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The True American Dream

Home Ownership, the Subprime Lending Crisis, and Financial Instability

 

For most Americans in the United States, home ownership is the fulfillment of a lifelong dream, as well as an essential way to achieve long-term financial security, for themselves and for future generations. But over the past few years, the U.S. has faced a "subprime" lending crisis, in which a flood of high-cost loans has jeopardized home ownership and future prospects for tens of thousands of Americans across the country. In the recent crisis, women and people who belong to racial minority groups have been especially hard hit, worsening longstanding gaps in wealth and economic opportunity.

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Forty-two percent of the net worth of all U.S. households is made up of home equity--the wealth that accumulates when a home increases in value. For most American families, their home is their single largest asset.  Home equity allows them to invest in education, business opportunities, retirement and resources for the next generation (1).

While owning a home may seem possible for anyone with financial means, discriminatory public policies have contributed to current inequities between women and men and between racial groups. Families from racial minority backgrounds and single, widowed and divorced women are still a relatively recent but growing number of homeowners. Who is eligible for credit or a loan, where one could purchase a home, what types of loans and government assistance were available--these have significantly impacted wealth and home ownership opportunities for decades. In many ways, the recent foreclosure and subprime lending crisis has worsened an already unjust situation.

Home Ownership Not the Same for All

Early in United States history, women could not legally own a home, or could only co-own a home with their husbands (2).  Women without male partners rarely had enough income to qualify for home loans--a fact that has changed only recently. 

Similarly, while post-WWII Federal Housing Administration programs made it possible for millions of white Americans with average incomes to own homes for the first time, a government appraisal system tied loan eligibility to race, deeming mixed-race communities a financial risk and making it difficult for most families of racial minority background to qualify for home mortgages (3).  Entire communities were "redlined," meaning that it was harder to get access to loans as well as banking services and insurance. The government did not invest in job creation or public transit in these neighborhoods, and as a result, supermarkets and other businesses were reluctant to build there. Without the opportunity to live in "good" and "safe" neighborhoods, certain families were effectively shut out of home ownership and economic development.

Today, as late entrants to the "game" of homeownership, women and families of racial minority background find themselves with a much lower net worth than their male and white counterparts. Not only do white men have more income, but the incredible rise in property values over the last 50 years has produced an enormous wealth gap, largely because of differences in home equity. By 1995 alone (prior to the current foreclosure crisis), the median white family had over eight times the net worth of the median African American family, and twelve times the net worth of the median Latino family (4).

Wealth differences multiply over time because a family’s net worth is the starting point for the next generation. Those with wealth pass assets on to their children by financing college, lending a hand during hard times, or assisting with a down payment for a home. Economists estimate that up to 80 percent of lifetime wealth depends on these intergenerational wealth transfers. The racial wealth gap--and the head start enjoyed by whites--has grown since the civil rights days of the 1960s, when gender and racial inequities were at the forefront of public debate (5).

Discriminatory Lending Practices

On average, women have higher credit scores than men; however, according to the Consumer Federation of America and the National Community Reinvestment Coalition, women are more likely than men to receive subprime mortgages with higher interest rates and less favorable terms. In 2006, about one-third of women received subprime mortgages, compared with one out of every four male applicants. Remarkably, the disparity between men and women increases with income levels (6).

Women generally report less confidence and knowledge about financial transactions (7). Coupled with deceptive or predatory practices, this lack of financial savvy has made women easier to exploit and more economically vulnerable than ever.

According to Professor Anita Hill, “elderly women are prime targets of refinance and home improvement subprime lenders” (8). On average women live longer than men and often have to contend with rising property taxes and medical expenses while living on fixed incomes (9).

“African-American women, who represent half of African-American home purchase borrowers, are particularly vulnerable,” Hill continues.  "In fact, there is evidence that subprime lenders charge [African-American] women and Latinas higher rates and fees than same-race men and white men, again, regardless of income and across all loan types (home purchase, refinance and home improvement)" (10).  The intersection of race, class and gender in these examples is particularly striking.

What are the consequences of these disparities, coupled with long-term inequities?  Women across ages, races and income levels face obstacles to building financial equity and wealth for themselves and their children. Women’s economic self-sufficiency, something that has been generations in the making, is threatened.  And the children of single mothers start their lives from economically disadvantaged positions, which translate to poorer health, schools and future life prospects.

Women are likely to earn less and spend a higher percentage of their income on housing, so they are also less likely to be able to absorb the cost of escalating, inflated subprime loan payments, and many are in jeopardy of becoming dependent on family and social services.  In addition to foreclosures, many women have seen their savings depleted, their credit history ruined and bankruptcy looming (11).  These financial setbacks are difficult to recover from, especially with lack of access to sound information, counseling and advocacy.

What Can Be Done?

In 1977, legislation known as the Community Reinvestment Act began requiring banks to serve the needs of all communities, including low-income and middle-income communities.  This legislation allocated trillions of dollars to poor and middle-class communities, created jobs, helped expand affordable housing opportunities and promoted small business development (12). Various groups are fighting to extend this legislation to apply to non-financial institutions, many of which were culpable in the crisis, including insurance companies, securities firms, mainstream credit unions and independent mortgage companies. 

While this has been a good building block towards reform, it is not enough to address current problems stemming from decades of discrimination, recent failures and longstanding inequities. Lending practices must be reformed so that subprime interest rates are capped; financial institutions must demonstrate that loans actually benefit borrowers; fair lending laws must be enforced; and predatory practices must be stopped.

Numerous financial literacy programs have sprung up around the country, many aimed at women and racial minority groups, and other targeted community investments have been made. These are helpful, along with other opportunities for individuals to build and retain wealth.  Recent fair pay legislation is a step towards this, and several foundations have experimented with loan underwriting programs that help individuals and families who don’t qualify under current guidelines borrow money.

Community-based organizations such as ACORN, the National Community Reinvestment Coalition, and the National Low-Income Housing Coalition are also working to help individuals who are at risk of eviction and loss of home ownership. Several states have passed foreclosure moratoriums, and advocates continue to help people negotiate new loan agreements, find jobs, and rebuild their communities.

Overall, when people have assets and economic security, they are free to build, create and contribute.  This is the true American dream, and the only way to ensure full participation and provide long-term economic security for all citizens.


REFERENCES:

1. PBS, “Where Race Lives--Go Deeper,” (accessed August 5, 2009).

2. Law Library of Congress, “Married Women’s Property Laws,” (accessed August 5, 2009).

3. PBS, “A Long History of Racial Preferences--For Whites,” (accessed August 5, 2009).

4. PBS, “Where Race Lives--Go Deeper,” (accessed August 5, 2009).

5. PBS, “A Long History of Racial Preferences--For Whites,” (accessed August 5, 2009).

6. Allan Fishbein and Patrick Woodall, “Women are Prime Targets for Subprime Lending,”  Consumer Federation of America (2006).

7. Prudential,  “Financial Experience and Behaviors Among Women,” (accessed August 5, 2009).

8. Anita Hill, “Women and the Subprime Crunch,” Boston Globe, (October 22, 2007).

9. Anita Hill, “Women and the Subprime Crunch,” Boston Globe, (October 22, 2007).

10. Anita Hill, “Women and the Subprime Crunch,” Boston Globe, (October 22, 2007).

11. Anita Hill, “Women and the Subprime Crunch,” Boston Globe, (October 22, 2007).

12. National Community Reinvestment Coalition, “CRA: Vital for Neighborhood, the Country, the Economy,” (accessed August 5, 2009).


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