www ISR
For ISR updates, send us your Email Address

Back to home page

ISR Issue 58, March–April 2008


Undue credit

How the financial services industry has underserved communities of color


THE UNFOLDING mortgage crisis is destroying communities across the country. According to the most recent estimates from, up to three million homes will be in foreclosure by the end of 2008. This pain is not being spread equally. A disproportionate number of foreclosures are coming in poor and working-class neighborhoods—and within that group, those predominantly inhabited by Blacks and Latinos are suffering most, in the process wiping out huge swaths of wealth. Estimates from United for a Fair Economy (UFE) predict that the total loss for Blacks and Latinos due to subprime loans will be between $164 billion and $213 billion out of the estimated $356 to $462 billion. The subprime collapse “will cause the greatest loss of wealth for African-Americans in modern U.S. history,” according to UFE’s Amaad Rivera.

A look through the newspapers reveals similar stories popping up across the country. In recent years, borrowers traditionally denied the dream of home ownership suddenly got approached by mortgage brokers with offers that seemed too good to be true. The booming housing market seemingly had room for all. For less than the cost of renting, anyone could get a mortgage and become a homeowner. Unfortunately, those have proven to be cruel promises. Month by month, low, introductory teaser rates expire and housing values plummet, leaving stunned families across the country with unaffordable payments. Quickly, they are falling behind on those payments and then facing foreclosures.

Subprime mortgages come with interest rates that are 2 percent to 5 percent higher than prime loans—but that was hidden by two- or three-year periods of lower rates, during which payments typically covered just the interest, and none of the loan itself. Altogether, subprime loans add up to $2.5 trillion since 2000, according to the Wall Street Journal. They account for only about 13 percent of total outstanding loans, but are 55 percent of foreclosures since the mortgage crisis began, the New York Times reported. The Center for Responsible Lending estimates that anywhere from one-in-five to one-in-three subprime home loans will ultimately end in foreclosure.

For communities of color, this turn of events isn’t a new story. It is just the latest chapter in a long history of financial racism within the United States. For more than six decades, the financial system has been a key cog in the machine of institutional racism. The tactics have not always looked the same, but the net result has been two sets of rules—one for whites and another for people of color.

In practice, financial racism has played out in a variety of ways, as Dr Edward Rhymes explains in “Losing what we never had,” an online article on Black Agenda Report. Historically, through a process known as “redlining,” communities of color have been cut off from all types of credit, thereby putting things like college educations and car and home ownership out of reach. Secondly, even when financial institutions offered credit, it was at higher rates than what whites pay—even for those at similar income and education levels. Thirdly, because mainstream financial institutions have historically underserved these communities it opened the door for predatory institutions—like payday lenders—to wreak havoc. It has also left communities more vulnerable to outright fraud. Lastly, the most recent dynamic has been that banks pushed risky subprime loans disproportionately into these communities. And, at all times, the real-estate industry has played a vital role in the continued segregation of towns and cities throughout the United States. The net result of all these policies has been that it has stunted the creation of wealth within communities of color and cost billions of dollars over the course of several generations.

Historical access to credit

The financial industry’s double standards date back to just after the end of World War Two. Thousands of soldiers came home from fighting looking to start families and buy homes. The Federal Housing Administration (FHA), a product of President Franklin Roosevelt’s New Deal, made this possible. Prior to the 1930s, aspiring homeowners needed to fund 50 percent of the purchase up front and had to pay off mortgages within five years. But since the FHA began insuring home loans, banks lowered those levels, down to 10 percent or 20 percent and extended mortgage lengths to thirty years.

However, from the start, the FHA treated Black GIs—of which there were one million—differently than whites. FHA underwriters warned that the presence of even one or two nonwhite families could undermine real-estate values in the new suburbs, according to Rhymes. This fostered the creation of all-white suburbs and reinforced existing patterns of segregation. It was symptomatic of the dominant form of financial racism during this era—denial of access to credit.

Also during this era, federal investigators evaluated 239 cities across the country for financial risk. All-white suburban communities away from inner city areas received the highest rating—green. Black, inner-city communities got the lowest rating—red. This, says Rhymes, is where the term “redlining” originates. As a result of these rankings, banks gravitated toward giving mortgages in the higher-rated, white communities.

