Why Foreclosure Defense Helps Decrease the Racial Wealth Gap
by Brianna Noonan October 27, 2016
While foreclosure is no longer as hot a topic as it was in the months following the 2008 Great Recession, it still affects tens of thousands of New Yorkers at rates higher than those before the 2008 crisis. Although new foreclosures are decreasing, subprime-lending related foreclosures continue to have a devastating effect on the racial wealth gap and thus the future of racial equality in America.
The racial wealth gap, defined here as the difference between the median household wealth of White and Black families, has been increasing since around 2007 and is now the highest it has been since 1989 when median White household wealth was 17 times that of Black households. Prior to the Great Recession, the racial wealth gap was decreasing and had hit a historic low point with White wealth six times that of Black wealth. The widening racial wealth gap can be attributed to the effects of subprime lending on Black homeowners who had taken out mortgages or refinanced their mortgages during the subprime lending boom. Subprime loans were designed for borrowers with higher risks of default; however, Black borrowers taking out loans during the years before the financial crisis were 30% more likely to receive a subprime loan, even after accounting for risk. One study found that in 2006 minority homeowners with incomes exceeding $230,000 were more likely to be sold subprime loans than Whites living near the poverty level.
Subprime loans are inherently worse than prime loans, because of the higher interest rates. They are also significantly more likely to result in default and foreclosure. The Center for Responsible Lending states that “(l)oans originated by brokers, hybrid adjustable-rate mortgages (“ARMs,” such as 2/28s), option ARMs, loans with pre-payment penalties, and loans with high interest rates (a proxy for subprime mortgages) all have much higher rates of completed foreclosures and are more likely to be seriously delinquent.” Because Black borrowers were categorically offered these types of loans, regardless of their default risk, they are more likely to become seriously delinquent and suffer foreclosure. The Center for Responsible Lending estimates that “15.6% of all subprime loans originated since 1998 either have or will end in foreclosure and the loss of homeownership.”
A recent report published by the Institute for Policy Studies and the Corporation for Enterprise Development, which focuses mainly on racial differences in wealth accumulation and average household wealth, shows just how alarming the current trends are in finding that “if the average Black family wealth continues to grow at the same pace it has over the past three decades, it would take Black families 228 years to amass the same amount of wealth White families have today.” This estimation is based on the average White household wealth. The study mentions, with regards to median wealth, “(i)f current trends continue, Black and Latino families at the median will never reach the level of wealth of White families today.” Many studies, including the aforementioned one by the Institute for Policy Studies and the Corporation for Enterprise Development, attribute the current differences between White wealth and Black wealth to racial disparities in homeownership, and particularly to the role of subprime lending before the financial crisis.
Expanding access to free and affordable legal services for low-income minority homeowners is one effective way to mitigate the effects of subprime lending practices on Black homeowners and on the racial wealth gap overall. Mitigating such wealth loss is crucial to keeping the wealth gap from increasing further and is an appropriate response to the overwhelming evidence suggesting racially discriminatory subprime lending practices are the cause of the widening racial wealth gap.
To learn more about this issue, view the complete article.
About the Foreclosure Prevention Project
CBJC’s Foreclosure Prevention Project provides free legal services to low-to-moderate income residents of New York City. If you or someone you know is experiencing foreclosure, please reach out to us at 212-382-6766.
 Lawrence K. Marks, “2015 Report of the Chief Administrator of the Courts” (Report, State of New York Unified Court System, 2015).
 Rakesh Kochhar, “Wealth inequality has widened along racial, ethnic lines since end of Great Recession,” Pew Research Center, December 12, 2014, http://www.pewresearch.org/fact-tank/2014/12/12/racial-wealth-gaps-great-recession/.
 Sarah Burd-Sharps, and Rebecca Rasch, “Impact of the US Housing Crisis on the Racial Wealth Gap Across Generations,” (independent report commissioned by the American Civil Liberties Union, Social Science Research Council, 2015).
 Debbie Gruenstein Bocian, Keith S. Ernst, and Wei Li, “Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages” (research report, Center for Responsible Lending, 2006).
 Jacob Faber, “Segregation Exacerbated the Great Recession and Hindered Our Policy Response,” NYU Furman Center, February 2016, http://furmancenter.org/research/iri/essay/segregation-exacerbated-the-great-recession-and-hindered-our-policy-respons.
 Debbie Gruenstein Bocian, Wei Li, and Roberto G. Quercia, “Lost Ground, 2011: Disparities in mortgage lending and foreclosures” (research report, Center for Responsible Lending, 2011), 4.
 Center for Responsible Lending, “Subprime Lending: A Net Drain on Homeownership” (Issue paper no. 14, March 27, 2007):3.
 Derick Asante-Muhammed, Chuck Collins, Josh Hoxie, and Emanuel Nieves, “The Ever-Growing Gap: Without change, African-American and Latino families won’t match White wealth for centuries,” (report, Institute for Policy Studies and Corporation for Enterprise Development, 2016), 5.
 Ibid., 7.
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