Where Did the Water Come In?

Katrina Vanden Heuvel, The Nation, February 20, 2008

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In 2005 and 2006, over 50% of all loans made to African-Americans, and over 40% to Latinos, were subprime—compared to only 19% of white borrowers. Martin Gruenberg, vice chairman of the Federal Deposit Insurance Corporation (FDIC), said at the Rainbow PUSH Coalition’s Wall Street Economic Summit in January, “Only one-sixth of this differential could be accounted for by the ability of the borrower.” Analysis of Home Mortgage Disclosure Act (HMDA) data shows that African-Americans and Latinos in New York City, Boston, Washington, Philadelphia and other cities were two to three times more likely to have subprime, high-cost loans than white borrowers with similar incomes and loan amounts.

The New York Times has reported on two neighborhoods in the Detroit area—one 97 percent white with a median income of $51,000, another 97 percent African-American with a median income of $49,000. In 2006, 17 percent of the loans made in the white neighborhood were subprime, compared to 70 percent of the loans in the predominately African-American neighborhood. Illinois Attorney General Lisa Madigan recently pointed out on National Public Radio, “. . . An African-American earning more than $100,000 was more likely than a white person who earned less than $35,000 to be put in a high-cost, [subprime] loan. .&nbs;.&bnsp;. Clearly there is discrimination going on.” The Times also reported that “. . . around 90 percent of subprime loans originated between 2004 and 2006 carried exploding adjustable rates. Some 70 percent of subprime loans have prepayment penalties, versus 2 percent of prime loans. . . .” Those pre-payment penalties made refinancing impossible for hundreds of thousands of people. “Yield-spread premiums” also paid kick-backs to brokers for steering borrowers into high-priced loans.

Officials at the Department of Housing and Urban Development (HUD) point out that there is no uniformity in how loan documents spell out the terms of loans, and some are woefully inadequate. The Times also reported that “many lenders peddled the most abusive and costly loans to unsophisticated, first-time home buyers. Known as ‘affordability products,’ the mortgages generated big commissions up front and were designed to require refinancing later on—which included yet another round of luscious fees for lenders. With refinancing no longer an option, it is becoming obvious that these loans were designed to fail.” Madigan told NPR, “I have had hundreds of people come to our office once they realized that they were in one of these high-cost subprime loans… telling us that they did, in fact, ask ‘Is this a fixed-rate loan?’ They were told yes, only to find out two or three years later it was an adjustable rate loan. I’ve had people tell us, you know, ‘we told them that our income was only $2,000 a month. . . .’ [But] we find when we look at the documents it was written down [by the lender] as $7,000, $9,000 a month. So people were being put into loans in spite of the fact that they were . . . giving the correct information. And it is all because of the fact that the brokers and the lenders were receiving incentives, in large part because there was just this demand on Wall Street for these mortgage-backed securities.”

“Nobody seemed to care because of who was profiting, on the one hand, and who was being exploited on the other,” Jackson said. “But now the water is—like the Titanic—the water is up around the deck where the big people hang out. But where did the water come in? The water came in at the bottom of the ship. The poor always pay more for less—for cars, goods and services, insurance, food, banking money. This time, however, it’s affecting the whole economy, that’s what is different about this. Again, if the government had not allowed the rich to get richer at the expense of the vulnerable you wouldn’t have this crisis.”

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A Democratic Congress hasn’t turned a blind eye to these accounts of predatory lending and the lack of regulation that invited it. In the House, both the Subcommittee on Financial Institutions and Credit and the Domestic Policy Subcommittee (chaired by Congressman Dennis Kucinich) have held hearings on predatory lending in the past year. Both Sandra Braunstein, Director of Consumer and Community Affairs at the Federal Reserve, and Chairman Sheila Bair of the FDIC, said on the record that their institutions have used HMDA data to discover patterns of discrimination and passed it along to the Department of Justice for prosecution.

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This metastasizing crisis, Jackson argues, needs to be seen as part of the continuing struggle for racial equality. But both journalists and economists have been slow to admit that lack of civil rights enforcement plays a major role in this financial collapse. “That’s the whole problem with the popular idea that we’re going to ‘transcend race,” he said. “You can’t transcend race, you’ve got to remedy the race…. Transcendentalism does not lend itself to racial remedy. We all want to get beyond a sore, but you must take the glass out and the inflammation out, and let it heal. Then you get beyond it. The Great Society sought not to transcend it, but to address it, through a plan to lift up the bottom. After slavery, it was Reconstruction. We seek to heal this, not to transcend it.”

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Jackson sees these same dynamics at play in the subprime crisis. “We do not have the dogs—that symbolism as a war state—but we do have what we call structural inequality. We’re free but unequal, free and unequally protected by law. If freedom is the absence of barbarianism, and the absence of indecency, then equality is the presence of justice.”

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