Location, location… wait. If you think the old trope about an area applies only to home sales, you’ve got another thing coming. Housing and consumer lending advocates are arguing that idea also applies to home loans — that the mortgage a buyer is offered is tied, in part, to his neighborhood.
These advocates argue that a disproportionate number of subprime loans have been offered to minority homeowners in poor, disadvantaged neighborhoods of New York and New Jersey.
The odious practice even has a name: reverse redlining.
It’s a riff on the practice of “redlining” — where depository institutions in low-income neighborhoods refused to lend to certain zip codes or areas that were demarcated on maps by red lines. Plain ol’ redlining was made illegal by the Community Reinvestment Act of 1977, which forced local banks to make home loans to the residents they took deposits from.
But now those same consumers — the ones originally denied credit in the 1970s — are increasingly becoming the victims of mortgage lenders offering refinancing that puts owners into unmanageable debt programs, causing them to ultimately lose their homes, say housing advocates.
Poor neighborhoods hit hard
According to a study released in October by NYU’s Furman Center for Real Estate and Urban Policy, neighborhood disparities for subprime loans persist. While Manhattan is mostly unaffected, poor neighborhoods in other boroughs of New York, which also tend to be minority neighborhoods, have been hit hard.
For example, in the Bronx, the Fordham University area had the highest concentration of subprime loans, with 47.2 percent of mortgage loans issued coming from subprime lenders. Of those loans, 57 percent went to Latinos, 35 percent to blacks and just 3.78 percent to whites. In Jamaica, Queens, 77 percent of the subprime mortgages went to blacks, and just 2 percent to whites, according to the study.
Which begs the question — are minorities being specifically targeted for subprime predation, or does it just hit them because they live in poor neighborhoods?
Vicki Been, director of the Furman Center, said the fact that whites received a disproportionate share of subprime loans (although less than blacks and Hispanics in “redlined” neighborhoods) was indicative that the lenders were practicing geographic targeting based on neighborhood. Been also said that blacks received a disproportionate number of subprime loans in higher-income, “white” neighborhoods, pointing to a racial component in subprime lenders’ marketing efforts.
Underlying credit reports for the racial groups, which would allow a statistician to control for race versus poverty, were not available, she said.
Certainly, many of the poor neighborhoods hit hard by the subprime crisis tend to be nonwhite. According to Sarah Ludwig, executive director of NEDAP (the Neighborhood Economic Development Advocacy Project), these neighborhoods “not coincidentally represent the vortex of foreclosure actions in New York, and they are also the neighborhoods of color where there is a long history of redlining.”
Banks not regulated
Ludwig said that while 98 percent of banks that get examined have satisfactory practices, many banks are not properly overseen or regulated. For one, a bank can leave a poor area that it had been required by law to provide loans in.
“As banks left neighborhoods and did not serve them, they left a lending vacuum, and the areas became ripe for subprime lenders that were engaged in predatory lending,” she noted. Evidence of subprime lending is ubiquitous in these neighborhoods, with signs posted offering quick and low-cost lending to people with depressed credit scores.
Pat Morrissey, executive director of Hands Inc., a group that develops vacant properties targeted at first-time homebuyers, and one of the original founders of the National Housing Institute, said, “What I see is that the subprime lenders are working these neighborhoods, like Orange and East Orange, N.J., which border Newark.”
They are looking for new home borrowers, or for people who already have equity, Morrissey said. “It is everywhere: in the mail, tacked up on poles because the neighboring banks don’t work in these neighborhoods.”
Part of the problem is that though the CRA was adopted in 1977 to ensure a lending pipeline to the poor, it did not have teeth until the 1990s, when interstate bank mergers had to be approved by federal regulators, said Morrissey, who was involved in helping craft the original CRA legislation.
“The teeth came with the ability for the regulators to hold up (or even deny) the mergers based on their previous performance,” Morrissey said. “When the regulators look at two banks that are merging, mostly they are looking at soundness, but they also look at any law that applies to the banking industry, like the Community Reinvestment Act.”
If the CRA had been enforced nationwide, “we would not have had this problem now,” concluded Ludwig.
Still, finding evidence of overt denial of credit either along neighborhood or racial lines would be difficult. For one thing, it is tough to get data to control for the credit scores — known as FICO scores — of poor and minority borrowers. It may be the case that the poor and minority borrowers who are now getting slammed in the subprime mess had poorer credit profiles in the first place. “I certainly heard the advocates like NEDAP say that it is getting tougher to get credit in these neighborhoods, but it is hard to separate out whether it is because of the FICO scores, or something else,” said Been, the Furman Center’s executive director.
And although neither advocates nor mortgage lenders said they know of bankers officially refusing to provide loans to blacks and Hispanics in low-income neighborhoods, they admit that unscrupulous predator lenders, builders and appraisers have worked together to provide refinancing products that they know the borrowers do not understand and cannot afford.
Another mutation: flipping
In another twist, advocates have found an alarming growth in the phenomenon of developers buying distressed properties and flipping them with little or no work performed. The end result, arrived at in collusion with lawyers, appraisers and lenders, is that the scarcely improved properties have been sold to low-income buyers at inflated prices.
The irony is that many of the same people who were denied credit in the 1970s, and then scraped together money to invest in a home, are now the same people who are being targeted for these predatory loans and going into foreclosure, said Meghan Faux, a lawyer and co-director of the foreclosure prevention project for South Brooklyn Legal Services.
“The Community Reinvestment Act was supposed to get banks to invest in the neighborhoods where they took deposits,” said Faux. “But the banks in the communities of color are remarkably different, and mortgage lenders are now targeting low-income communities with bad projects, and they are marketing really harmful products.”
Faux’s organization filed a legal complaint against United Homes and United Property Group LLC and a host of other participants, including lawyers and appraisers, on behalf of a borrower, Sandra Barkley, for allegedly engaging in a flipping scheme “whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser,” according to court documents filed in the United States District Court for the Eastern District of New York in December 2005.
The complaint outlines the alleged “scheme” by United Homes and its colluders’ work as follows: United Homes purchases damaged properties, conducts cosmetic repair work and, conspiring with various mortgage lenders, appraisers and attorneys, causes the properties to be “fraudulently and significantly over-appraised.” The over-appraisals allegedly allowed the United Homes entities to sell these properties to first-time home buyers whom SBLS said “are vulnerable to defendants’ high pressure, deceptive sales tactics — for far more than the true value of the property.”
Then, either through the use of “low-documentation” or “no-documentation” mortgage products that “mask the victims’ insufficient income and assets to repay these loans,” or through the use of intentionally inflated loans that are backed by Federal Housing Administration (FHA) insurance, the named defendants allegedly “imposed significant hardship on the minority homebuyers, saddling them with debt and monthly payments in excess of their ability to pay,” said the complaint.
Calls to United Homes, as well as to lawyers representing the firm, were unanswered by press time.
Other defendants named in the case, which if successful will be tried before a jury, include several large mortgage companies and major international investment banks, all of whom Faux said conspired with United Homes to overinflate the value of the home and provide predatory loans to Barkley.
The New York Attorney General’s office did not respond to repeated requests for comment on the issue, though Ludwig said it had been made aware of the practice of flipping and variant lending along neighborhood and racial lines.
All of the activity has made advocates determined to push for better laws to protect borrowers.
“We are pushing for a restoration of sound underwriting practices and laws that would require that lenders verify that the borrower can afford the loan before it is made,” said Ludwig. “The silver lining is there has been so much attention to these issues, it is possible we can turn it around.”