Achieving and Losing the American Dream

In the last 10 years, a few trends have swept the different companies I keep.  First there was the wedding wave of my late twenties; these days it’s the baby boom.  In between, many of us – single and married alike – have been fortunate enough to purchase our first homes – both suburban homes and urban condos. 

Yet, it seems at least half of my home owning friends were, like me, dependent on a large financial gift from their parents for their down payments (this is especially true in the NYC co-op market, in which the liquidity required to cover ~25% of the asking price up front is inconceivable for many, if not most, Americans).   I bought my condo just two years ago, close to the peak of the market, and instead of living rent free as a residential counselor in MIT’s undergraduate dorms.  Though my independent consulting helps to make ends meet, the reliable annual income I earn from MIT as a research and teaching assistant is only a couple hundred dollars more per month that my monthly housing costs.  While I appreciate the value of building equity and the amazingly generous gift my parents have given me by helping me buy this home (especially when I think of the $80k in rent we paid in Manhattan over seven years), owning a house demands a certain level of financial stability that I’m unlikely to possess as a graduate student without their on-going support (undoubtedly one of the perks of our four to one parent-child ratio). 

The recent spate of coverage on nationwide foreclosures and subprime lending sheds light on the financial precariousness for households that lack such a safety net.  In particular, foreclosures are disproportionately clustered among the elderly and non-white (especially African-Americans) in urban and inner-ring suburban communities, due in large part to the invidiousness of predatory lending in the subprime lending market.

This piece about suburbs fighting the onslaught of foreclosures is illustrative of this abusive practice, defined in a 2001 joint report by HUD and the U.S. Treasury as:

lending — whether undertaken by creditors, brokers, or even home improvement contractors — involves engaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower’s lack of understanding about loan terms. These practices are often combined with loan terms that, alone or in combination, are abusive or make the borrower more vulnerable to abusive practices. 

Predatory practices vary from loan flipping to charging excessive fees.  As the HUD-Treasury and other government reports demonstrate, predatory lenders prey on the elderly and African-American or other minority communities.  Given racial residential segregation in the U.S., this translates into a geographic concentration among subprime and predatory lending, as current foreclosures in urban and inner-ring suburban areas now demonstrate.  Subprime lending and the risk of predatory practices is also not restricted among low-income communities (indeed, as HUD cites in a 2000 report, only 20% of low-income whites versus 40% of upper-income blacks held subprime loans). 

It is important to distinguish between subprime and predatory lending.  The NY Times today focuses on four black households in Newark that are fighting foreclosure; the households range from a middle-class couple to a single mother, and highlight various means to homeownership.  As demonstrated by the single mom who bought from a traditional non-profit community development corporation (CDC) program that subsidizes first-time homeownership for those with blocked access to mainstream markets, subprime lending is not necessarily a bad thing.  Some CDCs such as Neighborhood Housing Services of New Orleans, Inc., part of a Congressionally-financed national network of non-profit community developers, emphasize homeownership training and financial counseling for low-income families, so that their small annual housing development and sales are much more likely to succeed, even as these families accept subprime rates to cover the increased risk to the lender. 

Yet, this article’s vivid examples of a few households that questionably bet heavily on needed future incomes that never materialized overemphasizes personal responsibility for the subsequent risk of losing their homes.  No doubt that as consumers we routinely make these types of calculations in most transactions, and readers’ sympathies for gambling on the revitalization of these Newark neighborhoods may likely be constrained by our own stereotypes of Newark and minority, urban communities more generally.  Even a cliched liberal like myself felt frustrated by what was portrayed as a failure of these buyers to better educate themselves on the probable vitality of these neighborhoods.  But with our national emphasis on homeownership – the White House was particularly proud of unprecedented minority homeownership rates in 2004 – and the development and revitalization booms that have rocked metropolitan communities since the mid-1990s, it seems prejudicial to dismiss these new owners as somehow more foolhardy than new homeowners in nascent, exurban subdivisions in Raleigh, Sarasota, and elsewhere.

Access to credit overall has exploded since the mid-1990s; the last few years equal the “biggest mortgage boom in American history.”  Between 1993 and 1998, federally regulated and insured prime lending to low- and moderate-income families grew by 80% from $75b to $135b.  Yet, this expansion of low-income access was very modest in terms of overall lending, climbing from 25% to only 28% of all prime loans.  During the same period, subprime lending grew from $35b to $160b, and went from less than five percent of all mortgages in 1994 to 13% in 1999.  The 2001 HUD-Treasury report reflects a policy trend at the millenium to define and respond to predatory lending practices unleashed during this time.  Given the resurgence of foreclosures, HUD recently released updated research on subprime lending.

Real estate and financial analysts estimate another three years of brutal market correction for the speculative housing boom of the last few years.  They see some “good” coming from households’ “trauma,” namely longer-term, “tighter” lending standards.  Maybe this is a needed slap on the hand for those speculators intent on flipping their properties (though I have no idea why it would be), but what about other areas suffering from widespread foreclosures due to “crumbling industry and rising unemployment rates?”  Per usual, what do we propose to do about structural changes in the economy that disproportionately punish some communities more than others? 

In truth, predatory practices are not new to low-income and minority communities, and have been an important factor in the continued inability of many urban, minority communities to develop and thrive.  Reasons that subprime lending is so critical in these neighborhoods is the absence of mainstream credit institutions (i.e., banks) as well as the greater need for emergency or immediate infusion of funds into low-income households.  Critically, subprime lenders are not subject to the same federal regulations as prime lenders.  The foreclosures we face now reflect an overall lack of regulation in the mortgage boom of the last few years. And falling consumer confidence reveals how we’re all starting to pay the price.


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