From the subprime mortgage crisis to the subsequent credit crunch, minorities are feeling the heat.
How well a particular industry fares during any given time has an impact on countless other industries and consumers. Case in point — rising gas prices are affecting everything from airfares to the price of getting a pizza delivered. A similar situation is happening with the wave of home foreclosures as the subprime mortgage crisis has fueled an impending calamity on the student loan industry. And minority borrowers, like minority homeowners, stand to emerge as the biggest losers.
There is speculation that the subprime crisis will result in the greatest loss of wealth for people of color in American history, according to United for a Fair Economy’s (UFE) recent study, “Foreclosed: State of the Dream 2008.”
Disproportionately targeted by predatory lenders, minority communities have naturally been affected disproportionately. Despite similar credit scores and income levels, Black and Hispanic borrowers were more than three times as likely to acquire high-interest loans than White borrowers in cities such as Boston, Chicago and Los Angeles just to name a few, even though the majority of subprime borrowers would have qualified for a conventional prime rate loan, according to a report from the Center for Responsible Lending (CRL).
Nearly 55 percent of subprime borrowers had credit scores worthy of a conventional prime mortgage in 2005. Nevertheless, CRL reports that 2005 data show that high-cost loans, which according to the CRL, “are a proxy for subprime loans,” account for more than half of the loans to African- American borrowers, around 40 percent to Hispanics, compared with only 17 percent of such loans to Whites. Therefore, says the CRL report, “This implies that subprime foreclosures will affect 8 percent of recent Latino borrowers and 10 percent of recent African-American borrowers. By comparison, subprime foreclosures will likely occur among only about 4 percent of recent White borrowers.”
UFE asserts that if adjustable rate mortgage loans had been distributed equitably, Whites would lose more wealth than minority communities. But that has not been the case.
It’s a disturbing reversal of fortunes since Black homeownership reached record levels in the late 1990s. In 1998, homeownership rates of Blacks and Hispanics grew nearly twice that of Whites, according to the U.S. Census Bureau.
“In 2004, Black homeownership was at 49 percent,” says Dr. William Spriggs, chair of Howard University’s department of economics. “Last year it dropped to 46.3 percent. That’s huge, and we will continue to see declines. It would not be inconceivable to see Black homeownership drop down to 44 percent. A decades’ worth of work lost in a matter of years.”
It is particularly disturbing, notes Dr. Wilhelmina Leigh, senior research associate for the Joint Center for Political and Economic Studies, considering how long it’s taken African-Americans to significantly increase their homeownership rates.
In 1940, the homeownership rate for White Americans was 45.6 percent. In 2000, the African-American homeownership rate was 46.3 percent.
“It took African-Americans 60 years to get to the homeownership rate of Whites in the 1940s,” says Leigh, author of “African Americans and Homeownership: Separate and Unequal, 1940 to 2006.”
In 2002, the Bush administration set a goal to close the minority homeownership gap by adding 5.5 million new minority homeowners by 2010 through a variety of initiatives, many of which aimed to assist low-income buyers.
“If we are going to have any kind of growth in the very near future, it’s going require a tremendous amount of government intervention,” says Leigh.
Earlier this year, President Bush signed an economic stimulus bill to increase the size ofthe loans that the Federal Housing Administration can insure, while allowing Fannie Mae and Freddie Mac, the two government- sponsored mortgage companies to purchase larger mortgages from lenders and guarantee or hold as investments.
In March, the administration eliminated restrictions on the volume of mortgages thatFannie Mae and Freddie Mac can hold in their own portfolios.
Most recently, the Senate passed a bipartisan package of tax breaks and other steps designed to help businesses and homeowners weather the housing crisis. The plan, titled the Foreclosure Prevention Act, combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.
“The long-term impact of this crisis is the recovery period. Once you’ve been foreclosed, there is a blemish on your credit report. You are out of the housing market for the next seven years,” says Spriggs, noting that foreclosures lead to declines in property value for neighboring homes and lackluster educational facilities in minority communities.
A 2002 study conducted by the Institute for Policy Studies at Johns Hopkins University concluded that homeownership improves children’s educational outcomes. The most obvious way, of course, is in the form of funding.
The National Center for Education Statistics reports that 28 percent of funding for America’s public schools comes from local property tax. Property tax revenues, which in many areas of the country had grown along with property values, are predicted to remain flat or even shrink during the next few years.
Students Feeling The Squeeze
Just as potential homebuyers and sellers are feeling the squeeze of the credit crunch, students across the nation will soon begin to feel the squeeze as banks and other student loan lenders either stop lending altogether or raise their costs and reduce their benefits.
More than 50 firms have either temporarily or permanently stopped issuing federal student loans, including College Loan Corp., the eighth-largest originator of federally guaranteed loans and Nelnet Inc., one of the nation’s largest loan consolidators. Forty-six of the lenders accounted for 12 percent of the federally backed student loan market, according to FinAid.org.
Sallie Mae, the largest student loan provider in the country, said it is tightening credit requirements for borrowers and pulling out of offering loans to students attending institutions with low graduation rates, some for-profit career schools and community colleges — the types of institutions that minorities attend in significant numbers. Beginning in May, the company will charge fees ranging from $35 for freshmen to a few hundred dollars for graduate students to apply for federal loans.
The exodus of lenders has caused some concern for financial aid officials. Raymond Solomon, director of financial aid at Winston- Salem State University, has already begun to see some changes.
“College Loan Corp. was one of our lenders. It was a big shock to hear that they were no longer lending. The impact, [however], was not too great. Only about 400 students were affected,” says Solomon, noting that his greatest concern was the diminution of loan benefits.
During the current academic semester, Solomon has seen more origination fees, more administrative fees and fewer repayment benefits.
“A lot of discounts on the back-end like a decrease in interest rates for a certain number of payments made on time are going away,” Solomon says.
During these sluggish economic times, the remainder of lenders are tightening their lending criteria by increasingly requiring higher credit scores and cosigners. In 2003, the Federal Reserve reported that credit scores vary “substantially” among racial and ethnic groups.”
“If a student or cosigner has adverse credit, it will certainly be more difficult to obtain a private loan,” says Marcia Boyd, director of financial aid at Florida A&M University. As of yet, neither institution, which are both historically Black universities, is worried about the availability of federal loans. “Federal loans remain available for eligible students,” Boyd says. The same remains true for students at WSSU.
As a result of the credit crunch’s domino effect, legislators are making the case that access to education deserves protection.
Recently, the House Education and Labor Committee approved bipartisan legislation to ensure that the turmoil in the U.S. credit markets does not prevent students or parents from accessing the financial aid they need to pay for college.
If enacted into law, the Ensuring Continued Access to Student Loans Act of 2008 would provide new protections to ensure that families continue to have timely, uninterrupted access to federal college loans.
The bill seeks to reduce borrowers’ reliance on costlier private loans by increasing the annual loan limits on federal college loans by $2,000 for all students, and by increasing the aggregate loan limits to $31,000 for dependent undergraduates and $57,500 for independent undergraduates. The bill would also give parent borrowers more time to begin paying off their federal PLUS loans by providing them with the option to defer repayment up to six months following their children’s college graduation — giving families more flexibility in difficult economic times.
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