By Liana Stinson
People come to the United States seeking the “American Dream.” The typical “Dream”: owning your own home with a white picket fence in the front, owning your own vehicles, and having a good job to support your family. This is shared by the majority of Americans along with those immigrating to this country. Owning a home has turned some minority and low-income individuals’ “Dream” into a nightmare.
Studies have shown that owning a home contributes to the overall general welfare of a person and their family including personal wealth, helping children succeed in school, strengthening families, etc. President Clinton and President Bush urged for new ways to extend credit to low-income individuals so that they too, could own their own home. This challenge excited lenders to create a win-win-win situation: low-income individuals get homes, lenders made money, and politicians get to take credit for expanding home ownership to low-income individuals.
Subsequently, lenders created “exotic loan products and loose underwriting guidelines” which were meant to entice these individuals into home ownership. Being a home owner is seen as moving up the ladder in society. So naturally, low income individuals want to share in that economic prosperity of owning their own home and gaining personal wealth. Lenders offered them subprime and predatory loans. Subprime loans gave people with low credit scores a chance to obtain a loan, and therefore a house, but it came with a cost. These loans were offered at much higher interest rates than regular loans. Because of the high interest rate, it was difficult for people to afford their monthly payments. Consequently, people defaulted on their loans which led to the financial crisis in 2007.
Subprime loans were also given to wealthy minority families. Strikingly, minority families making more than $200,000 a year in 2006 were “more likely to be given a subprime loan than a white family making less than $30,000 a year.” Subprime loans were a win for banks. The wealthy minority families would pay higher rates and wouldn’t default so banks would make much more money than if these families were given a regular loan.
Subprime loans were a part of predatory lending practices that banks engaged in. Lenders targeted minority individuals, offered the borrowers unfair or abusive terms, and convinced them to accept loans that the borrower cannot afford. One example of this occurred in Baltimore. Wells Fargo convinced minorities to accept subprime loans and gave them “less favorable rates than white borrowers.” The bank then foreclosed these homes when the borrowers failed to pay the massive interest rates. Wells Fargo agreed to a $175-million-dollar settlement in which it has to give $2.5 million directly to 1,000 area residents. The minority borrowers who were coerced into accepting subprime loans received an average payment of $15,000 each.
Prior to the financial crisis, home ownership was lender-based. Lenders were willing to extend credit to low-income borrowers which allowed banks to profit, borrowers to own a home, construction companies to have more jobs, and the economy to flourish. Politicians were also ecstatic about this credit line being extended because home ownership levels rose among low income individuals. This in turn increased politicians’ approval ratings with low income individuals.
Lender-based credit came with enticing offers along with home ownership. People could receive “no down payment, interest-only, negative amortization, and low introductory rates” loans. This allowed for borrowers to incur large amounts of debt and spending. This increase in loans and debt did help the economy, but it was short-lived. People were living beyond their means which could not, and did not, last forever. Housing prices have risen while the average wage has stayed the same. Politicians were still advocating home ownership which contributed to personal wealth. People were willing to borrow and accept high credit rates for homes above their means, and lenders were willing to extend credit.
Home ownership is still a viable and great goal to achieve. There are both social and personal benefit to owning a home and gaining personal wealth. Owning a home ties an individual to a community which allows that person power to participate in making decisions about that community. This enables people to become important and influential members of their community. Since the lender-based framework that led to people’s homes being foreclosed didn’t work, home ownership initiatives should be set up allowing low-income individuals to obtain fair loans so that they too can get a chance at the “American Dream.”
In order to create fair home ownership opportunities for low-income individuals, there needs to be a community-based framework set up. There needs to be a reliance on community-based organizations, a strong community for those individuals to buy in, and an increase in the investment from the federal government.
