The Fallacy of the Fallout

During a recent lunch with a friend and the inevitable discussion about affordable housing in the District, he mentioned that the District has done too much already for affordable housing and that it was poor policies that resulted in the mortgage meltdown and the financial crisis that ensued. My policy wonk hat turned, I countered by citing hard data about the history of restrictive covenants, redlining, and the inner-workings of the subprime industry. He seemed genuinely surprised by this and it registered to me that many people, even very smart people like my friend, simply did not know the truth. A few sensational headlines that trade ill-researched positions seem to be all you need to convince the masses.

A very informative video of the history of restrictive practices in housing can be found here: http://hatdc.org/?p=599.

As for the subprime meltdown, while fishing through dozens of articles has illuminated much for me, the most impactful piece I’ve found is a demographic study done by Maurice Jourdain-Earl, the founder of a company called ComplianceTech. The full report can be found here: http://www.mortgagebankers.org/files/Conferences/2008/RegulatoryComplianceConference08/RC08SEPT24HMDAMauriceJordain.pdf

What’s interesting is for starters the majority of Subprime borrowers were not low income household, but rather middle and upper income white households. Many of these borrowers were not first-time buyers either. The overwhelming majority of subprime borrowing occurred when existing homeowners pulled out home equity through refinancing. Equity stripping became the practice that fueled the subprime boom and is directly attributable as the reason why so many families are “under water” on their mortgages today.

Even though the majority of borrowers were middle and upper-income White households, the most unfortunate part was that Black and other minority households were disproportionately targeted for these toxic products, even in instances where they would qualify for “good” loans.

This study is really important because it not only proves that low and moderate-income Minority households were not to blame for the crisis, but also in figuring out a realistic solution for the existing problem.

According to Maurice Jourdain-Earl:

The problem with portraying the foreclosure crisis as a minority and low-income problem is that it affects how solutions will be approached. If, on one hand, it is believed that subprime rate loans were predominately made to marginal segments of society (Black, Hispanic or low-income) housing policymakers may approach solutions with bias assumptions about minorities and minority qualifications (low education, bad credit, and low-paying jobs, etc.). Thus, there may a tendency to write-off the subprime lending debacle as a type of affirmative action gone bad. On the other hand, if it is believed that the foreclosure crisis affects broader and more demographically diverse segments of society then a more politically responsible approach is likely, thereby changing the tone, climate and context of how solutions are crafted.

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