john a. powellExecutive Director, Kirwan Institute for the Study of Race and Ethnicity Williams Chair in Civil Rights & Civil Liberties, Moritz College of Law November 13, 2010 Consumer Rights Litigation Conference Boston , MA
What is ‘Home’? What is opportunity? Creation of Dual Housing and Credit Markets What’s on the horizon? Unfair (and fair) housing and credit are entwined What is a fair and just economic & financial system? Principles for Reform
Health EmploymentChildcare Housing Effective EducationParticipation Transportation
Opportunity structures are critical to opening pathways to success: High-quality education Healthy and safe environment Stable housing Sustainable employment Political empowerment Outlets for wealth-building Positive social networks
Neighborhoods don’t determine lives, but they shape and affect lives Living in a disadvantaged neighborhood as a child is the equivalent of losing a year of schoolSource: Sampson, R. J., P. Sharkey, et al. (2008). "Durable effects of concentrated disadvantage on verbal ability amongAfrican-American children." Proceedings of the National Academy of Sciences (PNAS) 105(3): 845-852.
7 … correlates with … generates children having levels unhealthy levels of of lead in their blood stress hormones in 9 times above children, which average; linked to impairs their neural ADD and irreversible development loss of cognitive functioning … links to higher … is highly correlated levels of violent with childhood offending among aggression and social juveniles maladjustment
• In 1960, African- American families in School poverty were 3.8 times Segregation & Lower Educational more likely to be Concentrated Poverty Outcomes concentrated in high- poverty neighborhoods than poor whites.• In 2000, they were 7.3 Increased Neighborhood Flight times more likely. Segregation of Affluent Families
Lack of low-cost credit options Few preventative care doctors High-cost grocery stores that lack fresh produce Concentrated poverty schools Policies need to both bring more sustainable choices to neighborhoods and allow people more choices on where they and their families live
…BUT NOT FOR EVERYONE: THE STORY OF UNFAIRHOUSING AND CREDIT MARKETS
For every $1 in assets held by African Americans, Whites hold $9 This disparity is primarily due to differences in home equitySource: “Net Worth and Asset Ownership 1998-2000”. Household Economic Studies. U.S. Census Bureau(2003)
The Creationof DualHousing andCreditSystemsSeparate andunequal
“If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values.” –Excerpt from the 1947 FHA underwriting manual 14
J. Hernandez shows howareas in Sacramento withracially restrictivecovenants in the past hadthe fewest loan denialstoday…shows where primecredit was steered.
Pre-Depression:The Two Party Housing Post New Deal: Market The Three Party Mortgage Market Party Party Party 2 Party 2 1 1 Lending Seller (and/or) Homebuyer InstitutionHomebuyer Lending Institution Party 3 Government Sponsored This becomes very big business, Enterprise purchases , i.e. F/F $800 Billion EACH sells/holds portfolio in 2009 or insures mortgages
1970s: Fundamentally new way of getting funding for mortgage loans – securities GSE’s start issuing “mortgage backed securities” Provided ‘guaranteed’ income to investors 1977 Private label mortgage backed securities issued By 1990s, GSE’s losing market share to private MBS After 1997, Fannie and Freddie buy more private label MBS (1998: purchased $25 B…2007: $267 B) 2003 …purchase more private subprime & Alt-A Collapse hits private market and Fannie & Freddie Though private MBS small % of holdings, big risk Note: GSE-issued prime securities performing fine
“Wall Street has gotten a lot of mileage out of the accusation that the political system simply doesnt understand how Wall Street works…The problem is that Wall Street also doesnt understand how Wall Street works… Bankers didnt understand the tail risk of collateralized debt obligations. Ratings agencies didnt understand the subprime mortgage market. Alan Greenspan didnt understand the risks posed by derivatives. Robert Rubin, the former co-chair of Goldman Sachs and one of Citigroups directors, told the Financial Crisis Inquiry Commission that "all of us in the industry failed to see the potential for this serious crisis."Ezra Klein, “Wall Street says Washington doesnt understand finance. Well, neither does Wall Street.” The Washington Post, April19, 2010.
