The Root: Homewreckers

"More than half of all black borrowers who got refinance mortgages in 2006 were sold subprime products. According to a recent study, black and Latino borrowers will collectively lose an estimated $164 billion to $213 billion in the wave of foreclosures that have followed that lending; we'll have absorbed about half the nation's overall foreclosure loss.

"But the breadth of the problem in our community has done little to change the depth of my mother's shame. She hid her troubles from my brother and me until the end. She blames herself. She feels stupid."

Kai Wright, columnist for The Root, was online Thursday, July 17 to discuss his article on the subprime mortgage meltdown and how it has affected black Americans -- including his own mother. Wright has also written about the issue for The Nation.

A transcript follows.

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Kai Wright: Hello all. My name's Kai Wright, and I'm here to chat about my article in TheRoot.com on the foreclosure crisis and its unique impact on African Americans. Looking forward to your questions!

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Bowie: I currently have an ARM that I took out in 2004 (at a good rate; I'm not in any trouble at all.)

My loan docs clearly state that my payment schedule is: 60 payments of XXXX at the five-year teaser rate 300 payments of less_than_XXXX

Since at the time I took out the loan, short-term Treasuries were paying 1.00%, my fully-indexed rate, as calculated at that time, was less than my five-year teaser. Of course, short-term rates aren't usually 1%. (They were 5% last year before this crisis became well known.)

I know enough about rates to know I wouldn't really be paying that amount after the first five years; but were some people not that knowledgeable and believed their docs?

Kai Wright: Good question. Your grasp of these details alone sets you apart from a huge number of borrowers who were sold subprime and other exotic loans. I interviewed one woman who is functionally illiterate and a broker sold her on a series of refinance loans adding up to more than $100,000. Her 21 year old niece co-signed for one of them. She's now going to lose a house she bought in the 70s. That is sadly typical.

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Thomas, Los Angeles: Great Piece..I never felt right about this housing boom...I knew people who could not get a cell phone in their name, getting houses...

Kai Wright: Lending to borrowers who could never repay and stood to gain nothing from the loan were two of the biggest abuses. Brokers targeted people who had been locked out of credit for generations and told them, 'Here's a chance to cash in on your equity.' Many people who are financially savvy look upon banks and lenders with some distrust, but many others trust that they have their customers' best interests in mind. That's the trust lenders exploited in many black and Latino neighborhoods.

Sadly, many people who took the bait and are now in trouble still believe they have done something wrong. And that's important, because it prevents them from engaging the lender and trying to get a better deal. They're ashamed, so they beat their heads against the wall trying to make the impossible work out.

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Washington, D.C.: Is it possible black Americans swallow this "home is your castle" more than most and therefore, get hurt more than most when the castle turns into a roach motel you can't get out of? It's a rude awakening.

Kai Wright: There's something to that idea, but the greater point is that, for black Americans, home equity is a terribly important part of wealth. By any measure, there's a giant wealth gap between black and white Americans. But once you remove home equity, that gap is stunning. According to NYU economist Ed Wolff, in 2004 black net worth was 1 percent that of whites after removing home equity. Add to that the security and the varied intangible benefits homeownership provides. Foreclosures are hitting all American neighborhoods, but the loss of homes takes a particularly high toll in black neighborhoods

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Laurel: Didn't the marketing of sub-prime loans in many ways resemble an 'affinity scam'? That woman who had the big wedding at the Mayflower and bought a mansion in Ft. Washington and several luxury cars; didn't her victims say she had characterized her services in terms like "building black wealth" or "stabilizing black communities"?

Among African-Americans, there is a (probably legitimate) perception that the real estate wealth gap compared to whites is at the root of many socio-economic differences. Didn't the marketers of sub-primes (and many were black) use the language and concepts of economic empowerment?

Kai Wright: They certainly targeted black neighborhoods. That happened in measurable ways, such as steering borrowers to higher priced loans (Center for Responsible Lending and ACORN have both done studies demonstrating this practice). But also in more subtle ways. In DeKalb Co., Georgia, community development officials talk about mortgage fraudsters and brokers alike hanging out at black churches to solicit customers. An elderly black couple there told me about a "nice young man" who cold-called them from Maryland and flipped them through a series of needless refinance loans. They were shocked when they realized they'd been taken, because he seemed so nice. He was a young black man and spoke to them in a way that put them at ease.