Community-based organizations thrive in areas where there is a lot of community participation. Those within the community are better able to understand the challenges and the particulars of them which enables the members to better solve the issues. An example of this happened in Syracuse, NY which faced “declining home prices, deteriorating neighborhoods, and an overwhelming number of absentee-owner properties.” The city interviewed the residents of Syracuse regarding theirs fears of ownership and the residents feared “continued price declines for homes in the area, such that whatever money they put down as equity would be wiped out.” The city of Syracuse then developed a home equity insurance program for homeowners. The policy would pay homeowners if, at the time of selling their house, local housing prices were lower than at the time they bought the home. This policy allowed Syracuse reverse the housing market that was falling for decades because people were not faced with the risk of losing home equity. This community-based policy allowed individuals to become homeowners when they were not able to prior. However, an increase in home ownership is not enough to solve the problem.
Homeowners are often not successful when there are other problems in the community such as poor transportation, poor education, high crime rate, etc. Community-based organizations can help right these wrongs by understanding the particular needs of the community. An example of this happened in Overtown, Florida. What was once a “thriving and vibrant black community,” turned into a city immersed with crime, riots and a dramatic population decrease from 33,000 to less than 8,000 over fifty years. Local organizations held meetings and developed a plan to help better the city. These organizations provided city residents with “job training, entrepreneurial development, wealth management, and business counseling.” The community-based organizations addressed these needs by understanding them which allowed the city to prosper again.
Finally, there needs to be an increase in the federal budget. Expanding the home ownership budget towards low income individuals would help spur the economy by allowing those individuals to spend their money on other things. When people are spending less on their mortgage bill, they are more likely to put that back into the economy by purchasing clothing or the pair of shoes that they have always wanted. Expanding the budget will also allow for more personal wealth. Owning a home gives an individual a very valuable asset which has the potential to create wealth for that person in the future. Expanding the budget will also allow for social mobility for the low-income individual. Home ownership is crucial in communities in regards to making decisions and becoming an active member in one’s community. An increase in the federal budget can allow low-income individuals a real chance at owning a home which will in turn positively impact their lives.
The government currently has a community development program called Community Development Block Grant (CDBG). This program has been around since the 1970s and has been used to provide funding to “Small Cities.” The cities then distribute the funds to activities that: “(1) benefit low and moderate income persons, (2) aid in the prevention or elimination of slums or blight, or (3) meet urgent community development needs.” There is also the Neighborhood Stabilization Program (NSP) which distributes funds to small cities for the purchase and redevelopment of foreclosed and abandoned properties. Of these funds, 100% must benefit low and moderate income individuals. At least 25% of the funds must be used to purchased foreclosed or abandoned properties and sell them to low income individuals. There is also a short lists of what activities the NSP funds may be used for.
Throughout history, owning your own home has remained part of the American Dream (with or without the white picket fence.) Low-income and minority individuals were enticed by that dream at a time where lenders were coercing them into accepting rates on mortgages that they could not afford. Even wealthy minorities were offered these high rates at the same time that white moderate-income individuals were offered normal rates. Home ownership comes with many social and personal benefits that all Americans, regardless of their minority status or low income, should be able to take advantage of. They should not be taken advantage of.
In order for this to happen, there needs to be much more involvement by community-based organizations. These organizations understand the needs of the community and are able to develop plans to create programs for sustainable low-income homeownership. Through these programs, low-income and minority individuals will be offered a fair chance at achieving the American Dream of home ownership.
- Jared Ruiz Bybee, In Defense of Low-Income Homeownership, 5 Ala. C.R. & C.L. L. Rev. 107, 140 (2013).
- Luke Broadwater, Wells Fargo agrees to pay $175M settlement in pricing discrimination suit, The Baltimore Sun (Jul. 12, 2012), http://articles.baltimoresun.com/2012-07-12/news/bs-md-ci-wells-fargo-20120712_1_mike-heid-wells-fargo-home-mortgage-subprime-mortgages
- Emily Badger, The Dramatic Racial Bias of Subprime Lending During the Housing Boom, CityLab (Aug. 16, 2013), https://www.citylab.com/equity/2013/08/blacks-really-were-targeted-bogus-loans-during-housing-boom/6559/