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Indiana industry appointments update - 8/1/2007

Jul 31, 2007

Should we have a foreclosure moratorium?Peter G. MillerForeclosure moratorium With the rapid increase in foreclosures nationwide, it follows that there would be a call for a foreclosure moratorium. Now such a call has come from several of the nation's leading civil rights organizations—organizations asking for a ban on foreclosures for the next six months. Sub-prime loans are tailored to meet the needs of borrowers with weak credit. Typically, that means individuals with limited incomes and, in our society, those with limited incomes tend disproportionately to be minority borrowers. • U.S. Census Bureau figures showed that as of 2000, Hispanic households had a median income of $33,400. African-American median household income was $30,400 and white, non-Hispanic households earned $45,900. • In 2000, according to the U.S. Census Bureau, the latest year for which figures are available, the median white, non-Hispanic net worth was $79,400. In comparison, the net worth for African-American households was $7,500, and, for Hispanic householders, the total was $9,750. • "Most rental property owners," said the U.S. Census Bureau, "were white (85 percent). Black or African-American individuals owned eight percent of multi-family properties, and Asian or Pacific Islanders owned four percent. Hispanic individuals (who may be of any race) owned six percent of multi-family properties. This disparity in ownership between whites and minorities grew larger as the property size increased. Whites owned 93 percent of large multi-family properties, while blacks and Hispanics owned only one and two percent, respectively." • "Black and Hispanic borrowers taken together are much more likely than non-Hispanic white borrowers to obtain credit from institutions that report a higher incidence of higher-priced loans," reported the Federal Reserve. "On the one hand, this pattern may be benign and reflect a sorting of individuals into different market segments by their credit characteristics. On the other hand, it may be symptomatic of a more serious issue. Lenders that report a lower incidence of higher-priced products may be either less willing or less able to serve minority neighborhoods. More troubling, these patterns may stem, at least in part, from borrowers being steered to lenders or to loans that offer higher prices than the credit characteristics of these borrowers warrant." What these numbers reflect are generations of racial, religious and ethnic discrimination. Millions of people alive today plainly remember such things as legal segregation, college applicants denied admission because of religious background and "gentleman's agreements" designed to limit neighborhood integration and equal opportunity. Millions today remain impacted by prior discrimination because past generations had less wealth and fewer opportunities to pass along. For instance, if your grandparents owned a home, that could be the source of intergenerational wealth. If your grandparents could not own because financing was unavailable to them as a result of discrimination, then the value of that property could not be passed through to the next generation—wealth that might have helped someone buy a home, start a business or finance a college education. In terms of mortgage lending, "redlining" was a common practice within recent memory—a technique designed to restrict, if not eliminate, the availability of credit in minority neighborhoods. In a speech last month, Federal Reserve Chairman Ben Bernanke explained that redlining may actually have been an outgrowth of federal policy. Said Bernanke, "The term 'redlining,' which refers to the practice of designating certain lower-income or minority neighborhoods as ineligible for credit, appears to have originated in 1935, when the Federal Home Loan Bank Board asked the Home Owners' Loan Corporation to create 'residential security maps' for 239 cities that would indicate the level of security for real estate investments in each surveyed city." "The resulting maps," Bernanke continued, "designated four categories of lending and investment risk, each with a letter and color designation. Type 'D' areas—those considered to be the riskiest for lending and which included many neighborhoods with predominantly African-American populations—were color-coded red on the maps, hence the term 'redlining.' Private lenders reportedly constructed similar maps that were used to determine credit availability and terms." The civil rights groups now seeking a foreclosure moratorium estimate that "40 percent of Latino families and over half of African-Americans who receive home loans get higher-cost mortgages—predominately, sub-prime loans." But despite the disproportionate impact of foreclosures on minority borrowers, the groups seeking a foreclosure standstill are unlikely to be successful at this time. The mortgage industry, for one, opposes a foreclosure moratorium. "Forbearance," said John M. Robbins, CMB, chairman of the Mortgage Bankers Association, "is certainly an effective tool in some cases, but it is not a sustainable long-term solution. If we have learned one thing coming out of the Katrina and Rita disasters, it is that blanket policies rarely have the desired blanket effects. Each loan is an individual transaction and situation, one which needs to be addressed individually between the lender and the borrower." What's really being played out here is the collision of two powerful forces—millions of aggrieved borrowers versus well funded lenders with powerful lobbyists and big political action committees. The congressional hearings now underway in Washington, D.C. and the plea for a foreclosure moratorium are only the first steps in this process. While civil rights groups will not prevail with demands for a foreclosure moratorium at this time, if interest rates rise and foreclosure numbers increase, then the odds will change in their favor, especially as the election season nears. "The politics of foreclosure are clear," said Jim Saccacio, chairman and CEO of RealtyTrac. "Foreclosure is not a political issue as long as it's rare. But once foreclosure numbers increase—and once neighborhood values begin to fall as a direct result—then foreclosures become a widespread voter concern. "History tells us," Saccacio continued, "that there have been any number of state and federal foreclosure bans in the past. In every case, such bans reflect public worries which have been converted into public policies. Given the growing number of foreclosures, there's little reason to believe that such bans could not arise again." Peter G. Miller is the author of "The Common Sense Mortgage" and is syndicated in more than 110 newspapers. He may be reached at [email protected].
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