| Importance of Homeownership in Wealth Building
Homeownership represents one of the best opportunities for African-American households to build family wealth and economic security. However, a large “homeownership gap” continues to exist between African-American households and white households. Fewer than half (48.4%) of black households owned their own homes in 2003, compared with three-quarters (75.1%) of whites. This gap contributes to the significant wealth gap between these groups.
In 2002, the median net worth of black households was 6.8% of that of white households—$5,988 vs. $88,651. Half of all African-American households that owned homes in 2002 held 88.1% or more of their total net worth in home equity.
Predatory loans threaten advances in black homeownership and wealth.
While increased access to credit to African-Americans and others is to be applauded, such credit should be constructive, not destructive. Subprime loans are intended to serve people who do not meet traditional underwriting criteria, including those with blemished credit records or without a traditional credit history. Subprime borrowers may not qualify for loans at interest rates available in the prime market. However, many people who qualify for prime loans are sold subprime loans with higher interest rates. Not all subprime loans are predatory, but predatory mortgage lending occurs predominately in the subprime market.
Predatory loans often contain high interest rates not justified by
risk, mortgage broker kickbacks, unwarranted prepayment penalties,
excessive or unearned fees, financed fees for unnecessary insurance and
other products, and mandatory arbitration provisions. Some lenders also
refinance (or “flip”) loans to collect more fees rather than to benefit
the borrower. Others target African-Americans, Latinos, the elderly, and
low- and moderate-income households. They push unnecessary or overpriced
loans on vulnerable populations.
These and other abusive practices have escalated predatory mortgage lending to a paramount issue. In 2001, we estimated that predatory mortgage lending practices helped strip in excess of $9 billion annually in equity from U.S. consumers. In addition, loans with predatory terms are much more likely to end in foreclosure than conventional loans. Foreclosures can devastate communities where vacant homes are concentrated.
© 2004 Center for Responsible Lending
www.responsiblelending.org
Black Borrowers Are Disproportionately Impacted by Subprime Market Practices
In 2002, African-Americans were 3.6 times as likely as whites to receive a home purchase loan from a subprime lender and 4.1 times as likely as whites to receive a refinance loan from a subprime lender.
Subprime lender share of home purchase loans by borrower race and income
Black Neighborhoods Are Disproportionately Impacted by Subprime Market Practices
Borrowers in neighborhoods where African-Americans are concentrated are much more likely than borrowers nationwide to receive a loan from a subprime lender. In 2000, borrowers in neighborhoods where at least 80% of the population was black were 2.2 times as likely as borrowers in the nation as a whole to refinance with a subprime lender (53.1% vs. 23.8%). The disparity between the subprime refinance share for predominantly black neighborhoods and the national subprime refinance share increased as neighborhood income increased.
A Critical Issue
For many families, home equity constitutes the majority of their net wealth. Subprime borrowers typically refinance or take out a home equity loan at a time of great financial need, when they are in the weakest bargaining position and most susceptible to practices that can deprive them of substantial sums of money and even their homes. Predatory mortgage lending practices in the subprime market, which disproportionately affect African-American borrowers and neighborhoods, must be addressed. About the Center for Responsible Lending The Center for Responsible Lending is dedicated to protecting home ownership and family wealth by working to eliminate abusive financial practices. CRL is a national nonprofit, nonpartisan research and policy organization that promotes responsible lending practices and access to fair terms of credit for low-wealth families.
For additional information, please visit www.responsiblelending.org. |
