Live From Main Street
The Housing Crisis: Not Just Subprime Anymore

by addiestan, The Media Consortium: Fri., Jul 11, 2008
Filed under: Media Consortium: journalism project

Marking National Housing Crisis Investigation Week, The Media Consortium examines Miami as a case study at the leading edge of a market disaster. Tomorrow, the Consortium’s next in its series of Live From Main Street town hall programs will take place in Miami’s Lyric Theater: “Magic City, Hard Times: How is Miami Facing the Economic Crisis and Working Toward a Sustainable Future?”

If you had any doubt of a housing crisis in the U.S., listen to the word from the horse’s mouth. According to RealtyTrac, a California-based firm that monitors foreclosures for investors, the national foreclosure rate for June 2008 exceeded by more than 50 percent the rate for June of last year. A foreclosure notice was delivered last month to one in every 501 U.S. households, RealtyTrac reported.

Yet the crisis is deeper than those numbers suggest. While the burst of the housing-market bubble is nearly always pegged to the surge in risky subprime mortgages made to under-resourced borrowers over the course of the last decade, the bust is affecting people who never borrowed a dime.

Neither borrower nor lender — but huring

“[T]he misconception is that the [housing] crisis is just a crisis around people who took loans,” said Gihan Perera, executive director of the Miami Workers Center. “On one level, that is clearly…where the bomb directly hit, in that there are tons of people who are losing their homes through foreclosures…but the ripple effect of the entire credit crisis is actually much bigger than that.”

In Miami, for instance, the foreclosure epidemic encompasses not only single-family homes, Perera explained, but apartment buildings, as well. “So the banks then are either trying to get rid of those buildings, or hold on to them at the least cost until they can get rid of them,” leaving tenants in the lurch. And with a flood of people losing their homes now entering the rental market, said Perera, who will be featured as a panelist at Live From Main Street program, rents are climbing.

The RealtyTrac report released yesterday names Florida among the five states with the highest foreclosure rates.

The crisis is reaching well into the middle class. In Florida, it’s not just urban centers like Miami that are hard-hit, but recently-built, upper-middle class boom-built communities like Celebration in the Orlando area, according to an investigation by a local television news operation, 2 News of WESH-TV. In their Central Florida region, WESH reported, “the most homes in foreclosure are in zip codes that didn’t exist five years ago.” But, regardless of income, communities of color appear to be the hardest hit, especially by the high level of defaults on subprime loans, which charge higher rates of interest than do prime mortgages. Often the rate for the first year or two of the loan is low, but then hikes up substantially after that.

Communities of color feel the pain

“All the estimates are that blacks and Hispanics will be hurt much more by the decline in housing fairly significantly,” said Algernon Austin, Ph.D., director of the Race, Ethnicity, and the Economy program at the Economic Policy Institute, a Washington, D.C., think tank. “United for a Fair Economy estimates that it will be, basically, one of the greatest losses of wealth for African-Americans and Latinos that we’ve seen in, you know, probably the last hundred years.”

For those who took the subprime loans, the crisis is particularly acute. The UFE report to which Austin refers asserts that “the subprime mortgage crisis will cause African-Americans to experience wealth losses of between $72 billion and $93 billion over its duration. For people of color in general, the racial bias of subprime mortgage lenders accounts for nearly double the wealth losses for people of color as for whites.”

The ten regions listed in the RealtyTrac report that show the highest levels of
foreclosures are in either California or Florida, states with large communities of color. In the 2000 census, Florida ranked number two among the fifty states for the size of its African-American population. At least 20 percent of its inhabitants describe themselves as Latino or Hispanic.

Women targeted by subprime lenders

Women are extremely hard-hit by the crisis, and discrimination may well be in play. In a 2006 study, the Consumer Federation of America looked at (PDF) who received high-interest subprime mortgages, finding that “women are more likely to receive subprime mortgages of all types regardless of income… For purchase mortgages, women earning double the median income are 46.4 percent more likely to receive subprime mortgages than men with similar incomes.”

Add race to gender, and you find that African-American women, who are more likely to head single-parent households than white women, are the suffering the worst of the mortgage meltdown — especially, perhaps, middle-class black women. According to the Consumer Federation study, “Upper-income African-American women are nearly five times more likely to receive subprime purchase mortgages than upper-income white men, and upper-income Latino women are nearly four times more likely to receive subprime loans than upper-income white men.”

Black women, as always, were the last people into the musical chair game,” said Perera, “and then the chair was swept [out from] under them.”

House of cards

Although the crisis now extends beyond subprime borrowers to people at all levels of investment in the housing market, it was the subprime frenzy that tipped the market, said Wilhemina Leigh, Ph.D., a senior researcher at the Joint Center for Political and Economic Studies in Washington, D.C. “Nobody was regulating the Wall Street investment banks” that bought up the the bad debt from the subprime mortgage brokers and packaged that debt in securities. “Consequently they bought whatever they felt like buying, whatever looked good. It was really like the wild, wild West…”

Add to that a lack of oversight of the subprime brokers themselves, and a crisis was born. “[J]ust given that there were large pockets of people of color who just didn’t understand how the process worked, they were a ready-made set of pawns to be used, and to be taken advantage of in many cases by brokers who moved into these areas that didn’t have banks or credit unions and set up their shops there. They were the only game in town, so if you wanted a mortgage and walked through their doors, no matter what type of credit score you might have had, even if you qualified for prime, you weren’t going to get that because the only thing these shops knew how to do was subprime mortgages.”

In areas like Miami, the proliferation of subprime mortgages helped fuel speculation and an unsupported real-estate boom.

Wall Street, developers get off easy

While Wall Street has taken a hit on the housing bust, it’s nothing compared to the price paid by Main Street “The way our laws are currently structured,” Leigh explained, “a person who buys a security that ’s backed by a pool of mortgages does not have any liability once the…underlying mortgages go belly-up.” Wall Street walks away, leaving Main Street holding the bag. Last November, in a report issued jointly by three nonprofits that advocate affordable housing, author Kevin Connor wrote, “The big five investment banks are projected to pay out $38 billion in bonuses this year (2007) — even more than last year.”

Even in the face of a full-blown housing disaster for working people in his city, said Perera of the Miami Workers Center, politicians are looking to keep developers in the black while cutting back on social services for everyday Miami-dwellers. He cites a $3 billion project handed to large developers to build a baseball stadium and a tunnel under the Port of Miami. “We couldn’t get a jobs program to dig ditches, and kind of help working-class people out, “said Perera. “We’re about to give $3 billion to developers to dig a tunnel.”