The picture remained this way for a generation. But the question of housing and access to credit came to be a demand of Martin Luther King Jr. and the civil rights movement. In April 1968, one week after King’s assassination, Congress enacted the Fair Housing Act as part of the Civil Rights Act of 1968. The act prohibited discrimination concerning the sale, rental, and financing of housing based on race, religion, national origin, and sex.

However, the practice of redlining did not abate. Congress eventually enacted two other pieces of legislation—the Home Mortgage Disclosure Act (HMDA) in 1975 and the Community Reinvestment Act (CRA) in 1977 to provide incentives to lenders to loan in previously neglected communities, and amended the Equal Credit Opportunity Act (ECOA), to prohibit discrimination based on race and national origin, among other criteria.

HMDA was designed to help implementation of both laws by requiring institutions to disclose summaries of their mortgage lending patterns. Despite all these measures, there remains to this day a massive disparity in the rate of home ownership between whites and Blacks and Latinos. In 2004, 76 percent of whites owned their homes, compared to 49.1 percent of Blacks and 48.1 percent of Latinos, according to the U.S. Census Bureau. For credit in general, the denial rate for African American families in 2004 remained twice that for white families—22 percent as compared with 10.8 percent. For Hispanic families, the ratio was about 12 percent, according to the Center for American Progress Web site.

But there was another problem with the wave of legislation. These laws focused only on access to credit, says Rhymes, because interest rates and mortgage pricing were strictly regulated by the government during that period. Financial institutions would come to exploit this hole in the next phase of economic racism.

Double standards

In 1980, passage of the Depository Institutions Deregulation and Monetary Control Act lifted regulations on interest rates and other loan pricing, which opened the door to banks creating two sets of rules and two sets of terms when offering loans to whites versus people of color. As a result, during the past thirty years, the form of financial racism has shifted from being a question of the denial of credit to one where credit is offered on predatory terms. Banks charge people of color higher rates of interest than whites even with similar geographic, educational, and income profiles, according to a 2006 report from the U.S. Department of Housing and Urban Development (HUD). Further, HUD reports that there is even division within the Latino community with dark-skinned Latinos tending to get higher interest rates than light-skinned Latinos.

For example, only 28.3 percent of low-income whites received high-cost home purchase loans in 2007 versus 36.5 percent of Latinos and 57.7 percent of Blacks. Additionally, 21.3 percent of middle-income whites received high-cost home purchase loans versus 49.4 percent of Latinos and 57.4 percent of Blacks. And just 16.4 percent of upper-income whites received high-cost home purchase loans versus 48.9 percent of Latinos and 54.4 percent of Blacks, according to an ACORN report. The breakdown is similar for refinance loans.

Different standards of credit haven’t just applied to housing. For example, in 2003, a Vanderbilt University study showed that Blacks were almost three times as likely as whites to be charged markups on loans financed by General Motors Acceptance Corp. The result of this was that Black borrowers paid an average of $1,229 in interest over the life of the loans compared to the average of $867 paid by whites. And this was true regardless of the profession and credit rating of the buyer or the model of the car purchased, according to the ACORN report.

Predatory payday loans are another example of how financial institutions prey upon communities of color. Payday loans are ones in which a lender grants a short-term loan—in between a borrower’s paychecks—and charges inordinately high interest. On a $300 payday loan, a borrower typically incurs $45 in fees and receives $255 cash, according to a 2005 report from the Center for Responsible Lending (CRL). However, most payday borrowers—who are severely strapped to make ends meet—usually cannot afford to pay back the loan right away. As a result, they end up “renewing” the loan, paying $45 a week until the loan is paid off. As a result, annual percentage rates (APR) for payday loans generally start at 391 percent, according to a 2004 report from Stephens, Inc.

In a study of North Carolina, for example, it was found that African-American neighborhoods have three times as many payday lender stores per capita as white neighborhoods. This disparity increases, says the CRL, as the proportion of African Americans in a neighborhood increases. As of 2004, payday lending was a $40-billion-a-year industry, according to another report from Stephens, Inc.

