How Banks Targeted African-Americans With Predatory Mortgages
Racist mortgage lending in the 1900s, heading into the 2008 financial crisis, and beyond
For decades, some banks systematically refused to lend to African-Americans with good credit, forcing them to predatory subprime mortgage lenders. On discovery of this tactic, the government pushed the banks to lend to African-Americans on the same basis as they lent to Whites. After the 2008 Financial Crisis, the banks seized on an opportunity to spin this government initiative as if it encouraged loans to the poor— and thereby have deftly misdirected voters to miss what the banks actually did at the time…
The Government Never Encouraged The Banks To Lend To The Subprime Market
Certainly, no one would quibble with the charge that it’s stupid to encourage banks to lend to people who cannot pay them back. By this allegation of alternative fact, the banker lobby has convinced most of the American people that the government actually did such a stupid thing.
Former New York Mayor Michael Bloomberg can be fairly considered a voice of corporate America. He blames the 2008 crisis on this government encouraging of the banks to lend to the poor. Here are his exact words:
“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp… They [governments] were the ones that pushed the banks to loan to everybody. And now we want to go vilify the banks because it’s one target, it’s easy to blame them and Congress certainly isn’t going to blame themselves.”
Indeed, many Democrats have accepted that the government contributed to the crisis by encouraging loans to the impoverished masses.
Let me show you the racism that is hidden in this claim.
When asked for proof of this government encouragement, big government critics point to the Community Reinvestment Act (CRA) of 1977. Back in 1934, the Federal Housing Authority (FHA) came up with a most curious credit screening plan. Instead of evaluating prospective borrowers on the universally used and time-tested basis of their personal credit scores, applicants would be first filtered by a group test. If they lived in a certain area, that was it for them. Even if they had the highest credit score possible, too bad. No need to look further.
The FHA had one of its agencies create maps of many cities outlining areas according to “security,” which means an educated guess as to the likelihood of getting repaid, including by seizing and selling the house. The worst area was delineated in red giving birth to the new banker term “redlining.” Banks followed the idea and created their own maps as well.
No need to guess which areas got the red pen and who lived in them.
If there is any doubt about the intended racism hidden in the scheme, a section of the FHA manual proposing limits on mortgage terms removes it (bolding added):
“Recommended restrictions should include provision for the following:
Prohibition of the occupancy of properties except by the race for which they are intended …Schools should be appropriate to the needs of the new community and they should not be attended in large numbers by inharmonious racial groups.”
Post World War II, even the Veterans Administration used these maps to decide who was worthy of home loans. African-American soldiers who had risked their lives for their country and had good credit ratings were turned aside and forced into higher rate subprime mortgages.
When the Federal Highway Act was created and because the areas that were redlined were so poor, many cities chose to disrupt these areas by running the new highways through them. The residents were displaced and forced to move into different redlined neighborhoods while their homes and businesses were destroyed by the highways.
BTW: Creating redline maps is just another example of the important and invisible power of the civil service. For others see my last article on CEO pay here.
The Detroit Wall
By 1940, the core of Detroit had become predominantly African-American. According to Jeff Horner, a lecturer in Wayne State University’s Department of Urban Studies and Planning, when Whites wanted to expand north, an enterprising developer knew how to pave the way so his purchasers could get FHA approval without hitting any potholes.
He built a wall around the African-American community at Eight Mile Road to keep it from encroaching on his new whites-only development above it.
The Detroit Historical Society says its effects remain: “Along its most impoverished sections, Eight Mile Road has, for several decades, been a destitute, dangerous strip of suffering businesses and broken windows.”
In Detroit, the red line is known on the street as the liquor line. There are few, if any, banks, supermarkets, hospitals or the like on the African-American side of it, but there sure are a lot of liquor stores.
While regular banks were practically non-existent behind the red lines, the unscrupulous and unregulated lenders saw opportunity where government mortgage agencies saw risk. They dotted the landscape like burger joints.
So, from the earliest time of the new prosperity after World War II, African-Americans and Latinos, who had excellent credit, were denied bank loans and sent off to the predatory lenders. The predatory lenders such as contract lenders, subprime lenders and commercial banks, did their part in making certain they wrung every penny of surplus income from these borrowers.
You don’t have to be big to be a predatory lender. One of the most insidious gambits is the contract purchase. Being completely unregulated, it attracts the most unscrupulous of the sharks.
It takes only a small amount of capital. The lender buys the home and resells it on terms that the title transfers only on final payment of the contract. The catch, of course, is that the borrower is unsophisticated and signs a contract with fine print that permits loading on a lot of other charges. And the real interest rate is difficult to calculate.
However, the lender does not want repayment, it hopes for default. (This is the key to making money on the backs of low-income earners.) Then, the lender can pile on loads of other charges. The contract debtor rarely gets out of debt.