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Los Angeles, Calif.: Hi there. I have a question and a comment.

Question: How does the proportion of African Americans and Hispanics affected by the sub-prime crisis compare to the proportion of African Americans and Hispanics living in the U.S.?

Comment: Amid all the stories about home buyers affected by this crisis, I think there's been too little focus on non-buyers who have been affected. For example, I didn't buy because I've been saving, and I didn't want to purchase a home with less than 10% down. But I had to watch in horror as people ran out and bought houses they couldn't afford and ultimately pushed the prices up. Now that prices are beginning to come down, their actions (as well as the mortgage lenders' actions) have put the economy in the tank and I no longer have job security so it's not a wise time to buy. Plus it's more difficult to get a mortgage now. I hope you and others will start to show people in similar situations to mine the same compassion you show those facing foreclosure.

Kai Wright: One study estimates that African Americans and Latinos will absorb roughly half of the economic loss from foreclosures once the dust settles. We are certainly not half of all borrowers. Another measure to note is that black borrowers of all income levels were 2-3 times more likely to get subprime loans than their white counterparts, even after controlling for other common risk factors.

On the question of non-buyers, it's important to move past the myth that these are all first-time homeowners. Over half of the subprimes given out since 1998 were refinances, and less than 10 percent went to first-time buyers.

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but the loss of homes takes a particularly high toll in black neighborhoods : PARTICULARLY the elderly.

Kai Wright: That's absolutely correct. Elderly *and* women, actually, are the hardest hit subsets among black and Latino borrowers. I haven't seen the number, but I'm told that's in part because the majority of black homeowners are women. Have to look that one up!

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Jessup, Md.: Hi Kai,

Just participated in Michelle Singletary's chat and she really pumped you up! I refinanced my townhouse twice from a fixed 30 yr loan to an arm, in order to cash out on the equity. Mind you, I was approached by the mortgage lender into doing this. I think I'm an educated brotha, but I knew nothing about the refi business. I ended up having to sell the townhouse in a distress sale, just to get the debt off my back. I could not afford the monthly payments at 9% interest. I went from 5.8% to 9% and ended up having to sell. In an apartment now, but will try to purchase again when my finances are much better.

Kai Wright: That's a sadly typical story. The same has happened in my own family, where my mother had to do a distress sale on a house she bought many years back. And this is the problem policy makers will have to confront: not just how to stop the bleeding, but how to repair the damage done.

One problem is that residential mortgages can't be sorted out in bankruptcy court like other debt. That's a carve out the industry has fought hard to protect, and which Congress has shown no interest in changing, thus far. The industry wants to keep all remedies voluntary, but with millions in or running toward foreclosure, we will likely need much more than lender-driven, voluntary work outs. Moreover, these are the same lenders that got us into this trouble in the first place.

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Tulsa, Okla.: What bills are lying dormant at the door of Congress to address this issue? Who has sponsored these bills and what companies/organizations are opposing them causing them to lie dormant? Has there been any media coverage of these bills, if so by what news outlets? I haven't heard of any of them. It is shameful that these companies have been been able to get away with this, but we must do what we can to stop it and make them pay.

Kai Wright: Everyone seems to agree at this point that we must use the FHA to get people out of these dangerous subprimes and into more traditional, fixed-rate 30-year mortgages. The debate is about how far to go. But even the most robust bill would help around 400,000 borrowers and would allow lenders to decide whether borrowers qualify. That means it will help only a fraction of those in trouble. Bills ending the mortgage exemption for bankruptcy (for select borrowers) sit idle.

An important part though is a proposed fund that will allow states and local govt's to buy up foreclosed properties and do something with them. That will help contain the crisis so that it doesn't echo out further--increased crime, decreased property values, etc. The president has vowed to veto that fund.

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Reston, Va: I read sometime ago that a large number of these people refinanced because they were at high risk of bankruptcy from unemployment, major medical bills, etc. They were led by lenders to believe that refinancing, paying off their bills, and putting a little cash in their pockets was more preferable than bankruptcy where they would be entitled to their homestead exemption. Even today, we still see these ads...

