Latinos, Blacks and the Home Mortgage Foreclosure Crisis

A WCVI White Paper

The End of the American Dream for Blacks and Latinos: How the Home Mortgage Crisis is Destroying Black and Latino Wealth, Jeopardizing America’s Future Prosperity and How to Fix It

By Dr. Raul Hinojosa Ojeda, Albert Jacquez, and Dr. Paule Cruz Takash

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Executive Summary

As the United States slips deeper into its most severe economic downturn since the Great Depression, a crippling blow to families and the long term health of the nation’s economy will occur through massive foreclosures and the spillover destruction of household wealth. Recent foreclosure projections estimate a total of 2.4 million homes lost in 2009 and 9 million lost during 2009-2012. Goldman Sachs estimates a total of 13 million foreclosures on all types of loans through 2014. These projections are based on the mountain of mortgage debt awaiting resets over the next few years, including 2 million more homeowners with sub-prime mortgages scheduled to be reset in early 2009.

Left unaddressed, the housing foreclosures caused by mortgage resets, rising unemployment and crashing property values may trigger catastrophic failure in the housing industry, affecting as many as 4 million more market rate mortgages. It could also cause additional financial sector crises, while increasing unemployment and business failures in the closely related home building, mortgage and appliance sectors. A multi-trillion dollar spill-over impact is also likely as foreclosures in 2009 will cause 69.5 million neighboring homes to experience a devaluation of $501.9 billion in total.
Over the next four years, foreclosures could affect 91.5 million nearby homes, reducing property values by $1.86 trillion in total, or $20,300 per household. As estimates of foreclosures from late 2008 to the end of 2009 have increased from 1.1 million to 2.2 million, so have the estimated total loss of housing wealth for homeowners, increasing from $2.2 trillion to $2.7 trillion.

The historic significance of this momentous economic crisis is not only the overall size of this housing market impact, but also the central role played by long-standing inequitable practices and policies that have seriously limited economic opportunities and wealth building for non-white groups in this country. The subprime targeting of Blacks and Latinos within the housing market is one more recent example of such practices and policies. What Americans of all backgrounds must come to appreciate is that the current unequal impact of the crisis on Black and Latino homeowners severely threatens the future recovery of the entire national housing market, and thus, the economic health of the country.

The Black and Latino experience is crucial for understanding both the origins and resolution of the current crisis in a way that establishes a prosperous middle-class based economic recovery. In essence this crisis raises the fundamental question concerning the future viability of the United States as a middle class economy in the 21st Century; one with the ability of creating, expanding and transmitting wealth not only between generations but in the context of a dramatic changing demographic transformation.

The secret of America’s 20th century success was the ability to turn the Great Depression into a recovery opportunity by establishing mechanisms to enable working families to begin owning homes and thereby build assets over time. These mechanisms created a generation of first time homeowners with the ability to create the wealth needed for their families to become economically secure, to prosper and to pass on assets to succeeding generations that could further build on this wealth.

The most ominous threat to the future recovery from the current crisis is that the concentrated impact of sub-prime foreclosures on Blacks and Latinos is occurring just as these “minority” populations are emerging as the new majority of next generation homebuyers poised to replace an aging primarily white homeowner population in the coming decades. At this critical juncture, lack of decisive action is not an option. We must also avoid the false dichotomy that maintains we should give up on supporting homeownership in favor of alternative urban design. Abandoning this nation’s commitment to affordable homeownership is also not an option either socially or politically, and it will only hasten a deflationary spiral while destroying the best option we have for financing the next feasible wave of sustainable regional development in this century.

Like the post-depression federally supported housing and mortgage programs that ushered generations of white home owners into the middle class, the United States again needs new mechanisms for financing mortgages for

the housing of the future (including higher density, energy efficient alternative housing development). Of immediate importance for this agenda is the halting of housing wealth destruction and its disproportionate impact among Blacks and Latinos.

Second, we must deliver low cost, long term financial products (not high cost and unsustainable prime loans) to the next generation of potential homeowners. Creating the same economic opportunities for the next generation of homeowners is not only critical to maintaining the economic prosperity of our aging population, but is essential for America’s 21st Century sustainable economy and middle class democracy.

Action Plan to Save Families and Homes, Return the Economy to Health

Given the dimension of the policy challenges ahead, immediate action is urgently needed both inside and outside Washington, DC by a variety of broad-based coalitions. As the mortgage foreclosure crisis has grown, a number of Latino and African American advocacy organizations have urged federal policy makers to address the problem. At the 2007 National Latino Congreso, delegates from 300 endorsing organizations and individuals from 15 states passed a resolution urging the Congress and the Federal government act on the problem. In October 2008, the National Black Latino Summit, which was lead by the Conveners of the National Latino Congreso, Policy Link and over 30 other national Latino and African American advocacy organizations, issued a “Call to Action” on the housing crisis. Numerous other Latino and
African American organizations and leaders have identified the housing crisis as one of the most important issues facing the nation today. These proposals echo and augment the ideas of Sheila
Bair of the FDIC with contributions from “Fix Housing First”, Former Texas Comptroller John Sharp, Barron’s Magazine, the National Latino Congreso, the National Black Latino Summit, and many others.

1. Mortgage Foreclosure Relief: Allow bankruptcy judges to modify mortgage terms to help homeowners avoid foreclosure and stabilize home values.

2. Affordable Down Payments for New Homebuyers though Homebuyers’ Tax Credit: Enact a permanent $130 billion Home Buyer Tax Credit, similar to the earned income tax credit, that can be monetized and used for down payments of new home purchases ($10,000 to 22,000 per taxpayer as a percentage of the price of the home). This would stimulate home purchases and help the next generation of Latinos and Blacks attain the American dream of homeownership.

3. Sustainable Mortgages for Next Generation Homeowners: Authorize $100 billion to Fannie Mae and Freddie Mac to allow refinancing of at risk private sector mortgages at a 4.5 percent interest rate in 2009. This would help create a generation of minority homeowners to share in the wealth building opportunities that have historically characterized homeownership.

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