Owning a home is the essence of the American dream. It represents economic achievement and security. The dream holds true across races, ethnicities, and genders. But the implementation does not.
We know society has historically worked against people of color. Examples include a century of legal slavery and exclusion from participating in wealth-building programs like the 1862 Homestead Act and the 1944 GI Bill. These programs gave millions the assistance and tools needed to improve their economic lives. A strong, flourishing middle class, a hallmark of America’s prosperity, arose as a result.
Today, in a new millennium, millions at the lower end of the economic spectrum face a new obstacle: the sub-prime mortgage crisis.
The crisis occurred because a financial product intended for limited use has been disproportionately marketed to many. The crisis has ruined many economic lives and communities, and cost the financial institutions that underwrote massive numbers of shaky sub-prime loans hundreds of billions. These losses triggered a global economic crisis, the end of which is not in sight. The next chapter could well be about a deep US recession.
The resulting human cost is less often mentioned. Yet, the targeting of people of color and poor people as the best candidates to sign up for one of these loans is emerging as an indisputable and reprehensible fact. In the hands of the mortgage lending industry, sub-prime loans became predatory loans–a faulty product that was ruthlessly hawked even though financial institutions were aware of its defects. Even a surface check of the demographics shows that, in city after city, a solid majority of sub-prime loan recipients were people of color.
Hungry for new and different product, the financial services industry added features to sub-prime loans–exploding adjustable rates, balloon payments, penalties for early re-payment–that hobbled their recipients financially and made it unlikely that they would be able, after a brief honeymoon period, to repay the loans at all.
A deeper look into the crisis reveals that the sub-prime lending debacle has caused the greatest loss of wealth to people of color in modern US history. The estimate is that, so far, blacks have lost between $72-83 billion; Latinos, $75-98 billion.
There is also a spillover effect from the wholesale writing of bad loans: communities are torn apart. As one house after another in a neighborhood goes vacant, squatters move in, crime spikes, local stores close. The value of other people’s houses in the vicinity, even those who have not taken out sub-prime loans, deteriorates by thousands of dollars. The local tax base erodes, since fewer people are living there and paying taxes. This in turn leads to revenue shortfalls which mean budget cuts in public services, teachers, police and firefighters, repairs to bridges and schools, and other government activities that offer residents quality of life.
But the government has remained silent and inactive in the face of the crisis. There are, however, things that can be done.
Just as rules have favored one group or another throughout US history, so can rules now help crisis victims regain productive lives, wealth, and homes. Residents and their government, working together, can alleviate the crisis with new rules like regulating the mortgage industry, federal investment in financing homes, lowering the cap on the mortgage deduction, providing incentives for developers to build affordable homes, and dedicating federal estate tax revenues to housing disaster relief.
The hundreds of billions in short-term gains reaped by the financial industry didn’t even last as long as ice cream in the sun. But cleaning up the mess they made will take the taxpayers and their government a long time.