Fair Credit and Fair Housing in the Wake of the Subprime and Foreclosure Crisis
A New Day for HousingThe Annual Conference of the CT Housing Coalition October 7, 2009 Hartford, CT Christy Rogers The Kirwan Institute for the Study of Race and Ethnicity The Ohio State University
Fair credit and fair housing (broadly defined) will only happen together Global finance has evolved against – and plays out in – racially and economically segregated neighborhoods Fair housing and fair credit is an issue for all of us, but attention needs to be targeted to marginalized communities – African American, Latino, Immigrant, Native American…
Diagram courtesy of Chris Peterson, University of Utah Law
Pre-Depression: The Two Party Housing Market Party 1 Party Post-Depression FHA 2 Homebuyer Era: Seller (and/or) The Three Party Lending Institution Mortgage Market Party Party 3 Party 2 Government 1 Sponsored Lending Institution purchases, insures Homebuyer Institution or underwrites loanBased on research by ChrisPeterson, University of Utah Law School
“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 8
How do we climb out of the subprime lending and foreclosure fiasco without worsening the already widening opportunity gaps in: Home ownership and mortgage lending Credit access, debt, leverage Banking, savings
Make progress in fair housing in three areas Improve access to fair financial options (mortgage and otherwise) Affirmative community revitalization Opportunity-based housing Ensure that programs and policies responding to the subprime crisis reach those most affected Connect and engage diverse stakeholders for cross-cutting advocacy
Access to fair financial options (mortgage and otherwise) Proliferation of non-bank financial institutions (unregulated mortgage brokers; payday lending; refund anticipation loans) Banks’ and non-banks’ increasing reliance on fees (overdraft, credit card, remittances) Separation of risk origination from risk bearing …implications for low-income customers and communities of color
Congressional legislation coming…CFPA, or specific overdraft legislation? Federal Reserve proposing opt-in, not opt-out Some banks offering to make some concessions on fees…(BOA; J.P. Morgan Chase; etc.) 2009 fees: $38.5 billion; fees increased 4% this year; avg. overdraft fee $35; banks make more on overdraft fees than credit card fees In 2006, overdraft fees were roughly 75% of total consumer fee income
Half of overdraft fees are from small ATM/debit purchases (the “$40 cup of coffee”) Some banks include the overdraft allowance in the account balance shown at the ATM In undercover visits, GAO officials often couldn’t get required disclosures detailing fees A handful of consumers pay the lion’s share of fees (i.e. FDIC study showed that customers with 5 or more NSF transactions – 14% of customers -- accounted for 93.4% of total NSF fees)
[Tree] People who overdraft repeatedly are more likely than the general population to be lower income, single, non-white, and renters Center for Responsible Lending. “Quick Facts on Overdraft Loans.” April 9, 2009. [Forest] Incomes lag while housing, health care, and education costs skyrocket…more people get in more debt, but the picture is uneven.
If overdraft ended overnight, one economist estimated 1,000 banks and 2,000 credit unions would go under 45% of banks and credit unions make more on overdraft fees than they do in profits What’s a sustainable profit model for banks?
Worldwide flows: $320 Billion in 2008 Unrecorded flows through informal channels are believed to be at least 50% more than recorded flows In last five years, remittances have grown by 63% and now represent the largest source of income for many developing countries On the horizon: mobile transfers (in developing countries, more people own mobile phones than have bank accounts)
Africa :Total remittances (US$ million) 38,611 Asia and Oceania :Total remittances (US$ million) 113,055 Europe: Total remittances (US$ million) 50,805 Latin America and the Caribbean: Total remittances (US$ million) 67,905 Near East: Total remittances (US$ million) 28,449 Orozco, Manuel. “Sending Money Home: Worldwide Remittance Flows to Developing and Transition Countries.” December 2007. Inter- American development Bank.
