Reverend Jesse Jackson was in New Delhi to mark the sixtieth anniversary of the martyrdom of Mahatma Gandhi but the subprime crisis back home was also on his mind. He phoned and said, “If you look at the analysis on TV, everybody is discussing macroeconomics. CNN, CNBC, MSNBC, none of them go deep in their analysis as to what really happened. The lack of enforcement of civil rights laws, of fair lending laws, drives this economic tsunami. This is not an economic miscalculation – this is the price we pay for not enforcing the law.”
Jackson points to the targeting and steering of African-Americans and Latinos who were qualified for prime loans into risky subprime mortgages (defined as 3 percentage points higher than the prevailing rate for long-term Treasury bonds). “Redlining was to not loan to certain areas,” he said. “This is what amounts to reverse-redlining – steering black and brown borrowers into subprime who were eligible for prime. That’s out and out breaking discrimination laws.”
In 2005 and 2006, over 50% of all loans made to African-Americans, and over 40% to Latinos, were subprime – compared to only 19% of white borrowers. Martin Gruenberg, vice chairman of the Federal Deposit Insurance Corporation (FDIC), said at the Rainbow PUSH Coalition’s Wall Street Economic Summit in January, “Only one-sixth of this differential could be accounted for by the ability of the borrower.” Analysis of Home Mortgage Disclosure Act (HMDA) data shows that African-Americans and Latinos in New York City, Boston, Washington, Philadelphia and other cities were two to three times more likely to have subprime, high-cost loans than white borrowers with similar incomes and loan amounts.
The New York Times has reported on two neighborhoods in the Detroit area – one 97 percent white with a median income of $51,000, another 97 percent African-American with a median income of $49,000. In 2006, 17 percent of the loans made in the white neighborhood were subprime, compared to 70 percent of the loans in the predominately African-American neighborhood. Illinois Attorney General Lisa Madigan recently pointed out on National Public Radio, “…An African-American earning more than $100,000 was more likely than a white person who earned less than $35,000 to be put in a high-cost, [subprime] loan…. Clearly there is discrimination going on.” The Times also reported that “… around 90 percent of subprime loans originated between 2004 and 2006 carried exploding adjustable rates. Some 70 percent of subprime loans have prepayment penalties, versus 2 percent of prime loans…. ” Those pre-payment penalties made refinancing impossible for hundreds of thousands of people. “Yield-spread premiums” also paid kick-backs to brokers for steering borrowers into high-priced loans.
Officials at the Department of Housing and Urban Development (HUD) point out that there is no uniformity in how loan documents spell out the terms of loans, and some are woefully inadequate. The Times also reported that “many lenders peddled the most abusive and costly loans to unsophisticated, first-time home buyers. Known as ‘affordability products,’ the mortgages generated big commissions up front and were designed to require refinancing later on – which included yet another round of luscious fees for lenders. With refinancing no longer an option, it is becoming obvious that these loans were designed to fail.” Madigan told NPR, “I have had hundreds of people come to our office once they realized that they were in one of these high-cost subprime loans… telling us that they did, in fact, ask ‘Is this a fixed-rate loan?’ They were told yes, only to find out two or three years later it was an adjustable rate loan. I’ve had people tell us, you know, ‘we told them that our income was only $2,000 a month…’ [But] we find when we look at the documents it was written down [by the lender] as $7,000, $9,000 a month. So people were being put into loans in spite of the fact that they were… giving the correct information. And it is all because of the fact that the brokers and the lenders were receiving incentives, in large part because there was just this demand on Wall Street for these mortgage-backed securities.”
“Nobody seemed to care because of who was profiting, on the one hand, and who was being exploited on the other,” Jackson said. “But now the water is – like the Titanic – the water is up around the deck where the big people hang out. But where did the water come in? The water came in at the bottom of the ship. The poor always pay more for less – for cars, goods and services, insurance, food, banking money. This time, however, it’s affecting the whole economy, that’s what is different about this. Again, if the government had not allowed the rich to get richer at the expense of the vulnerable you wouldn’t have this crisis.”
It is now estimated that 2.2 million subprime home loans have already failed or will end in foreclosure – the highest foreclosure rate since the Depression – with a total equity loss of $164 billion. Moreover, neighboring homesto foreclosed properties will see a decline in value of $200 billion. A US Conference of Mayors Report estimates that the foreclosure crisis will reduce home values by an additional $519 billion in 2008, bringing the total forecast of lost equity for the nation’s homeowners to $1.2 trillion.
