We’re Not Stopping the Foreclosure Crisis because it Affects Mostly Brown People

First posted in June of 2010, but every bit as relevant today and it was then.  

BROWN SHADES

I was so relieved today when I read the results of a study published by the Center for Responsible Lending on the foreclosure crisis.  You see, up until now, I’ve been struggling to understand why we as a nation have allowed the foreclosure crisis to go on unchecked.

I mean, come on… not only has not one government program worked in the least, but at this point we don’t even have anything in place that MIGHT work to stem the tide of foreclosures that quite literally threatens our country’s economic stability, and therefore that of the entire world.

Think about it… according to the Obama Administration and a whole gaggle of media pundits, we managed to figure out how to save a multi-trillion dollar banking system that was only days away from imploding.  We turned around the worst economic and financial meltdown in 70 years… in less than one year!  Even General Motors, which was bankrupt a few months ago and about to cause starvation in a large part of the Midwest, as I recall, is not only back on its feet, but its about to have a banner year.  Banks like Citibank, Bank of America and others, went from being practically penny stocks a year ago, to handing out record bonuses only months later!

The stock market bounced like a Superball, coming up from the depths of panic to break through the 10,000 mark like it was tissue paper.  Interest rates are at record lows… there’s no threat of inflation… the housing market has bottomed out… in fact, Realtors and mortgage brokers are telling me that things are going gangbusters.  Around the world, entire countries are defaulting as they drown in debt, but not only did we get our economy back into recovery mode, but we even had time last year to fix our health care system!  We’re absolutely incredible!  USA…. USA… USA!  Come on, chant with me!

Even while fighting a seemingly un-winnable, protracted war in Afghanistan, we happen upon the largest underground treasure chest on the planet.  I mean, it’s like then one day we were shootin’ at some food, and up through the ground came a bubblin’ crude… oil, that is… black gold… Texas Tea.  Next thing we knew, why Jed’s a trillionaire!  And we’re not God’s chosen nation?  Please!

So, you can imagine how surprised I’ve been that when it comes to the biggest problem we have, the foreclosure crisis, its been pretty much left alone to eat away and the financial and societal fabric of our country.  It would be like finding out after the Deep Water Horizon disaster, that we decided to just leave the oil in the Gulf of Mexico where it floats.

DEEP

Well, as of today, the Center for Responsible Lending (“CRL”) has straightened it all out for me, and I’m so relieved that I’m taking the weekend off to finally relax a bit.

We’re not fixing it because it’s mostly affecting brown people! 

Oh, thank God… and here, I’ve been worried about almost nothing… aren’t I embarrassed?  It’s like the fence that we keep talking about building to stop illegal immigration into this country that’s NOT being built along the Canadian boarder.

The Center’s study showed that a home owned by a black family is 76% more likely to go through foreclosure than a home owned by a white family.  Gotcha’!  It’s like the Rodney King riots in LA so many years ago.  The riots went on like a National Geographic Special until late in the day when someone threw a beer bottle across Wilshire Blvd. landing in Beverly Hills… and they called out the National Guard.

The study also showed “worrying evidence” that the crisis will “wipe out a generation of wealth in communities of color and exacerbate the existing income gap between white and non-white families.”

So, I guess white families don’t have that much to worry about.  No matter what, they’ll still be doing a whole lot better than the non-white families.  That’s good news, right?  See… relax, white people!

The study then says the following:

“Once the foreclosure crisis is complete, as many as 10 million homes will go through the foreclosure process, which has cut across all demographic and income groups, from trailers to McMansions, from homes with sub-prime loans to homes with vanilla mortgages.”

Okay, first of all… the foreclosure crisis doesn’t “complete”.  What do you think happens… someone rings a bell and that’s it… it’s over now?  Foreclosures breed foreclosures breed foreclosures.  Each one lowers the property value of the houses near by, eating away at the equity and causing more and more people to owe more than their home is worth.  Nationally, 25% of the homes are underwater; in California the number is close to 50%.

111 HOME

Negative equity and broken credit markets are what drive foreclosures, because when life events occur, and they most definitely do occur, people can’t sell or borrow against their underwater homes so they end up in foreclosure, which furthers the reduction in home values in the surrounding area.

Negative equity also means lower levels of consumer spending and that reduces sales of goods and services, which makes unemployment go up… which in turn leads to more foreclosures and less spending by consumers.  And all of this is to say nothing about the bondholders that lose their invested dollars as the payment streams inside the mortgage backed securities dry up from increasing defaults and falling home prices.

And should we even bother talking about the toxicity of the assets that are STILL clogging up the balance sheets of our too-big-to-fail, too-big-to-save banks?  I know, Geithner at Treasury and Bair at FDIC have suspended the accounting requirements for banks that would normally require them to write down the values of such assets, so they don’t have to recognize the losses at the moment, but that’s not a permanent fix, right?  That doesn’t mean the losses aren’t there, just because you don’t recognize them, right?