The Atlantic published a fine expose on contract sellers and their tactics:
“There was Howell Collins, whose contract called for him to pay $25,500 for a house that a speculator had bought for $14,500. There was Ruth Wells, who’d managed to pay out half her contract, expecting a mortgage, only to suddenly see an insurance bill materialize out of thin air — a requirement the seller had added without Wells’s knowledge. Contract sellers used every tool at their disposal to pilfer from their clients. They scared white residents into selling low. They lied about properties’ compliance with building codes, then left the buyer responsible when city inspectors arrived. They presented themselves as real-estate brokers, when in fact they were the owners. They guided their clients to lawyers who were in on the scheme.”
Then, when the borrowers default, extra and unjustified late and default charges are piled on. These people cannot afford a lawyer to fight. There are absolutely no effective consumer protection laws to help. Faced with the unmanageable and mounting debt, the borrowers often leave in despair. The lenders get the mortgage payments made to date and the house.
Big Time Predators — Private Mortgage Lenders
Private mortgage lenders, such as Ameriquest and Countrywide Financial, large and small, (called shadow banks because they were completely unregulated) used similar tactics but had the advantage of the deceptive variable rate mortgage. This is the one exposed in The Big Short. Recall that the defaults in 2008 started when the teaser rates of about 3% stopped after two years and the higher rates of about 7% kicked in. The hedge fund money manager anti-heroes in the movie knew exactly when the housing market was going to tank by looking at the mortgage terms.
In All the Devils Are Here (Chapter 9), Bethany Maclean and Joe Nocera tell of staff at Ameriquest revealing how it recruited high school grads (presumably because they would not understand what they were doing) and used-car salesmen to man the phones for cold calls to find victims. Researchers identified homeowners who had mortgages coming up for renewal. These were contacted and offered extra money on new “cash-out mortgages.” Borrowers, who could qualify for prime mortgage rates, were tricked into more expensive mortgages by the array of product choices that adjustable rate mortgages (ARMs) could provide. Hidden fees were added to the mortgage debt to be paid at the end (with some 20 years interest added on), so no pain was felt on signing.
When borrowers raised concerns about affordability, the staff had been trained to assure them that they had no worries. The housing market would always rise, and the lender would always be there to give them a new mortgage if needed. There was no risk. Just trust the mortgage lender and enjoy the basketfuls of money.
Employees with the assistance of the lender’s staff would concoct mortgage applications so these NINJA (No Income, No Job, No Assets) customers appeared, on paper, to be good credit risks. According to Bethany and Nocera, one Ameriquest loan officer Christopher Warren posted a rambling online confession claiming that nearly 75% of the applications contained false statements. He said, “a typical welcome aboard gift was a pair of scissors, tape and white out…” (p 52; loc 2707)
Bigger Time Predators — Commercial Banks
Wells Fargo made headlines again a couple of weeks ago as its new CEO got a 38% pay raise. In 2017, the bank admitted to creating up to 3.5 million fake accounts, forcing customers into unneeded auto insurance, and charging mortgage borrowers undue fees. Its present CEO promises reform.
This bank appears to have a long-time culture of taking advantage of customers. Relevant to our topic, in 2009, former Wells Fargo staff filed affidavits in a lawsuit brought by the city of Baltimore against the bank.
“Wells Fargo, Ms. (Beth) Jacobson said in an interview, saw the African-American community as fertile ground for subprime mortgages, as working-class African-Americans were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages…
[Two] loan officers said the bank had given bonuses to loan officers who referred borrowers who should have qualified for a prime loan to the subprime division. Ms. Jacobson said that she made $700,000 one year and that the company flew her and other subprime officers to resorts across the country.
Ms Jacobsen pointed out that these practices took a great toll on customers. For a homeowner taking out a $165,000 mortgage, a difference of three percentage points in the loan rate — a typical spread between conventional and subprime loans — adds more than $100,000 in interest payments.”
A report from the Center for Investigative Journalism, a nonprofit organization founded in 1977, revealed that many banks are still refusing loans to African Americans and Latinos of good credit standing relative to the number of loans granted Whites of the same standing. The banks contacted denied any discrimination. However, there is data in the report so that the reader can judge the banks by their actions and not only by their words.
Racism Gets A New Deal
Now, how can Bloomberg and the banker community turn the CRA into a belief the government forced banks to lend to people with poor credit? The success of that false proposition is a tribute to how little understanding the average voter, including well-meaning politicians, (perhaps Mr. Bloomberg himself) have of how the financial system works. And that is not likely to change. As Michael Lewis, an investment banker for five years, related in The Big Short, the system and terminology is intentionally obfuscated. No university teaches a course on how it works.
Indeed this unfamiliarity has permitted the members in Congress to reinvigorate racism in lending. In March of this year, the Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. There is an argument that the increased standards for regulatory capital for smaller community banks may have been a little too high. However, there is another provision. Banks no longer have to report who got mortgage loans and on what terms at the 50 transaction mark. That limit has been extended to 500. The Atlantic reports that data (p. 8) from the Consumer Financial Protection Bureau , a federal government agency, suggests the legislation might exempt four out of every five such banks and credit unions.
As Ezra Klein of Vox explains, “that is, a change that will make it harder to track racial bias in lending..”