A Democratic Congress hasn’t turned a blind eye to these accounts of predatory lending and the lack of regulation that invited it. In the House, both the Subcommittee on Financial Institutions and Credit and the Domestic Policy Subcommittee (chaired by Congressman Dennis Kucinich) have held hearings on predatory lending in the past year. Both Sandra Braunstein, Director of Consumer and Community Affairs at the Federal Reserve, and Chairman Sheila Bair of the FDIC, said on the record that their institutions have used HMDA data to discover patterns of discrimination and passed it along to the Department of Justice for prosecution.
But when Congressman Al Green of Texas asked how many cases had been prosecuted by the Justice Department in the last five years, no one knew the answer. A call to the Justice Department brought this e-mail response, “The Department has used its authority to enforce the Fair Housing Act and the Equal Credit Opportunity Act to bring cases against lenders that targeted certain protected classes of borrowers with predatory or abusive loans: United States v. Delta Funding (2000); United States v. Long Beach Mortgage (1996); Hargraves v. Capital City Mortgage Corp. (2000).
You read that correctly – three cases, the most recent eight years ago. (In contrast, HUD reports that it investigates approximately 480 lending discrimination complaints each year and obtains settlements in nearly 30% of them.) Jackson pointed out, “One of the things that happens when people are against civil rights law, Dr. King would often say, is they either resist it and not pass it… or if they cannot stop it, they pass it but don’t enforce it…. When we called Attorney General Mukasey to discuss this matter he said, ‘Well, if you get us some information.’ The information is out there! You know, I mean he knows what’s happening there.”
Mayors, State Attorney Generals, and the US Attorney General should sue lenders for predatory practices and to recover lost revenues stemming from a real estate market undermined by subprime mortgages designed to fail. Baltimore is suing, Cleveland and Illinois – led by Illinois Attorney General Madigan – are all pursuing these kinds of lawsuits. (The FBI has also begun investigating the subprime market – but thus far, no mention of any focus on predatory lending.) Jackson believes it is time for a Marshall-like Plan on Mortgages. He pointed to the need for federal intervention and significant restructuring in the Great Depression with the Reconstruction Finance Corporation; and in the 1990’s with the Reconstruction Trust Corporation rescuing failing savings and loans. “This crisis is bigger than those,” Jackson said. “It’s much bigger.” He called the recent stimulus package “almost like medical malpractice. If you go into the doctor’s office with your right arm broken and you need it reset, but they do surgery on the left arm– you’d call that malpractice!” he laughed. “You ignore the crisis! This stimulus package does not address the impact of these multibillion dollar losses of tax revenues in American cities and suburbs. It completely ignores the source of the crisis. Because if they focus on that area they’ve got to deal with what happened.”
This metastasizing crisis, Jackson argues, needs to be seen as part of the continuing struggle for racial equality. But both journalists and economists have been slow to admit that lack of civil rights enforcement plays a major role in this financial collapse. “That’s the whole problem with the popular idea that we’re going to ‘transcend race,” he said. “You can’t transcend race, you’ve got to remedy the race…. Transcendentalism does not lend itself to racial remedy. We all want to get beyond a sore, but you must take the glass out and the inflammation out, and let it heal. Then you get beyond it. The Great Society sought not to transcend it, but to address it, through a plan to lift up the bottom. After slavery, it was Reconstruction. We seek to heal this, not to transcend it.”
A few times Jackson mentioned the first chapter of Martin Luther King, Jr.’s book published a year before his death: Where Do We Go From Here – Chaos or Community? It addresses the unfinished business of the civil rights movement, closing the gaps created by structural inequalities – leveling the playingfield. “The first phase… had been a struggle to treat the Negro with a degree of decency, not of equality,” King writes. “White America was ready to demand that the Negro should be spared the lash of brutality and coarse degradation, but it had never been truly committed to helping him out of poverty, exploitation or all forms of discrimination…. As the nation passes from opposing extremist behavior to the deeper and more pervasive elements of equality, white America reaffirms its bonds to the status quo…. The practical cost of change for the nation up to this point has been cheap…. The real cost lies ahead.”
Jackson sees these same dynamics at play in the subprime crisis. “We do not have the dogs – that symbolism as a war state – but we do have what we call structural inequality. We’re free but unequal, free and unequally protected by law. If freedom is the absence of barbarianism, and the absence of indecency, then equality is the presence of justice.”
As more and more studies, statistics, shattered lives and shuttered communities are visible, an unavoidable question arises: where is justice?
This article was co-authored by Greg Kaufmann, a freelance writer residing in his disenfranchised hometown of Washington, DC.