And, as home values fall will the banks get better or worse, from a financial perspective?  Class?  Anyone?  Anyone?  Right… worse!

So, what would cause the foreclosure crisis to be “complete”?  Immigration to this country?  Can’t be that, ‘cause obviously many of those people would be brown and we’ve already established how well that color does when trying to hold onto homes.  So, I guess you could say that brown couldn’t really do that much for us.  (Sorry about that , couldn’t resist.)

 

BROWN

 

And might I mention… “from homes with sub-prime loans to homes with vanilla mortgages.” From sub-prime to vanilla?  Why not just go with “from chocolate to vanilla,” and be done with it.  Say what you mean, child.  I’d like to suggest that you are obsessed with color and need at least a vacation, and probably years of therapy.

The CRL shows that, “all in all, 17 percent of Latino homeowners, 11 percent of black homeowners, and 7 percent of white homeowners have lost their homes to foreclosure since 2007, or are at imminent risk.”

Okay, let’s do the math…

According to the U.S. Census Department, here’s how the color chart in this country breaks down as of 2000, which we can assume hasn’t changed all that much compared with today in percentage terms.  And please know that I did not write the words below, it’s how the Census describes things.

White alone, non-Hispanic:            199,491,000

Black, or African American:             41,127,000

Hispanic or Latino                        46,944,000

So…

7 percent of white families is: 13,964,370.

11 percent of black or African American families is: 4,523,970

And 17 percent of Hispanic or Latino families is: 7,980,480

Want to know what those numbers show more than anything else?  They show that more than 25 million American families are about to be wiped out, and endure a life changing event because Wall Street’s bankers abused the mortgage securitization process, knowingly creating bonds that appeared to ratings agencies to be “triple A” but weren’t, which was necessary in order to sell them to pension plan investors, because at the same time they distorted and abused the usage of credit default swaps that allowed them to place bets against the defective bonds at 50:1 odds.  Okay, so that’s both an over-simplification and a run-on sentence, but my point is the same.

These same banks leveraged themselves 30 and 40 to one, based on the absurd belief that housing prices would never reverse themselves.  They created toxic mortgage products designed for nothing more than refinancing in a year or two, and then used predatory lending strategies and tactics to take advantage of people of ALL COLORS, of all ethnicities.

BROWN BLACK

Did the predatory lending, however, target the inner city, lower income African American communities?  You bet it did.  In fact, I wrote an article about that abomination last year, titled: “Wells Fargo’s Ghetto Loans and the Mud People.”  And if you haven’t read it, you should.  Everyone should.

Our foreclosure crisis is not a race issue.  And, at the same time, it very clearly is.

Our foreclosure crisis is an American tragedy that, as we stand here today, is sure to be catastrophic on an historic scale… for tens of millions of American families in every conceivable shade of brown, at every economic level.

To think that it is somehow possible for tens of millions of American families to endure such a tragedy… while watching a handful of elite Wall Street bankers, directly responsible for the crisis, not only walk away unscathed, but encouraged to remain in their positions and allowed enormous profits as a result… to think that such a thing can happen without impact to our society as a whole is utter foolishness.

This is not a tragedy that discriminates.  The race diminished as a result of what is being allowed to transpire will be “human”.   But, at the same time, it’s those of color that will pay the highest price and endure the most abuse.

To suggest otherwise is not only insensitive at a level that makes one cringe, but additionally, will only serve to divide people further, at a time when the nation is already struggling under the unfounded and erroneous belief that it is only “irresponsible borrowers” who find themselves in foreclosure, and they are therefore deserving of their fate.

As the CRL study correctly states:

“The costs of foreclosure are extensive, multifaceted, and long-term, extending far beyond individual families to their neighbors, communities, cities and states.”

However, while the CRL study correctly points out that, African Americans, Latinos and other ethnic minorities will pay a higher price as a result of the crisis widening, it will be the legacy of disparity in incomes and education that will be the cause.  This effect will not be the result of the crisis discriminating but from the realities of life in America, a nation still trying to recover from the inequity of segregation.

At the same time, I do believe that there have been racial undertones preventing our society from taking faster action to prevent this crisis.  This crisis was initially mischaracterized as being a “sub-prime” crisis, and because there are racial undertones and racial realities associated with the term “sub-prime,” it is also, I believe, unquestionably true that that our nation has done less to address the crisis to-date than we would have had the affected segment of society been seen as predominantly “white”.  And to the extent that’s the case, all involved should be deeply ashamed.

