hear that there’s a presidential candidate out there that made a pile of cash from a firm that deals in sub-prime lending. Anyone know anything about that?
obstinately Off-Topic:
Has anyone heard anything about a P2P file sharing client called Pando? Any opinions about it? Hate it? love it? Crashed your machine? Let in pests and vermin? Gave you dandruff? Email me as idiosynchronic at gmail. Thanks, folks.
When my wife and I bought our first house in early 2000, mortgage brokers and bankers used the term “80/20 loan” or some variation thereof to mean a mortgage where you put up a downpayment of 20% of the purchase price and financed the remaining 80%. This was important to us, because at this level of downpayment you don’t have to pay an extra fee for purchase money insurance, and you don’t have to excrow taxes and insurance. By the time we bought our next house, late last year, the term “80/20″ had come to be used almost exclusively to describe the 100% financing arrangement mentioned in this post– one bank finances the 20% “downpayment,” and another bank does the 80%. We had to basically insist on doing a traditional mortgage with a 20% downpayment. The industry just lost its damn head in the last 5 or 6 years..
There is no question to me that many lenders are predatory and do not have a client’s best interest at heart. However, the only issue I have with the anti-lender rhetoric is that if you had taken one of these loans to buy a home anytime up to 2002/2003 it was almost impossible to lose. If you take one after that, it is almost impossible to win. The behavior of the broker is the same in either case, its only the behavior of the market that turns him from your best friend to your worst enemy.
None of which deals with what Sheezlebub was talking about, namely, the racial discrimination involved in this type of lending.
PiatoR:
For some reason, the first thing that pops into my head is an old Rocky Horror line:It’d probably go down well with the libertarian wingnuts, not so well at all with the Christian extremist wingnuts.
I had to be very aggressive with my real estate agent to get them to *not* finance me with an ARM.
Sub-Prime was all the rage, and all the kewl kids were doing it, because once the mortgage is off your company’s books, its someone else’s problem entirely {TM}
Not to “collectors”, exactly, but to investors.
On its face, it’s a good idea. You make a loan, and that means you’re out money. But, if you sold that loan to someone else, you’d have your principle and a bit of profit, and could make another loan. It’s good for you; you make more loans and make more money. It’s good for the investors, who can get into the mortgage biz without loan-making overhead. It’s good for consumers because there’s more money flowing around, so it’s easier to get a home loan.
However, once there’s a market for these mortgages, there’s less interest in making sure each one is solid. If you hold 10 mortgages, you’re looking at loss of 10% of your principle and interest if one defaults. If you hold 100, well, a few defaults is no big deal. Make up for the defaults in volume. Plus, the sub-prime market is like the credit cards for the poor… you can jack up the interest and fees, because the poor folks are caught between a rock and a hard place.
Also, with borrowing easier, and at lower interest, people had more buying power, inflating house prices, requiring more buying power to buy any house… but for the past couple years, with housing prices rising rapidly, you could quickly gain equity in your home due to the increase in property values. This led to some level of gambling (and more than a little greed), so who worries if you bought a house for a slightly higher price? You’ll be on top soon enough!
Over and over and over again, I see systems in place designed to keep people poor, designed to put them in over their heads, designed to be unjust, and my blood keeps boiling. Where do we go from here? What do we do? How do we put a stop to this?
“Over and over and over again, I see systems in place designed to keep people poor, designed to put them in over their heads, designed to be unjust, and my blood keeps boiling.”
It’s a feature, not a bug. Capitalism, Baby!!!
Always remember: The “invisible hand” of the market has a raised middle digit…
MikeEss, I always figured it was a clenched fist, coming down to squish me like a roach on the kitchen counter.
Education of prospective buyers as to what they can afford and what loan products to shun would seem a good first step.
1. Commodification of mortgages. Once the financial wizards got their hands on what was a “basket of risk”, the idea was to repackage it, the bank would keep the less risky bits and sell off the riskier bits to hedge funds, pension plans, and other investors. Since banks knew they could always palm off the riskier bits on someone else, there wasn’t sufficient incentive for them to make sure the mortgage obtainers could in fact pay off what they had promised to pay.
