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Why Were These Consequences Unexpected?
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June 01, 2010, 01:39 AM
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From the New York Times:
By MICHAEL POWEL
MEMPHIS — ... Not so long ago, Memphis, a city where a majority of the residents are black, was a symbol of a South where racial history no longer tightly constrained the choices of a rising black working and middle class. Now this city epitomizes something more grim: How rising unemployment and growing foreclosures in the recession have combined to destroy black wealth and income and erase two decades of slow progress.

The median income of black homeowners in Memphis rose steadily until five or six years ago. Now it has receded to a level below that of 1990 — and roughly half that of white Memphis homeowners, according to an analysis conducted by Queens College Sociology Department for The New York Times.

Black middle-class neighborhoods are hollowed out, with prices plummeting and homes standing vacant in places like Orange Mound, White Haven and Cordova. As job losses mount — black unemployment here, mirroring national trends, has risen to 16.9 percent from 9 percent two years ago; it stands at 5.3 percent for whites — many blacks speak of draining savings and retirement accounts in an effort to hold onto their homes. The overall local foreclosure rate is roughly twice the national average.

The repercussions will be long-lasting, in Memphis and nationwide. The most acute economic divide in America remains the steadily widening gap between the wealth of black and white families, according to a recent study by the Institute on Assets and Social Policy at Brandeis University. For every dollar of wealth owned by a white family, a black or Latino family owns just 16 cents, according to a recent Federal Reserve study.

The Economic Policy Institute’s forthcoming �The State of Working America� analyzed the recession-driven drop in wealth. As of December 2009, median white wealth dipped 34 percent, to $94,600; median black wealth dropped 77 percent, to $2,100.

So, at the height of the Housing Bubble, during George W. Bush`s campaign to add 5.5 million minority homeowners, median white wealth was $143k while median black wealth was 9k. Now, that median number is high relevant because the black homeownership rate had started out the last decade a little under 50% and the goal of the Clinton and Bush administrations had been to push it to well over 50%. But black households right at the 50th percentile — the people whom both administrations had wanted to get mortgages — had less than $10,000 in net worth (during the Bubble). In other words, these marginal homeowners had a negligible cushion to ride out a downturn in home prices.

The net worth figures for Hispanic are similar. Not surprisingly, the San Francisco Fed study of hundreds of thousands of mortgages handed out in California during the Bush years shows a foreclosure rate 3.3 times higher for blacks and 2.5 times higher for Latinos.

Now, the higher foreclosure rates for blacks probably weren`t that economically disastrous, since they tend to live in low home price neighborhoods in low price cities, such as Memphis and Detroit. But Hispanics averaged bigger new mortgages than whites on average during some of the boom years since they tend to be concentrated in high-priced California and its spillover states.

The mayor and former bank loan officers point a finger of blame at large national banks — in particular, Wells Fargo. During the last decade, they say, these banks singled out blacks in Memphis to sell them risky high-cost mortgages and consumer loans.
Yeah, that was what the Clinton and Bush administrations encouraged them to do. It`s called community reinvestment, diversity, and a lot of other socially acceptable names.
The City of Memphis and Shelby County sued Wells Fargo late last year, asserting that the bank’s foreclosure rate in predominantly black neighborhoods was nearly seven times that of the foreclosure rate in predominantly white neighborhoods. Other banks, including Citibank and Countrywide, foreclosed in more equal measure....

�The mistake Memphis officials made is that they picked the lender who was doing the most lending as opposed to the lender who was doing the worst lending,� said Brad Blackwell, executive vice president for Wells Fargo Home Mortgage.

Yes, but more lending to minorities, which is what the government, the media, and all right-thinking people were demanding, equals worse lending. It`s called diminishing marginal returns. The way you got to do more lending was to lend to more marginal characters, which is what both political parties were insisting upon.
Not every recessionary ill can be heaped upon banks. Some black homeowners contracted the buy-a-big-home fever that infected many Americans and took out ill-advised loans. And unemployment has pitched even homeowners who hold conventional mortgages into foreclosure.

Federal and state officials say that high-cost mortgages leave hard-pressed homeowners especially vulnerable and that statistical patterns are inescapable.

�The more segregated a community of color is, the more likely it is that homeowners will face foreclosure because the lenders who peddled the most toxic loans targeted those communities,� Thomas E. Perez, the assistant attorney general in charge of the Justice Department’s civil rights division, told a Congressional committee.

Glad to see the Obama Administration is taking such a sophisticated view.
... For the greater part of the last century, racial discrimination crippled black efforts to buy homes and accumulate wealth. During the post-World War II boom years, banks and real estate agents steered blacks to segregated neighborhoods, where home appreciation lagged far behind that of white neighborhoods.

Blacks only recently began to close the home ownership gap with whites, and thus accumulate wealth — progress that now is being erased. In practical terms, this means black families have less money to pay for college tuition, invest in businesses or sustain them through hard times.

There`s a huge history of racial discrimination in housing, much of it outside the South, that has been largely forgotten. For example, it was common in LA in the postwar era for sales contracts to have clauses saying the buyer couldn`t resell to blacks. From the standpoint of economic theory, this was an interesting phenomenon. The restriction in the contract wasn`t in the self-interest of the sellers, who, after all, were moving out. All else being equal, the restriction on the right to resell their new property to the highest bidder hurt the buyers on an individual basis, but, evidently, was in their collective self interest.

Similarly, all else being equal, from a theory point of view, unrestricted neighborhoods should have had the highest appreciation since the sellers could sell to the highest bidders. But, all else wasn`t equal and the opposite happened: restricted neighborhoods appreciated faster, on average, than unrestricted neighborhoods.

Wells Fargo says it has modified three mortgages for every foreclosure nationwide — although bank officials declined to provide the data for Memphis. A study by the Neighborhood Economic Development Advocacy Project and six nonprofit groups found that the nation’s four largest banks, Wells Fargo, Bank of America, Citigroup and JPMorgan Chase, had cut their prime mortgage refinancing 33 percent in predominantly minority communities, even as prime refinancing in white neighborhoods rose 32 percent from 2006 to 2008.
In summary, after decades of complaining that minorities were being discriminated against by not getting enough mortgage money, public discourse has been so lobotomized that the discrimination framework remains the only acceptable way of thinking about the mortgage meltdown, even when it`s clear that a part of the problem was that minorities got too much mortgage money.