BLACKS

Lastly, the CRL study estimates that between 2009 – 2012, there will be indirect losses in wealth resulting from depreciation of nearby properties of close to $400 billion in African American and Latino communities, but based on the report’s other conclusions, I think it’s far more meaningful to realize that the number will be far in excess of $1 trillion, all communities combined.  These losses will not accrue to those losing homes, but by those near by.  And yet many in this group still maintain that those in financial distress now, should not be helped.

When you add in the direct losses of those losing homes, and the directly related deterioration of the bonds and credit derivatives, the numbers climb into the tens of trillions of dollars, and very quickly the scope of the problem becomes both apparent and overwhelming.

Then look at our country’s core problem: unsupportable levels of debt… government, personal and corporate. Consider the aging and massive baby boomer generation that is declining in its propensity to earn and spend, has not saved enough for retirement, and will need to access the unfunded promises of pensions and Medicare. We cannot spend, borrow, or grow ourselves out of this debt.  As Chairman Bernanke said just a week ago while testifying to Congress, we are on an “unsustainable path”.

Those that believe we can grow our way back to prosperity as we have before are misinterpreting history.

The result of the Great Depression and war years was a debt-free population that had saved through the war.  The post-WWII baby boom, coupled with the fact that our country’s manufacturing capacity was not destroyed during the war, is what drove our country to the economic prosperity we’ve known for the last 50 years.  Conversely, today’s college students are looking at graduating to no jobs, six-figure debt loads, and as a result, are in no rush to start the families that provide the foundation for economic expansion.

Those that believe we can spend our way back are just as mistaken.  Any amount of fiscal stimulus, eventually runs out, and when it does all we have to show for it is more debt.  Japan, for example, tried massive amounts of stimulus spending, and the result is a country with debt to GDP of 200%, but no economic growth more than two decades later.

We passed a $700 billion stimulus bill just a little over a year ago… we failed to create jobs or any lasting impact.  We stimulated housing with tax credits, government spending, and the purchase of mortgage backed securities, and the moment those programs stopped the real estate market literally fell off a cliff and is again poised to continue its inevitable decline.

And, certainly most memorably, we sacrificed transparency in order to go dramatically further into debt.  We pumped trillions of dollars into failed financial institutions, embraced childish policies, like “extend and pretend” and the suspension of mark-to-market accounting, and circumventing our legislative process, we allowed banks to borrow from the Fed and loan to Treasury in order to make the spread, which we allowed the banks to call “profits”.

These programs and policies have led to three notable outcomes:

  1. Our banking system didn’t fail, but the toxic assets that were threatening the solvency of our institutions are right where they were in the fall of 2008.
  2. We are much deeper in debt as a result of the massive borrowing and spending associated with “saving” institutions that remain insolvent absent government support.
  3. The money that made the banks appear profitable, combined with no lending and essentially risk-free trading, resulted in a citizenry forced to watch literally hundreds of billions in bonuses handed out to the very individuals that caused the crisis in the first place.

After almost 20 years, Japan should have shown us by now that you can in fact deficit spend for decades without result.  Greece, Spain and others to be named later should show us what happens when the ability to do so runs out.

The problem we face is unsustainable levels of debt throughout every aspect of our society.  If we are to ever break the deflationary spiral we have allowed to take hold, we have no choice but to fix the structural problems that can only continue to make any sort of real recovery impossible.

The cuts will be painful and perhaps politically unpalatable, but they are at the same time, anything but optional.  Reducing the amounts promised by public pensions, cutting government wages, the restructuring of public programs like Social Security and Medicare, a reduction and perhaps elimination of corporate taxes, and changes to the tax code that eliminate the incentives to send jobs overseas, and the unwavering commitment to eliminate debt in government and throughout our society… all are areas worthy of our immediate attention.

Just think where we as a nation might already be today, had we followed a different path coming out of the financial meltdown.  We could have dedicated a portion of the stimulus, government spending and tax credit programs to stabilize the housing market. A stabilized housing market would have buoyed consumer spending, which would have in turn reduced unemployment thereby preventing additional and unnecessary foreclosures.

Of course, on the other side of the coin, absent the trillions of dollars we pumped into failed financial institutions, our banks would be somewhat smaller, but I think most of us could have gotten by with that reality for a while.  And we could have enacted real financial reforms that would eliminate the problem of “too big too fail” for future generations… like our son’s and daughter’s, for example.

Lastly, to those who believe that there is an upside to our foreclosure crisis… that they will one day be among those able to scoop up near limitless opportunity born from the losses of their fellow citizens, I can only offer that they are sadly quite mistaken.

While few in this group may realize it today, that sort of thinking can only lead to their inclusion in our country’s race to the bottom.

 

Mandelman out. 

 

 

 

Other Mandelman Matters articles you might like… in fact you probably will… Oh, come on… why not try clicking at least one?

 

Click here to understand Securitization, the Bond Market & Mortgage Backed Securities.

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