2. Involvement of very sleazy groups using real estate to launder drug profits, fraud, etc. When the party is going on, no one wants to put in any sort of checks-and-balances that keep the balloon from inflating. (Self-proclaimed “capitalists” are the ones that scream the most about the free market. They’re also the loudest when the whole thing crashes.)
3. No one wants to admit that markets return to the mean. Every single real estate bubble was hyped by individuals who wanted to believe that “this time, it will be different!” Who wouldn’t want to just sit in one’s house and be able to make money through no action? Homeowners loved it. So yet again, we humans have to get hit over the head with TANSTAAFL.
4. Was in Japan during the crash of the real estate bubble there. Been there, seen it. Yup, real estate market can drop by 40%. Learn from others’ mistakes before you run into your own.
There is no question to me that many lenders are predatory and do not have a client’s best interest at heart. However, the only issue I have with the anti-lender rhetoric is that if you had taken one of these loans to buy a home anytime up to 2002/2003 it was almost impossible to lose. If you take one after that, it is almost impossible to win. The behavior of the broker is the same in either case, its only the behavior of the market that turns him from your best friend to your worst enemy.
I agree with you that minorities tend to take out these “shitty” loans. My only point was, a couple years ago, using one of these “shitty” loans to purchase a property would be almost a financial slam dunk. You get to leverage someone else’s money to invest in a property that gains 10% or more per year in equity, while enjoying a tax break and the other intangible benefits of home-ownership.
In that context, anyone not aggressively marketing these loans to low income earners would be doing them a disservice. With interest rates rising and home prices depreciating, the lender’s behavior has not changed, the borrower’s behavior has not changed, only the market has changed. Thus, some of the rhetoric about good/evil and being bloodsucking parasites is a bit of a distraction.
In addition to that, much of the thesis of this article depends on the idea of the lending industry being some large monolith with the ability to control the behavior of it’s individual brokers to enforce racist policy. I’ve noticed the repeated anecdote of “I went to the bank and because I was a minority they wouldn’t offer me any loan but the shitty subprime one, so I was stuck and I took it”. Given the hundreds of local lenders, and the thousands on the internet, it just doesn’t stick. Frankly, it is total bullshit.
Banks
orare BloodsuckersThere, fixed the title for you. This all kind of makes me think Molly Ivins was being kind when she said that bankers had hearts the size of caraway seeds.
[…] June 4th, 2007 At Pandagon, Sheezlebub has a long post up commenting on a WSJ article about the subprime lending blowback which is wreaking havoc on many communities, with waves of foreclosures, specifically one neighborhood in Detriot. Now, reasonable people can agree that this spate of subprime mortages probably hasn’t been great for those who are taking them out and for the banks who provided them. But to cast the issue, as Sheezle does, in such stark terms, with the banks as parasites preying on the virtuous hard working middle class of America isn’t very useful…or true. She (i think it’s she, i really don’t know for sure) brings up this one statistic, purporting to be irreversible evidence that redlining is still happening: . A 2006 study by the Center for Responsible Lending found that African-Americans were between 6% and 29% more likely to get higher-rate loans than white borrowers with the same credit quality. […]
I think that what many of us are saying is that while these “shitty” loans may be more popular (bad word, I know) in minority communities, in the past few years, especially after ~2004, everyone was being pressured into them. Traditional mortgages became a “bad” word in the mortgage industry. Even Greenspan said that banks should be pushing the non-traditional over the traditional specifically BECAUSE the interest rates should return to more historic norms. Banks that are locked into too many 30 year fixed at 5.25% are going to look icky to investors if standard interest rates return to 8%+. The bet they were making was that while ARMs and other alternative mortgages will eventually screw over a percentage of over-extended consumers, the majority of people will do anything to keep their house. And they won’t be able to get the 5.25% fixed mortgages once they realize how deep the shit is.
Originally, the alternate types of mortgages were developed for and intended for short term housing investors. People who had a definite time table for living in a particular location–whether that was because they knew they had to move in a certain time frame, or they were flipping the house.
