Dr. Martin
Luther King, Jr. once said his Dream was “deeply rooted
in The American Dream.” The realization
of home ownership has long been considered a keystone of
both Dr. King’s Dream and The American Dream, especially
for African Americans, but recent events in the
mortgage-lending industry could spell nightmare,
instead. Subprime
mortgages, specifically, have become terrorizing
threats, not only to African American homebuyers, but to
the American economy as well.
National
media reports indicate subprime mortages have put an end
to “The American Dream” of home ownership for far more
African Americans than any other racial or ethnic group
in the country.
This trend seems no less the case in
Georgia. A recent study
by the Atlanta
Journal-Constitution of first-time homebuyers,
indicates:
“At 49 percent, blacks were the most likely
minority group in metro
Atlanta to end up
with a subprime loan.” The number given
for Hispanics was nearly a third or 33 percent, while
only 10 percent of Asians were subprime consumers. The credit
scores, so vital to obtaining such loans, also tend to
be worse nationwide for African Americans than those of
white consumers by percentage rates similar to the
tendency of each group to seek such
loans.
What is a
subprime mortgage and why have so many African Americans
chosen them over safer, more traditional
loans?
A mortgage
is considered subprime when
the rate of interest required by the lending institution
exceeds that of the prime rate which
is set by Federal regulators on U. S. Treasury
securities. While this interest rate is closely adhered
to by most commercial lenders, according to the AJC study, prime
mortgages are “typically priced at 1 to 2 percentage
points above the cost of Treasury securities,” while
subprime ones carry Annual Percentage Rates higher than
“3 percentage points above” this rate. Pearlie Toliver
of BB&Tof Middle Georgia says, “Subprime loans have
had a devastating effect on the overall economy,
including what other lending institutions must now
require even of borrowers with good credit.” According to
Toliver, many banks now must insist upon higher credit
scores and loan to value ratios for anything over 70%
financing than they did just six months ago. Kelvin
Collins of the Macon Better Business Bureau offers a
litmus test for the likelihood of such loans being
serviceable:
“If a lender tries to educate you on what you are
getting into, s/he most likely has your best interest in
mind. Make sure you understand the complete terms of the
agreement, read the whole contract or have someone who
deals with contracts look at it for you.”
These
companies bombard consumers with pop-up ads on the
internet and invade mailboxes with printed offers,
evidently irresistible to many would-be homeowners or
others seeking “big ticket items,” such as cars, boats,
etc. Prospective buyers with low or no credit scores may
be drawn to subprime loans because these consumers are
pretty much guaranteed to actually receive this type
loan, regardless of their scores. Ads for some subprimes
also offer lower monthly payments, or approval with low
or no down payments. Still others
even offer to postpone the start of the payback for an
appealing length of time, which some borrowers
erroneously think will allow them time to build up
enough money to handle the debt. However, the shifting
mortgage rates of some such loans create unpredictable
monthly payments, which may differ too much to be
reasonable for serious credit risks, lower-income
buyers, or those with good credit but budgets already
overloaded with unpaid debts. Nevertheless,
subprime lenders continue to aggressively seek subprime
borrowers.
There may
even be penalties for paying off some mortgages early.
“Buyer, beware!” applies, but the AJC study
suggests there may yet be a more mean-spirited reason
for the disparity among minority groups: “Subprime
lenders tend to focus on minority communities” and
African Americans are “aggressively targeted for the
worst loans on the market.”
Dr. Melvin
E. Walker, Professor of Economics at The Fort Valley
State University and a member of the Board of Directors
of a Fort
Valley bank,
points out that not all subprime lenders are “predatory”
ones. He
says, “Some of these businesses actually exist to
provide serviceable loans for high-risk borrowers, while
others never intend to allow borrowers to either be free
of the debt or reclaim the collateral.”
News media
accounts of the alarming rise in the number of real
estate foreclosures and losses of other loan-generating
property due to defaults on these debts have prompted
concern nationally. Not only do the borrowers lose in
subprime defaults, but their plight is threatening to
the general public as well. For example, property values
plummet in areas where subprime foreclosures leave
numerous houses empty and “For Sale” signs on too many
lawns. Even
low-risk prospective buyers get nervous when faced with
the obvious failures of so many others, local realtors
claim.
Pastor James
L. Bumpus of Tremont
Temple
Baptist
Church in
Macon also feels
that “What national leaders are modeling by going from a
trillion dollar budget surplus to a trillion dollar
debt, largely to finance the war in
Iraq, is not
helpful either.”
He adds: “It fuels individual greed—our desire to
have more than we can afford and the illusion that we
can have it all, right now, without negative
consequences.
Debt management is a serious matter for all
Americans, not just African Americans.”
What then
can African Americans and others seeking to buy their
first homes—often the first home owned in the family—do
to avoid the pitfalls of the more treacherous subprime
mortgage loans?
Collins
advises prospective homebuyers to continue to rent until
they can afford the shifting mortgage rates or can
qualify for less risky types of loans. Toliver suggests
dealing with reputable lenders, who will take the time
to educate those with whom they do business about the
possible effects of the loan situation and how it can
best be undertaken successfully.
Most
recently, the crisis in subprime-lending has taken these
turns: (1)
President Bush has signed legislation which gives relief
from greatly rising monthly payments, but only for about
450,000 of the almost 2 ½ million homeowners currently
threatened with the loss of their homes; (2) Bank of
America has made a deal which salvages Countrywide, one
of the nation’s largest and, some say, more respectable
subprime lenders; (3) the City of Baltimore has sued
Wells Fargo for predatory lending and disproportionately
targeting minorities. Bush claims the problem is that
“These mortgages are often bundled and sold by
subprimers to investors and speculators as assets, and
there’s no telling who actually owns the mortgage when a
borrower wants to negotiate.”
Are there
suitable alternatives to the subprime trap for high-risk
consumers?
[Jermaine Smith,UFirst (?)
Financial
publications, such as The Wall Street
Journal, Fortune Magazine, and Business Week,
have featured numerous articles over the last few
months, predicting either the collapse or a serious
slowdown in the housing industry, widespread home
foreclosures, lowering of property values, decline of
the value of the dollar, drops in stock market values,
the dissolution of banks and other financial
institutions worldwide, and even considerable damage to
the U. S. economy as a whole, all due to the subprime
mortgage crisis.
The White House, the U.S. Supreme Court and the U.
S. Congress are all engaged in the battle to ward off
the subprime loan “tsunami” now threatening the
financial well-being of this country, to say nothing of
the state-by-state battles. Indeed, other
nations around the world anxiously await
America’s solution
to its problem and subsequently theirs. The great hope
is that this country will emerge from this debacle
financially stronger and better able to protect its
consumers whose “pursuit of happiness” would be better
realized without perpetual
indebtedness.