Even when people of color have been granted credit, they’ve largely ended up carrying greater amounts of debt. Overall, 49.4 percent of lower-income Latino families have loan-to-value ratios that are greater than 90 percent. The percentage for comparable Black households, according to the 2006 HUD report, is 44.4 percent and for whites only 29.7 percent.

Further, Blacks and Latinos are more often subject to so-called prepayment penalties than whites, the CRL reported in 2005. For borrowers living in zip code areas where more than half of residents are of minority groups, the odds of receiving prepayment penalties are 35 percent higher than in zip codes where people of color comprise less than 10 percent of residents.

Apart from this, there is also the practice of “steering,” whereby real-estate brokers across the country steer people of color looking to buy houses away from white communities and vice versa. In a 2006 test study, the National Fair Housing Alliance reported the “blatancy of the discrimination in agent behavior was astounding.” The study found that almost 20 percent of the time, African-American and Latino testers were refused appointments or offered very limited service. In addition, white testers were routinely offered incentives—such as lower interest rates or help with closing costs—that were not offered to Black or Latino testers.

As a result of these practices, reported the Poverty and Race Research Action Council in January 2008:

The average white person in metropolitan America lives in a neighborhood that is 80 percent white and 7 percent Black.... A typical Black individual lives in a neighborhood that is only 33 percent white and as much as 51 percent Black, making African-Americans the most residentially segregated group in the United States.

Steering also takes place in terms of what kinds of mortgages people of color are sold. According to the UFE, “Mortgage brokers and other financial institutions deliberately targeted asset-poor communities whose members were eager to acquire homes. Members of asset-poor communities were lured into loans under false premises.” Freddie Mac and Fannie Mae, which buy loans from mortgage lenders, have estimated that 15 percent to 50 percent of the subprime loans they bought in 2005 went to borrowers whose credit scores indicated they were qualified for prime loans, according to the New York Times.

The rise of subprime

The passage of the Financial Services Modernization Act of 1999 sped up the consolidation of the banking industry. The act removed much of the separation that existed between banking, insurance, and securities, enabling financial institutions to enter each other’s lines of business. For the housing sector, this meant that the balance of mortgages shifted from regulated commercial banks and savings institutions to unregulated affiliates, independent banks, and other institutions.

At this point, the “securitization” industry took off. Beginning in the mid-1980s, large investment banks got the idea that, rather than holding mortgages on their own books, they could put them into mortgage-backed securities pools and sell the bonds. The pools offer higher returns than Treasury bonds or corporate debt, so they became very attractive very quickly, especially as long as delinquencies and defaults remained very low. For mortgage originators, this model meant they could vastly increase their lending volume. Rather than keeping mortgages on their books for thirty years, they kept them for six months or less, then sold them to investment banks. As a whole, about $6.5 trillion in mortgage debt (about half of total mortgage debt) is now held in these kinds of securitizations, according to government data—an increase from $372 billion in 1985, according to

Bonds are created based on these massive pools of mortgages—which tend to be $1 billion or larger—and then sold off to investment banks, pension funds, hedge funds, and other institutional investors, which choose what risk level they want to buy. The highest rated and least risky bonds pay off at lower rates, while the riskier bonds—such as ones tied to subprime loans—pay off at higher rates. Thus, originators increased the volume of subprime lending to meet the demand of institutional investors.

The use of subprime mortgages in communities of color was a deeply cynical maneuver on a number of levels. On a certain level, it was made possible because of how in the past the same banks denied access to mortgages. Thereby communities of color have historically had lower rates of home ownership than whites. Now banks were coming back to the same communities they’d denied mortgages to in the past, selling the dream of home ownership at the cost of exposing communities of color to dangerous mortgages. It is the classic pattern of predatory lending. According to the CRL:

In addition, high-risk loan products and terms, so common in the subprime market, make it easier for unscrupulous lenders to entice borrowers with a low initial payment, regardless of whether the borrower can manage future payments. Costly fees and prepayment penalties associated with predatory loans also strip equity, making it harder for borrowers to refinance and forcing them into foreclosure more quickly. We also note reports of increasing problems associated with foreclosure “rescue” scams.