Even a couple of years ago, though, using the shitty loans would have been almost a financial slam dunk only if you knew that you were going to sell before the bubble popped. Believing that the bubble wasn’t going to pop before say 5 years was up (a fairly average time frame to live in a house) was foolhardy. And to talk about people risking their housing on refinancing with one of these loans–they should have used these only if they were refinancing to fix up to sell. They were always short term investments. The problem was/is that they were presented as the only choice to those who were looking at housing as a long term investment.
Loan officers who ARE honest and talk their clients through several options and find out what the really need and help them pick the best loans because word-of-mouth is the best way to get new clients…
get their clients stolen by liars who use bait and switch.
Consumers do get screwed over, but sometimes they screw themselves.
Heh, thanks BYU. That’s the way ARMs were presented in the research I did — a good bet if you know you’ll be moving within the time frame.
But, you know, I had the time and resources to do research, and I didn’t have lenders outright lying to me. I probably would have believed what I was told if they had.
And let me tell you, my lender sure didn’t question the fact that I wanted an ARM, or spend a lot of time explaining to me what I was getting into. It was bing bang done — if I hadn’t done my own research, I would’ve been lost.
I forgot to mention that I keep getting mailings that advertise exotic subprime loans. I assume all my neighbors are getting them too. I’ve never seen mailings like that at my parents’ house. They live in a majority white neighborhood; I don’t. It’s totally anecdotal, but it does imply that subprime loans are pushed to blacks and Latinos.
It is axiomatic in the finance industry that the higher the risk, the higher the rate required to entice banks to make the loan. With a fixed loan and clean contract terms, this isn’t so much a problem. But to make it easy to get in, then jack up the payment is just cruel. It actually makes the loan way too risky for the rate charged.
Ultimately, though, I’d like to see the rate increase more modestly with risk.
If you would be so kind as to include this with my previous comment:
I always thought it a bit backward to make it so hard for people to pay back loans the poorer they are. But since we can’t reverse the rate curve, I do wonder if there is anything we can do to convince the finance industry that making loans that are impossible to realistically pay off is not in anybody’s best interest.
Perhaps the only way is to threaten onerous regulation to make sure that contracts intended for at-risk populations have certain standard features. The threat of federal regulations made the insurers self regulate better. We should raise the heat on the bankers, too.
Oh, I get mailers all the time with all kinds of schemes in them, and I live in a majority-white area. You can’t swing a dead cat without hitting a mortgage lender around here.
The really scary ones aren’t the sub-prime loans, but the negative amortization ones. I’m generally a red-in-tooth-and-claw capitalist sort, but I’d be all in favor of laws making damn sure NegAm loans are only given to people who know exactly what they’re getting: a mortgage that gets bigger with each payment. I can see the market need for them, but only under special circumstances that i doubt most are in right now.
Minorities preferentially take out these shitty loans? No. That’s the whole point of the data Sheelzebub was citing: minorities who have the same credit scores as white people who get regular loans don’t get offered the lower-cost versions. They only get offered the more-expensive crap versions. Just like they get told houses and apartments in certain neighborhoods aren’t for sale. (This reminds me of the infamous phrase “mother-dominated childrearing”.)
Oh, and the “slam-dunk” thing: no. Unless your purchase of a house happened to coincide with the market low and your sale with the market high, the “creative” loans weren’t particularly good for anyone. The fact that people’s houses were briefly “worth” some inflated amount was of use only to people in a position to sell those houses and buy in some mythical other place where prices were less inflated. For the majority of people who either had no opportunity to sell (e.g. still working in the same city) or would have to buy another similarly inflated house, the creative loan is just a way to extract more money from them as long as they stay put. (And sometimes also when they move.)
“Oh, the banks are made of marble/
With a guard at every door/
And the vaults are filled with silver/
That the workers sweated for…”
One thing I think would help the situation is to reintroduce the concept of regulation–something that got wiped out over the past twenty years or so.
Regulation? REGULATION?
Sheelzebub, are you just TRYING to piss off the Invisible Hand?