In 2004, 5% of transfers (of total 40 million per year) were done via direct deposit into accounts at financial institutions Western Union and Money Gram charge $12-50 fee per transaction People are suspicious of bank pricing, don’t have needed ID, or know of hand-to-hand alternatives Bank of America has offered free remittance service since 2005…banks want new customers If banks are going to get new customers via the remittance market, how do we ensure that they subsequently offer them sustainable options?
Affirmative community revitalization How has the subprime crisis exacerbated fair housing and equitable community development challenges? (Mpls, Cleveland, Boston, Sacramento) How has the subprime and foreclosure crisis affected immigrants, especially low-income and undocumented immigrant homeowners? What has the impact been on the urban Indian population (data)? How might the homeowner/rental balance shift and affect rental markets?
Study of North Minneapolis (M. Ireland) Subprime lenders did disproportionate lending in the area Vast majority of foreclosed mortgages issued through mortgage broker CRL study: pay on avg. $35,000 more over life of loan vs. sub-prime mortgage through retail lender Prime lenders disproportionately absent Foreclosed homeowners owed 4-5% more than the original principal balance
Under-reported, disproportionate affect on rental families with school-age children Rental properties accounted for 61% of foreclosures 40% of foreclosed households had children in Minneapolis public schools; 60% were African American Yet foreclosure prevention only for homeowners Properties lose value and endanger neighbors Averaged ten months to sell at average loss of $65K 83% of properties had 911 calls post-Sheriff’s Sale, with an average of 8 calls per property
Ensure that programs and policies responding to the subprime crisis reach those most affected How do we assess the current federal policy response with respect to fair housing and civil rights goals? (TARP, NSP2)
Federal programs designed to mitigate the effects of the financial crisis must meet their obligations under the Fair Housing Act “All executive departments and agencies shall administer their programs and activities relating to housing and urban development (including any Federal agency having regulatory or supervisory authority over financial institutions) in a manner affirmatively to further the purposes of this subchapter and shall cooperate with the Secretary [of HUD] to further such purposes.” – Sec. 808(d)
TARP scope close to $ 3 Billion (OSIG Report) TARP funds relate to housing and urban development TARP funds must be spent in a way to affirmatively further fair housing
Funded by $75 Billion in TARP funds Incentivizes mortgage loan modifications to keep families in their homes Civil rights & consumer groups advocacy resulted in the directive to collect and report data on race, ethnicity & sex of applicants for HAMP loan modifications
Make greater use of principal reduction to achieve affordability Make interest rates reductions permanent, not short term Increase transparency of decision-making process w/r/t eligibility for loan modifications and the terms of those modifications Expand program to all loans serviced/ owned by past, current, or future TARP recipients
Offer responsible, sustainable loans that enable people to choose where they want to live Assure that homes are marketed without discrimination (including REO homes) Sponsor foreclosure prevention efforts that affirmatively further fair housing and do not discriminate Finance fair economic development and mixed- income housing
CAP recommendations: No more TARP $$ until special inspectorgeneral for TARP “gives a passing grade on fair lending practices;”Pass CFPA
Similar policy feedback from small policy roundtables: Seattle-Portland Austin, TX Detroit, MI Oakland, CA New Orleans, LA Federal policy and advocacy consensus building meeting in Washington, DC (November) Final policy and advocacy “blueprint” – all papers & blueprint publicly available (website coming)
Fees Janneke Ratcliffe. “A Bridge to Somewhere: the road from predatory lending to good financial services for all Americans.” August 5, 2009. American Prospect. GAO. “Federal Banking Regulators Could Better Ensure That Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts.” January 2008. http://www.gao.gov/new.items/d08281.pdf FDIC. “Study of Bank Overdraft Programs.” November 2008. http://www.fdic.gov/bank/analytical/overdraft/ Center for Responsible Lending. “Quick Facts on Overdraft Loans.” April 9, 2009. http://www.responsiblelending.org/overdraft-loans/research-analysis/ Leverage data Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances. Federal Reserve Board, Survey of Consumer Finances, February 2009. Page A37.