This past fall marked the 10-year anniversary of the start of the financial crisis. Fueled by risky, subprime mortgages with predatory terms, the financial crisis and ensuing recession was the worst economic disaster in the United States since the Great Depression. Unemployment climbed to 10 percent nationally and 12 percent in Philadelphia. Between 2007 and 2015, approximately 7.5 million homes were lost to foreclosure, affecting an estimated 19 million people. In Philadelphia, foreclosures peaked in 2009, with approximately 8,500 foreclosures filed in that year alone.
As Philadelphia continues to experience a boom in housing construction and as prices in many neighborhoods climb ever higher, it can be easy to forget that we are only recently emerging from a crisis in which thousands of Philadelphians lost their homes. The anniversary of the financial crisis provides an important opportunity to reflect on the impact of the foreclosure crisis and how we can make sure every Philadelphian has a safe and affordable place to call home.
Many Americans have probably heard the term “subprime” and most may understand that the financial crisis was caused largely by risky mortgage lending, but in my experience, few understand how truly predatory and egregious so many of these loans were. As an attorney who represents low-income homeowners in Philadelphia, I have seen mortgages with “exploding ARMs” (loans that advertise a low teaser rate, but that jump to an unaffordable payment six months into the loan, and never go back down again), loans with hidden balloon payments that are almost as much as the original loan and that come due when the borrower thinks she has paid off the loan, loans that are structured to never pay down any principal, loans with fraudulent appraisals, and loans with an 18-percent default rate that was triggered as soon as the borrower was late on just one payment. I have represented numerous homeowners, many of them elderly and with limited financial experience, who simply had no idea what they were signing. Sometimes the mortgage broker lied. Sometimes the broker brought the paperwork to the client’s home for them to sign, putting additional pressure on already vulnerable individuals. In one case, when the homeowner was confined to her bed after a stroke, the mortgage company conducted the closing in her bedroom. She could barely sign the paperwork, much less understand what she was signing.
In 1996, subprime lending represented just 9.3 percent of the total mortgage market. By 2006, it had increased to $600 billion and was nearly a quarter of the total mortgage market. And while “subprime” loans were ostensibly made to borrowers who couldn’t qualify for “prime” loans at more attractive rates, in fact, by the mid-2000s, many lenders were simply trying to maximize the number of subprime loans that they made. As many as 55 percent of the subprime loans originated in 2005 were given to borrowers who qualified for prime loans. See Rick Brooks & Ruth Simon, “Subprime Debacle Traps Even Very Credit-Worthy,” Wall Street Journal, Dec. 3, 2007.
Much of the increase in subprime lending reflected the increased targeting of black and Latino borrowers. Of all the predatory conduct that pervaded mortgage lending from the late 1990s to the mid-2000s, the discrimination visited on black and Latino borrowers was some of the most insidious. Decades of redlining left minority neighborhoods, and black and Latino neighborhoods in particular, starved for access to credit. Subprime lenders filled this void. Nationally, more than half of the mortgages taken out by African-Americans in 2005 had subprime features, compared to the industry average of 20 percent. See Raymond Brescia, “Subprime Communities: Reverse Redlining, The Fair Housing Act and Emerging Issues in Litigation Regarding the Subprime Crisis,” 2 Alb. Gov’t L. Rev. 164, 173 (2009). These racial disparities were especially pronounced for borrowers with high credit scores. Among borrowers with credit scores above 660 (indicating good credit), black and Latino borrowers were three times as likely as white borrowers to receive a subprime loan, see Debbie Gruenstein Bocian, Center for Responsible Lending, “Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures” 5 (2011). In 2011, Bank of America paid $335 million to settle charges brought by the Department of Justice that its subsidiary Countrywide steered black and Latino borrowers into high-cost and risky subprime loans more often than similarly situated white borrowers. Wells Fargo paid $175 million to settle similar allegations in connection with a Department of Justice investigation. Other lenders that settled DOJ charges of lending discrimination during this time period include JPMorgan Chase ($53 million), National City Bank ($35 million), and SunTrust ($21 million), among others.
As one might expect, subprime loans with predatory features are more likely to result in foreclosure. Black and Latino borrowers are twice as likely as white borrowers to have lost their home to foreclosure. Thankfully, Philadelphia’s nationally renowned Residential Mortgage Foreclosure Diversion Program mitigated the impact of the foreclosure crisis for thousands households; in 2011, the rate of completed foreclosures for loans originated between 2004 and 2008 was 1.9 percent, compared to 22 percent in Detroit and nearly 9 percent in Cleveland. And yet the same racial disparities persisted here in Philadelphia. By 2011, 3.7 percent of African-American borrowers in Philadelphia with loans originated between 2004 and 2008 had lost their homes to foreclosure, compared to just 1.5 percent of white borrowers.
Fast forward to 2019 and much of the predatory conduct that was so common in the late 1990s and early- to mid-2000s has been curtailed by the Dodd Frank Wall Street Reform and Consumer Protection Act. Many of the most predatory features are prohibited and lenders must now consider a borrower’s ability to repay a loan, a common sense requirement that was shockingly absent prior to the passage of Dodd Frank in 2010. It is also no longer permissible to reward brokers and mortgage employees for placing borrowers in a loan that is more expensive than the loan for which the borrower otherwise qualifies. Most subprime loans during the years leading up to the crisis were originated by mortgage brokers who received financial incentives from lenders to place borrowers in the most expensive loan possible. These perverse incentives helped fuel much of the discriminatory targeting of black and Latino communities for predatory subprime mortgages.
Most of the predatory loans I described above couldn’t be made today, at least not in connection with a mortgage on a borrower’s home. Unfortunately, discrimination in lending continues to lock many qualified black and Latino borrowers out of the opportunity to own a home, and many existing homeowners cannot access the equity in their homes to make needed repairs.
A year ago, Reveal from the Center for Investigative Reporting published its findings of a year-long investigation and analysis of 31 million Home Mortgage Disclosure Act records. The results found that black and Latino borrowers, including in Philadelphia, continue to be denied conventional mortgage loans at far higher rates than white borrowers, even after accounting for income, loan amount, debt-to-income ratio and other economic and social factors, see Aaron Glantz & Emmanuel Martinez, “Kept Out: For People of Color, Banks are Shutting the Door to Homeownership,” Feb. 15, 2018.
And for those who already own a home, the same lack of lending and investment in predominantly black and Latino neighborhoods limits their ability to tap the equity in their homes to conduct needed repairs, a critical issue for Philadelphia’s aging housing stock. Representing low-income homeowners, I routinely see the negative consequences that the lack of access to fair and responsible credit has on the ability to make desperately needed home repairs. Adding insult to injury, the recent report from the controller of Philadelphia on the Accuracy and Fairness of Philadelphia’s Property Assessments found that the Office of Property Assessment routinely over-assessed properties in West, Southwest and Northwest Philadelphia, neighborhoods that are predominantly black and Latino, and are also among the poorest in the city.
We have come a long way from October 2008, when the economy was in free-fall and the foreclosure crisis just beginning. Unfortunately, in this city of neighborhoods, not all of our neighbors are being equally served.
Joanne Werdel is a staff attorney with the Consumer Housing Unit at Philadelphia Legal Assistance. She represents low-income Philadelphia homeowners facing the loss of their homes from mortgage or tax foreclosure.