You want us all to suffer and die in poverty when the Invisible Hand is driven off to some other country because we dared to bring in “Regulation”?
What are you, some kind of communist?…
I grew up in the Detroit area, and though I haven’t lived there in 10 years, I still have a pretty good network of contacts there. This situation, though affecting minority borrowers more, is present throughout the metropolitan Detroit area. A good friend of mine is about two paychecks away from losing his house a couple of years after he opted for creative financing.
The economic situation in the area is only exacerbating the problem. The housing market there is teetering on the precipice, if it’s not in collapse already, and there doesn’t seem to be a solution.
To a great extent I think the collapse of bank regulation is a generational thing. Until the mid-80s, the people in charge of regulating banks had been through the Great Depression and had seen what unfettered idiots in the financial industry could do. The S&L fiasco (which happened partly because S&L’s managed to evade most regulation) was the first sign of senescence. Since then it’s only gotten worse, with all the smart boys thinking it can’t happen here, or that they’ll be exempt from the troubles if it does.
(And, as I think I mentioned earlier, it’s not just regulation once, but ongoing regulation. Because every time you put a rule in place it’s some bright, well-paid person’s job to figure out how to make more money by finding a way around it.)
Like paul said, t’s not like this type of thing hasn’t happened before….
Lift the boot of oppression off the throat of the persecuted banking industry and things get crazy. Suit clad grifters move in and all of a sudden one of the most boring stable investments becomes something that looks like it was created by wealthy tweakers.
Ohio, once again, had an actual bank panic in 1985 over the mismanagement of the finances of one S&L chain. We’re all still stuck with an old school vet from the fiasco called the Keating 5: John McCain. Silverado S&L ended up costing taxpayers over a billion dollars, yet Neil Bush is still not in jail.
I find it unsettling that I actually agree with Moira.
I’ve been thinking about this as a personal responsibility issue since the last time we discussed lending. I still believe that a lot of people get fucked by their sweet-deal mortgage because they try to hustle the house. But the house also lies and cheats, in this case.
[…] Connecting the dots: Insight on how predatory lenders not only destroyed neighborhoods, discriminated against non-whites, contributed to the current default/forclosure rates, destroyed the financial security of families, and on top of all that fed (if not caused) regional real estate bubbles. I have yet to see so many strands woven so skillfully into the real estate issue. […]
Did I say they prefer the shitty loan? I only said what the data said: That they are more likely to get a shitty loan.
Now, can you tell me in the data where it says that minorities don’t get offered the lower cost versions? What does the data *really* say?
I still think this post suffers from a total lack of understanding of how large and diverse the mortgage industry actually is. The anecdote of “I went to the bank, and this is all the offered me, so I signed” is so stupid it boggles my mind. This is a HUGE market. Go to another bank. Then go to a broker. Then call a national lender. Then try an internet lender. Tell each one of them that someone else is giving you a better deal. If none of them will give you a better deal, there may be a reason other than race.
And you’re missing the many posters in this thread who discuss their own experiences with lenders using high-pressure tactics to get them to go with “alternative” loans.
And frankly, it says a lot that the *first* option offered to people of color with good credit is some sort of BS “exotic” loan, yet if you’re White with the same credit, you’re more likely to get a traditional mortgage.
This is a HUGE market, yes. But it’s also a homogenized market. IOW, there are plenty of places to go and get the same offer.
We did this. We got quotes from multiple banks, we went to the online sites where they “compete”–and the first offer from any lender we talked with was some exotic bullshit. Say, “no, we want a 30 year fixed” and we got talked and talked and talked at about how the lending agent’s pet alternative mortgage is the greatest thing since sliced bread. Until the day we signed our closing papers, the broker we were working with brought STILL up the “well, look what interest rate you could get on an ARM! or this interest-only loan!”
This was 2004, and we were white, with good credit. Insisting over and over again that we wanted a 30 year fixed (and sticking with our own belief that the 30 year fixed was the best loan for our situation, no matter what sales slime got thrown at us) finally got us a 30 year fixed. But it was an absolute pain in the ass to get it.