Analysis Politics

The National Mortgage Settlement: Failing Women and Communities of Color?

Imani Gandy

At first, the $25 billion settlement seemed like a blessing. But it may not be providing enough relief to the communities that were disproportionately affected by the foreclosure crisis.

New research reveals that the Black-white racial wealth gap is widening and is attributable to racial disparities in home ownership. As such, mortgage relief programs are being scrutinized for their failure to address the needs of communities of color.

The $25 billion National Mortgage Settlement at first seemed like a blessing for families decimated by the foreclosure crisis. But according to housing counseling organizations and community activists, the program is not providing relief to the communities of color that were hardest hit by the foreclosure crisis and the predatory lending practices that were the primary cause of that crisis.

The Subprime Lending Crisis

The 2008 collapse of the United States economy was caused by the unchecked casino mentality on Wall Street in the late 1990s and early 2000s, a time when banks enabled investors’ lust for bigger dividends on financial instruments that were ultimately worth nothing. All of this can be tied to one peculiar financial instrument: the mortgage-backed security, or more specifically mortgage-backed securities comprised of loans to borrowers who were unqualified for such loans.

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With the introduction of mortgage-backed securities, the due diligence normally performed by banks to ensure that borrowers had the capacity to repay the loans fell by the wayside because the banks were no longer on the hook if the borrower defaulted on the loan. With the introduction of subprime mortgage-backed securities, banks began to target communities of colors, handing out loans to Blacks and Latinos without regard for borrowers’ ability to repay them.

Writing last year in the Washington Post‘s The Root DC blog, Barbara Reynolds cited research showing that “[o]verall, African Americans and Latinos were 30 percent more likely to receive high-rate subprime loans compared with white borrowers.” Such practices cost these families—and are continuing to cost these families—hundreds of billions of dollars.

Furthermore, these practices disproportionately affect women, especially Black women, as Avis Jones-DeWeever, executive director of the National Council of Negro Women, pointed out in a 2008 article.

The Foreclosure Crisis

When the housing bubble burst, it hit communities of color the hardest. Janis Bowdler, director of the Wealth-Building Policy Project at the National Council of La Raza, told Rewire that “the crisis hit Latino families first, hard, and in waves, continuously,” in part because of economic inequities and in part because “Latino families were concentrated in places where the bubble was the worst: in California, the Las Vegas area, and Florida.”

“Latinos have lost 66 percent of their household wealth,” she said, adding that “the modicum of success with income gains and wealth and asset gains in the Latino community were wiped out.” Meanwhile, “African-Americans have lost 58 percent of their household wealth.” Indeed, between 2007 and 2009 there were 2.5 million foreclosures in the United States, and African-American and Latino families lost their homes in greater proportion than white families, according to a Center for Responsible Lending report.

The National Mortgage Settlement

Negotiated in February 2012 between 49 state attorneys general and five of the nation’s largest banks—Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial—the settlement was viewed as a small but necessary step toward ameliorating some of the damage that the foreclosure crisis caused homeowners.

The settlement made it clear that it was wrong for loan servicers to engage in robo-signing practices, whereby they would perfunctorily sign foreclosure documents without the presence of a notary public and without knowing whether or not the information contained in the documents was factually accurate.

It was intended to provide up to $25 billion in relief to borrowers in crisis as well as direct payments to states and the federal government.

The civil rights community rallied around the settlement, despite a prevailing feeling that “the money wasn’t enough compared to the harm done,” said Bowdler, explaining that activists felt they had to take the deal. “The mortgage settlement was tied to the robo-signing scandal, and so for legal reasons we had a narrow legal hook, and we think we got the most out of it that we could,” she said. “Our thinking was, we’ve got a lot of families that are right on the edge and we need to get the relief that we can to them right now.”

According to Bowdler, the spirit and intent of the settlement was to keep families in their homes. Of the total $25 billion from the settlement, $17 billion was supposed to be available for principal reduction. As the National Association of Attorneys General explained at the time, “The principal reduction program will target homeowners who cannot afford their current payment but could make reasonable payments if the loan amount were reduced.”

Bowdler said there was a concern among civil rights activists that banks would do the bare minimum, rather than do what they should in order to help families stay in their homes. She said that activists knew going into the settlement that it “wasn’t going to solve all the problems that homeowners were facing in terms of foreclosure, but it was supposed to be an influx of relief.”

Unfortunately, it hasn’t been. In the year since the settlement was negotiated, civil rights activists’ fears have proven valid. The banks have barreled through their settlement obligations to reduce principal balances, but communities of color have seen little benefit from these efforts.

“There’s this emerging sense that all of that principal reduction that was supposed to be generated is unaccounted for. We can’t find it and we don’t know who’s getting it, but we’re pretty sure it’s not coming back into our communities,” she said. But she has theories. She describes the prevailing fear that “for efficiency’s sake, banks would go to the suburbs, to the ‘McMansions,’ where they could get large hits on principal reduction.” There was also concern that “in communities of color, where they’ve suffered one hit after the other, one failed program after another, that borrower and homeowner burn-out and fatigue are high.”

Bowdler also expressed concern that the “banks seem to be taking a lottery approach.” “Some people are getting huge principal reduction, and huge balances wiped down the slate, but for every one of them, there are hundreds of family who don’t get it,” she said. In practice, the settlement has set up a system of winners and losers. “Some people are big winners,” she said, “and the vast majority of people don’t get anything.”

At a February 27 summit held by the Alliance for Stabilizing Our Communities, a partnership between the National Council of La Raza, the National Urban League, and the National Coalition for Asian Pacific American Community Development, community leaders gathered to reflect on the progress of the settlement in light of the Office of Mortgage Oversight’s third report and posed questions to the federal monitor, Joe Smith. Namely, they expressed concerns that communities of color are not reaping benefits from the settlement at a level proportional to the harm done. During the symposium, community leaders called for increased transparency in the implementation of the settlement and for increased principal reduction in order to ensure that banks offer relief to individuals hit hardest by the foreclosure crisis.

Unfortunately, it is virtually impossible to determine, at the policy level, how the national settlement is faring. Because the settlement did not put into place any data collection procedures, “there’s no data on who is getting the principal reductions.” All that’s left is anecdotal evidence, like the stories of stricken homeowners in this video released by NCLR.

Principal Reduction and Fairness

One question that looms large in the media relates to the fairness of principal reduction as a policy. “Why should irresponsible homeowners who obtained loans they couldn’t afford receive a bailout?” is a question you often hear.

Arguably, it’s only fair that the banks absorb the costs of their wrong-doing to the communities of color that their practices harmed the most. But Bowdler argues that it is an issue not just of fairness and justice, but also of sensible economics. The Great Recession has caused the unemployment rate in communities of color to skyrocket. So even for families that were not sucked into subprime loan scams and who were able to obtain decent loans, the crisis caused by the subprime loan scam has had a negative effect on them as they try to meet their financial obligations.

“The reason why banks should reduce principal,” Bowdler explained, “is because it makes economic sense for their bottom line as well as for the homeowner. When you take a family who is in a hardship—who is deeply underwater on their loan—and you reduce their principal, it has been shown that this is the most effective way to keep a family in their home and away for foreclosure. And you can do it in a way that costs the bank and the investor less than actually going through a foreclosure.”

We probably won’t understand the full extent of the damage that the foreclosure crisis has wrought in communities of color for years to come, but activists are not giving up. The prevailing concern for community activists, Bowdler said, is “how are we going to save and revive our neighborhoods, keep them safe, keep local economies going.”

“All of these goals are things that we should all care about,” Bowdler added.

Indeed, they are.

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