CRL estimates that from 1998 – 2006, only 9% of all subprime loans went to first time homebuyers Majority were refinance loans Refinance loans disproportionately marketed to African American neighborhoods Photo and story credit: Baltimore Finds Subprime Crisis Snags Women --New York Times 1/15/08
Estimated cost of subprime lending to all homeowners: $2.7 trillion Loss of accumulated wealth in home equity over generations…???? WHAT WILL THE EFFECTS BE ON ALREADY LOW OPPORTUNITY NEIGHBORHOODS?
Financial Reform Consumer Protection Bureau
“the whole financialsystem has beenriggedagainst lower incomecommunities ingeneraland communities ofcolor in particular” Source: Pastor et. al, Program for Environmental and Regional Equity
“if we are going to turn the financial industry back into something that benefits the“our financial consumer … WE HAVE TOsystem has a SHIFT THE UNDERLYINGdistinctly racial BALANCE OF POWER”character, one thatrequires a responserooted in racial andsocial justice” Source: Pastor et. al, Program for Environmental and Regional Equity
“… the focus should not be simply onNeed for foreclosure relief, butsocial on a new financialmovements frame that has at itsfor heart the restoration offinancial opportunity for all”equity
Federal housing finance policy must align with and support longstanding federal housing goals to protect against discrimination. The federal government has a responsibility to ensure that the secondary market serves all borrowers in a fair and equitable manner and to foster the equalization of homeownership rates. A reformed housing finance system must eliminate the dual credit market. Regulatory oversight of the housing finance system must be rigorous and comprehensive and must include effective fair lending enforcement.
Secondary market transactions must be transparent and accountable to the public. The system must have an affirmative obligation to offer capital and credit in communities devastated by the foreclosure crisis and offer access to families who were targeted for inappropriate and unsustainable mortgages. The housing finance system must provide capital for sustainable rental and ownership development in all communities. The housing finance system must support product flexibility and sustainable innovation and offer access to institutions of all sizes and in all geographic areas.
www.KirwanInstitute.org www.race-talk.org KirwanInstitute on:
Unequal credit markets and segregated housing happened together. Fair credit and fair housing will only happen together. Global finance has evolved against – and plays out in – racially and economically segregated neighborhoods. Advocates need to know more about banking and finance Fair housing and fair credit is an issue for all of us, but attention needs to be targeted to marginalized communities. Otherwise, policies miss key opportunities and challenges and miss those most affected by the crisis.
AFTER THE SUBPRIME LENDING CRISIS…WHAT DOWE DO FROM HERE?
Summary Findings Fair housing and fair credit are about local places, people, relationships, and histories Federal policy must support (and not undercut) both anti-discrimination efforts and affirmative commitments to fair housing and fair credit What is a fair and just 21st Century economic system, and what kind of financial system is needed to support it?
Recognize that the paths to fair credit and fair housing will differ according to regional context and local history. Take local impediments to fair housing and fair credit – racially discriminatory history, proliferation of predatory credit, resistance to mainstream institutions – seriously. Assist local and regional fair housing and community reinvestment activists in their efforts to organize, mobilize, and lobby. Promote local, multi-partner pilot projects that are mission driven to affirmatively promote fair credit (like the National League of Cities’ “Bank On Cities” initiative). Connect fair housing, fair lending, community reinvestment, civil rights and other advocacy groups (financial reform, faith-based, labor, etc.)
Support the creation of a Consumer Protection Financial Agency and give it adequate resources and enforcement power. Promote regulatory reform of the product, rather than the institution. Recognize and enforce the duty to affirmatively further fair housing in relevant federal agencies and programs. Press for better and more comprehensive data for all federal spending programs, including stimulus funding. Expand HMDA data reporting requirements to include loan term information. Enact a comprehensive, nationwide plan to protect renters from foreclosure.
Contribute to a national communications effort around the danger of excluding a majority of American workers from a solid financial future. Explore the potential for fundamental changes to regulation and financial incentives. Current incentives are perverse – they promote credit products inherently more likely to fail or result in punitive fees to those least able to manage them. Support the national networks of fair housing, community reinvestment, fair lending and financial reform movements.