From 1994 to 2005, the subprime home loan market grew from $35 billion to $665 billion. From 1998 to 2006, says the CRL, the subprime share of total mortgage originations climbed from 10 percent to 23 percent. Blacks and Latinos have tended to get subprime mortgages at a higher rate than the general population.

This is no accident. Stories are emerging of how mortgage brokers have preyed on these communities, peddling the most complex mortgages in areas traditionally underserved by the financial sector. For the brokers at the street level, there were higher commissions dangled before their eyes if they could get a borrower to take a subprime loan instead of a prime loan or Alt-A (the notch between the other two ranks). Mortgage brokers—who are involved in about 60 percent of all mortgage loans—received yield spread premiums on subprime loans compared to conventional mortgages. On average, reports the Wall Street Journal, brokers were paid 1.88 percent of the value of subprime loans, compared to 1.48 percent of conventional mortgages.

Current estimates from the Consumer Federation of America show that 46.6 percent of all mortgage loans to Latinos nationwide were subprime. For Blacks, it was even higher—53.7 percent, according to the Dallas Morning News. Subprime loans, said the Morning News, account for only 17 percent of loans to whites.
Effects on wealth

A fall in housing values is more damaging for communities of color because more of the wealth in these communities is tied to housing (as opposed to stocks or other investments.) Two-thirds of the net wealth held by African Americans and Latinos consists of home equity, according to a 2004 study by the Pew Hispanic Center.

Overall, median household net worth in 2004 stood at $11,800 for Black households in contrast with $118,300 for white households. In 1982, reports the UFE, the figures were $5,500 for Black households and $82,900 for whites. At that pace, it would have taken 594 years to achieve racial parity—a process that will likely be thrown backwards because of the subprime debacle.

According to the Urban League, home equity accounts for nearly 90 percent of Black homeowners’ total net worth. So as housing prices plummet, it’s having a disproportionate impact on the Black community.
As Glen Ford of Black Agenda Report puts it:

This is institutional racism writ large, and indisputable. If Black wealth creation through home-owning is central to the drive for equality, then the private sector cannot be allowed free reign; they have already proven themselves criminally culpable in the death of dreams. And the crisis is by no means over. The rot extends to the non-mortgage practices of global financial institutions, that bundle worthless paper and trade it like real money. So deeply corrupt are the mega-banks, brokerage houses and finance capitalists of all kinds, the entire planetary house of cards is in danger of collapse.

Overall, the subprime meltdown will have a devastating effect on communities of color in the United States. There have been flashes of organization from some existing groups to challenge the crisis. The Rainbow-PUSH coalition organized small demonstrations on Wall Street in early December and in Washington, D.C., calling for economic justice. In July the NAACP filed suit in federal court against fourteen of the country’s largest lenders, alleging systematic, institutionalized racism in sub-prime home mortgage lending. And in January, the city of Baltimore sued Wells Fargo bank for engaging in what it described as abusive practices that have created a foreclosure crisis in Black neighborhoods and eroded city coffers.

More is necessary. There needs to be an understanding that the financial system is one of the mechanisms through which the capitalist system as a whole has siphoned wealth from the bottom of society to the top. The most recent dynamics—predatory lending and the explosion of subprime mortgages—have to be seen as part and parcel of a broader ruling-class offensive that has been waged since the 1970s. There has been a long downturn in wages that has been offset by an explosion of credit in order to maintain consumption levels. As a result, the working class has no savings whatsoever and, in fact, the national savings rate has been negative in recent years for the first time since the Great Depression. Communities of color have felt the effects most acutely, but the attack has been broad-based and the effects on the continued shakeout of the housing bubble will be devastating for the working class as a whole. This fits with the general pattern of capitalism’s divide-and-rule strategy among the working class—doubly oppressing some sections of society based on race, gender, sexual orientation, etc. But on the whole, the working class has been preyed upon.

The current crisis in the economic system speaks to a need for the Left to formulate demands of economic justice—which could include access to non-predatory forms of credit, regulation of the financial sector, an end to privatization of social services and state resources, as well as demands for universal health care and funding for higher education.

Petrino DiLeo is a writer and a member of the International Socialist Organization in New York City.
Back to top