Kai Wright: That's correct. One of the devastating realities is that families like those I profiled in The Nation got drawn through an effort to get rid of other debt. They transferred unsecured credit card debt into secured mortgages that they can't go to bankruptcy court to resolve. Worse, they then got into greater credit card debt while trying to keep up with a mortgage they should never have had and couldn't afford.

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in order to cash out on the equity: Therein lies the key phrase. We must eliminate this get-rich-quick, instant-gratification idea that we can live in a home AND cash in on its equity at the same time. We can't eat our cake and have it too.

Kai Wright: That's the lie brokers sold. George Mitchell, who I profiled, got $361 out on a $125,000 refinance, his final in a series of four refinances over four years. Every other penny went to pay off the previous refinance or to the new lender's fees and closing costs.

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Minneapolis, Minn.: I am interested in hearing your thoughts about whether Barack Obama has a strategy to pull us out of this housing mess?

I feel the psychological damage that is being done to people who owned and now don't is just not being mentioned. I think your column mentions the effect on your mother but I keep thinking of the families displaced and what it does especially to children.

Thanks for the perspective.

Kai Wright: Obama has moved a good bit on this issue in the course of the campaign. He started out repeating the mantra of "borrower responsibility." Industry lobbyists and the White House have worked to frame this fiasco as one of twin guilt--shady lenders and greedy borrowers. Obama accepted that frame at one point, with language about not bailing out "risky" borrowers. (The reality is that borrowers were tricked into bad deals by predatory lenders.) Today, Obama is pretty far ahead of most other policy makers on the issue. He supports allowing some mortgages to be worked out in bankruptcy court.

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Detroit, Mich.: Kai, it's awful that your mom lost her house. Where is she living now? What is her attitude towards all that has happened?

Kai Wright: She's in the process of moving and, finally, getting over the shame and feeling like it's her fault. Like the rest of us, she's now focused on rebuilding.

Beyond the financial elements, there is a real community impact here that must be dealt with. My mom's been able to find a place in her same community, but many people are not. Many old, stable and/or blossoming black communities are now instead splintering. We saw what the destruction of communities and neighborhoods did in the 1980s. It's terribly important that lawmakers recognize the danger here, beyond home ownership itself, and step in to keep these neighborhoods intact.

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Responsibility: People who supposedly had the intelligence and education to be responsible for handling massive sums of money (the hedge funds and banks and stockbrokers etc) have brought us the Great Depression, the Savings and Loan Crisis and the .com meltdown -- all of which negatively impacted our economy for years afterwards. That individual homeowners got caught up in this is unfortunate, but by shifting the blame to them, isn't that just making it possible for those truly responsible to do it yet again with some other magic money scheme?

Kai Wright: Responsibility really is the key question here. As I mentioned earlier, industry and the White House have worked to keep the idea of "risky" and "irresponsible" borrowers in our minds. But the reality is that many, many borrowers were simply conned. Lenders and brokers exploited their trust. Underwriters willfully looked the other way. So did federal regulators. And banks and investors profited greatly--for a while. Borrowers may have made bad choices, but they were steered into those choices.

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New Haven, Conn.: Seems like the subprime mortgage fiasco is just the tip of the iceberg in illustrating the precarious position of the black and brown middle-class, do you see hope that the younger generation is likely to be more financially savvy?

Kai Wright: I'd agree. It's the latest in a decades-long history of predatory lending behavior in black neighborhoods. African Americans were locked out of the massive, midcentury public investment that created middle class homeownership in America. There's been a racial disparity in homeownership of greater than 20% ever since then, and lenders have consistently advantage of it. What's required now is a second public investment to create a sustainable middle class for everyone, not just whites.

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Kai Wright: Thanks for all your great questions. I didn't get to all of them, but we covered some ground. The question of responsibility is key here. Yes, we all must be responsible for our behavior, but that's got to be true for corporations and policymakers as well as citizens. And in this crisis, lenders exploited borrowers' trust and unfamiliarity with mortgages to turn a quick buck. They must be held responsible for that.

Thanks for reading!

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