Monday, February 4, 2008

Reverse Redlining: Foreclosing the American Dream

By Charles Patton, Research Assistant at the Kirwan Institute

“Financial apartheid,” “foreclosures meltdown,” and “Cleveland’s Katrina” are just some of the euphemisms that have been used to describe the devastating result of a recent surge in subprime lending that has resulted in a spike of foreclosed homes.
Subprime loans are often provided for borrowers who have deficient credit histories. These loans have higher interest rates than prime or conventional loans to compensate for this credit risk. Reverse redlining occurs when lenders target particular groups including minorities and the elderly. In “The New Redlining: Predatory Lending in an Age of Financial Service Modernization,” Gregory Squires notes that the neighborhoods targeted most often are predominantly African American.
Gregory Squires and Charis Kubrin argue in “Privileged Places: Race, Uneven Development and the Geography of Opportunity in Urban America” that the recent surge of reverse redlining is a result of conventional banks leaving low-income, minority areas, which led to an increased presence of fringe banking institutions (e.g., check-cashing outlets, payday lenders, pawn shops, etc.). Additionally, the authors argue that the conventional banks that remain in these neighborhoods do not effectively market to low-income, minority households.
However, some argue that reverse redlining is simply an attempt to assist those with poor credit histories purchase a home. It is neither new nor uncommon to increase the interest rate for those who are considered a credit risk. However, Squires argues that those who take this stance overlook that 30% to 50% of these African American borrowers could qualify for prime loans. At the 2000 Rainbow/Push Wall Street Conference, Franklin D. Raines, CEO of Fannie Mae, stated that approximately half the borrowers in the subprime market have credit scores to qualify for prime market loans. A study funded by the U.S. Department of Housing and Urban Development (HUD) found that blacks were paying more interest than they should. This is partially a result of racial disparities in referrals to lender’s prime borrowing divisions, regardless of income or credit history.
These subprime borrowers can also fall victim to predatory tactics. This includes structuring payments so they do not even cover interest costs, excessive fees, basing the loan on the equity of the home instead of the borrower’s ability to repay, etc.
There are several consequences of this financial phenomenon. Members of these targeted communities often lose a considerable amount of money. Squires and Kubrin provide an example of how this occurs. They argue that because of increased interest rates, “cheque-cashing customer with an annual income of $17,000 would pay almost $250 a year for services that would cost just $60 at a bank.” As years pass, this pushes impoverished families further into poverty. Foreclosures often result from these subprime loans and predatory lending. As a result, because most wealth is accrued through homeownership, these practices strip a considerable amount of wealth from potential black homeowners. Additionally, unlike in the suburbs, foreclosed homes in low-income areas often become abandoned buildings. According to Immergluck and Smith’s “The Impact of Single-family Mortgage Foreclosures on Neighborhood Crime,” these buildings provide havens for criminal behavior. As the number of abandoned buildings increases, fewer residents are present to deter crime. Subsequently criminals flock to these communities because there is less chance they will be caught for their illegal activities. Thus, these discriminatory and predatory lenders are not only stealing from the poor but they are essentially leaving them for the wolves.

5 comments:

  1. very enlightening essay!

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  2. One huge problem is that there are no regulations or rules as to who can and cannot work as a loan officer. I have seen individuals who have few morals and really just want to build their own wealth working as loan officers. Much of the problem stems from this fact. These Mortgage companies must have a more extensive screening process!

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    and if I cant can I buy a house? Also I am familiar with the term surety bond so is a mortgage bond just a guarantee I will pay on time or is it more?

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