In April 2000, a coalition of community groups led by The Greenlining Institute called on then-Federal Reserve Chairman Alan Greenspan to crack down on predatory subprime mortgage lending, warning that regulators had been "unduly restrained and late in their reaction to a multibillion dollar crisis." It was the first in a series of unheeded warnings from the communities of color and low-income Americans, who are frequently the proverbial "canaries in the coal mine" signaling trouble in our financial system.
Four years later, in the pages of American Banker, we warned that the problem of predatory and misleading adjustable-rate mortgages had worsened to the point of actually endangering major financial institutions. In light of what's happened since, it's worth revisiting what we said in that July 30, 2004 column:
"There are hundreds of different and often quite complex ARMs. Countrywide Financial Corp., for example, has more than 100 varieties. As Mr. Greenspan told us, it is quite possible that even someone with an advanced degree in calculus would not fully understand the implications of any particular ARM.
We agree. No amount of disclosure is likely to protect low-wealth communities from an ARM disaster, nor is full financial literacy. This time bomb could also damage the financial health of many major banks as well as Freddie Mac and Fannie Mae."
It may be rude to say, "I told you so," but, well, we did. Now, as Greenlining marks our 20th anniversary, we're looking at a housing and homeownership landscape that is nearly as troubling as it was a decade ago. And yet again, the canaries in the coal mine are having trouble breathing.
Cheerful headlines about a housing market recovery and rising prices mask deep troubles just under the surface. Communities of color had much of their wealth wiped out and haven't recovered more than a tiny fraction of what they lost. Compared to whites, they had far more of their assets in their homes, not in retirement accounts or the rebounding stock market. Millions had their credit ratings devastated by forces over which they had little or no control, from predatory subprime loans to unexpected job losses.
So now we face a paradox. On average, home prices are up and sales are beginning to recover. Yet millions of hardworking and responsible American families find the door to homeownership shut by tight credit by credit reporting systems that overlook many forms of responsible and timely bill paying, by the struggle to come up with an adequate down payment even when their income is sufficient to handle a mortgage, and by competition from investors swooping in and paying all cash in hopes of making a quick buck leaving in the dust those who simply want to shelter their family and build a neighborhood.
We can do better than this.
But it won't happen automatically. The institutions with the power to make it happen need to act.
The banking industry must create sustainable mortgage products that will work for responsible families of modest means. Models of such programs exist, but for the most part they're happening only on a limited scale. And the banks that have such loan products need to promote them, not just keep them tucked away in their back pocket as proof of how responsible they are.
Additionally, we desperately need a proactive homeownership policy from the federal government. Such a policy would support housing counseling, work to establish public-private down payment assistance pools, establish credit policies that prevent the recklessness of the bubble without needlessly shutting out responsible borrowers and develop programs to channel REO properties to families and community groups rather than investors and quick-buck artists.
