As Congress debates an economic recovery package, it is important to keep in mind how the country got into this mess in the first place: the racially motivated lending practices of Wall Street banks and mortgage companies that targeted Black and Latino families with unfair and discriminatory loans.
With most of the congressionally approved money yet to be awarded to assist homeowners, their stories should be kept uppermost in mind.
Attention to this highly important issue was given in 2008 when the Urban League, the NAACP and the Congressional Black Caucus made it the centerpiece of their annual conferences. As the fall election campaign swung into high gear, however, save for oblique references by the Republican candidate, John McCain, concerning the “mismanagement” of Fannie Mae and Freddie Mac and more caustic comments by demagogues like Ann Coulter blaming Black and Latino families for the meltdown, the debate largely stayed away from what may have been seen as a racially charged issue.
Still, as the main civil rights organizations charged last summer, the racist origins of the subprime mess are difficult to ignore.
An excellent study by United For a Fair Economy entitled “Foreclosed” is instructive. The report suggests several indicators, chief among them the disproportionate numbers of people of color holding such loans. Over 50 percent of all mortgages held by African Americans fall into this category. The figure is 40 percent for Latinos.
These percentages have grave economic implications. “Given that people of color are a disproportionate number of the subprime borrowers, and that this group’s assets are mostly concentrated in home ownership, the current foreclosure crisis can be considered the greatest loss of wealth for communities and individuals of color in modern U.S. history,” argue the authors of “Foreclosed.”
Consider that Blacks and Latinos will lose between $164 billion and $213 billion for loans taken during the past eight years.
Race and the housing bubble
The disproportionate numbers of Blacks and Latinos with subprime loans, while suggestive, serve as only partial explanation, however. The central question is what caused it? Were the higher relative percentages merely the casual result of ongoing poverty or was a more underlying factor at play? Bush administration policy provides important clues.
Keep in mind that subprime loans were allegedly established and encouraged as part of government and corporate efforts to provide support for struggling working-class families troubled with bad credit histories. However another factor was at work in this process.
In point of fact, the proliferation of these loans can be traced to the aftermath of the dot-com bubble. After the bubble burst, speculators turned to the housing market. As Yale economist Robert Shiller noted in 2005, “Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents?”
As things turned out, it wasn’t just that investors discovered a new and lucrative market, but rather that they were encouraged to do so by U.S. fiscal policy. Faced with declining rates of returns because of low long-term interest rates and buyers priced out of the market because of skyrocketing housing costs and declining wages, bankers deliberately devised loan strategies with hidden fees and ballooning interest rates that would greatly elevate their rate of return, targeting unsuspecting and ill-informed consumers. The subprime crisis was born.
Remember the ownership society
George W. Bush’s “ownership society” would be the ideological cover for this program. In it, credit would be extended to potential homeowners with low incomes and allegedly marginal or bad credit.
Former President Bush himself pushed the program, believing it would create “stakeholders” in his “ownership society” and expand meager Black and Latino support for the Republican Party. In the view of The New York Times, the Bush administration “pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors.”
Indeed, “the business interests of some of his biggest donors” goes to heart of the matter.
While the subprime program was supposedly targeted at those with bad credit, and given that a large percentage of minorities fill this category because of poverty, it would seem disproportionality might be a normal outcome of a well-intentioned program’s attempt to redress historic wrongs.
Good intentions, however, were not the point. At stake were big business interests. A strong case can be made that banks deliberately connived to target minority buyers in order to push profit margins, knowing full well (from their own risk assessment calculations) that the loans could not be repaid. Not only were the banks betting on the defaults, but, in fact, they were pressuring prospective Black and Latino borrowers to take out such loans, leading the unwitting customers like so many sheep to a financial slaughterhouse.
Homeownership, as it turns out, was not the major objective of the lenders. Despite rhetoric promoting an ownership society, only a fraction of loans were awarded to first-time homebuyers. And public officials were well aware of this even before the financial meltdown became full blown. In the summer of 2007, in a speech before the Brookings Institute as the credit markets began to seize up, Sen. Charles Schumer (D-N.Y.) charged:
“According to the chief national bank examiner for the Office of Comptroller of the Currency, only 11 percent of subprime loans went to first-time buyers last year. The vast majorities were refinancing that caused borrowers to owe more on their homes under the guise that they were saving money. Too many of these borrowers were talked into refinancing their homes to gain additional cash for things like medical bills.”
Nor was bad credit the primary factor for distributing the loans, a myth conveniently circulated and repeated to this day. Schumer again rebutted the notion, quoting none other than The Wall Street Journal:
“Based on the Journal’s analysis of borrowers’ credit scores, 55 percent of subprime borrowers had credit scores worthy of a prime, conventional mortgage in 2005. By the end of last year, that percentage rose to over 61 percent according to their study. While some will have damaged their credit in the interim, it’s clear that many subprime borrowers have the financial foundation for sustainable homeownership, but may have been tricked into unaffordable loans by unscrupulous brokers.”
Thus, working-class Black and Latino families, over half of whom were eligible for conventional loans, and burdened by several years of stagnant and falling wages during a jobless recovery, were led by mortgage companies into clear and blatant cases of predatory racially-inspired lending.
The racial overtones in this swindle are evident. But what made the loans predatory? The United For a Fair Economy study provides the following criteria:
• marketing and sales to inappropriate customers
• pre-payment penalties (70 percent of subprime loans had such penalties)
• adjustable rate mortgages (ARMs), which often carry unexplained ballooning interest rates that increase payments by as much as one-third (a majority of subprimes were ARMs)
• exclusion of tax and insurance costs when estimating the monthly payment for a potential homebuyer
• encouraging ordinary borrowers to take interest-only loans, where in the initial year or two only the interest is paid, after which payment on the principal kicks in, raising the cost dramatically.
The Bush administration was not only complicit in these practices, but may have helped mastermind them. “The president also leaned on mortgage brokers and lenders to devise their own innovations,” according to The New York Times. “And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.”
Might not have expected? In fact, the Bush team aggressively tore up regulations, intimidated and fired reluctant administrators, and litigated against states bucking their authority, taking cases even to the Supreme Court.
Whether subprimes caused the great financial instability or simply triggered the deepening of an already existing problem, one thing is sure: its racist origins are undeniable. What Marxist theoreticians like Henry Winston and William L. Patterson called the “Achilles’ heel” of U.S. capitalism — racism — has once again made itself felt and sent shockwaves around the world, helping close one chapter in the class and democratic struggle and opening up another.
At the heart of the collapse of the financial system and the accompanying economic recession lies the unparalleled greed of the banks coupled with the declining wages of poor working people exacerbated by a racist social division of labor. The solution to the problem may well continue to lie in the repayment in full of a centuries-old debt. To paraphrase Martin Luther King, capitalism’s promissory note is still marked, “Insufficient Funds.”
Joe Sims (email@example.com) is the publisher of Political Affairs.