john a. powellExecutive Director, Kirwan Institute for the Study of

Race and EthnicityWilliams Chair in Civil Rights & Civil Liberties, Moritz College of Law

November 13, 2010Consumer Rights Litigation ConferenceBoston , MA

What is ‘Home’? What is opportunity? Creation of Dual Housing and Credit Markets What’s on the horizon?

Unfair (and fair) housing and credit are entwined What is a fair and just economic & financial system? Principles for Reform

Housing

ChildcareEmployment

Education

Health

Transportation

Effective Participation

Opportunity structures are critical to opening pathways to success: High-quality education Healthy and safe environment Stable housing Sustainable employment Political empowerment Outlets for wealth-building Positive social networks

Neighborhoods don’t determine lives, but they shape and affect lives

Living in a disadvantaged neighborhood as a child is the equivalent of losing a year of school

Source: Sampson, R. J., P. Sharkey, et al. (2008). "Durable effects of concentrated disadvantage on verbal ability among African-American children." Proceedings of the National Academy of Sciences (PNAS) 105(3): 845-852.

… generates unhealthy levels of stress hormones in children, which impairs their neural development

… correlates with children having levels of lead in their blood 9 times above average; linked to ADD and irreversibleloss of cognitive functioning

… links to higher levels of violent offending among juveniles

… is highly correlated with childhood aggression and social maladjustment

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Lower EducationalOutcomes

Increased Flight

of Affluent Families

Neighborhood Segregation

SchoolSegregation &Concentrated

Poverty

• In 1960, African-American families in poverty were 3.8 times more likely to be concentrated in high-poverty neighborhoods than poor whites.

• In 2000, they were 7.3times more likely.

Lack of low-cost credit options Few preventative care doctors High-cost grocery stores that lack fresh

produce Concentrated poverty schools

Policies need to both bring more sustainable choices to neighborhoods and allow people more choices on where they and their families live

…BUT NOT FOR EVERYONE: THE STORY OF UNFAIR HOUSING AND CREDIT MARKETS

For every $1 in assets held by African Americans, Whites hold $9 This disparity is primarily due to differences in home equity

Source: “Net Worth and Asset Ownership 1998-2000”. Household Economic Studies. U.S. Census Bureau (2003)

The Creation of Dual Housing and Credit SystemsSeparate and unequal

http://upload.wikimedia.org/wikipedia/en/9/97/Holc_redlining_map.jpeg�

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“If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values.” –Excerpt from the 1947 FHA underwriting manual

J. Hernandez shows how areas in Sacramento with racially restrictive covenants in the past had the fewest loan denials today…shows where prime credit was steered.

Post New Deal:The Three Party Mortgage

Market

Pre-Depression: The Two Party Housing

Market

Homebuyer

Party 1

Seller (and/or) Lending Institution

Party 2

Homebuyer

Party 1

LendingInstitution

Party 2

Government Sponsored Enterprise purchases , sells/holds or insures mortgages

Party 3

This becomes very big business, i.e. F/F $800 Billion EACH portfolio in 2009

1970s: Fundamentally new way of getting funding for mortgage loans – securities GSE’s start issuing “mortgage backed securities” Provided ‘guaranteed’ income to investors

1977 Private label mortgage backed securities issued By 1990s, GSE’s losing market share to private MBS After 1997, Fannie and Freddie buy more private label

MBS (1998: purchased $25 B…2007: $267 B) 2003 …purchase more private subprime & Alt-A Collapse hits private market and Fannie & Freddie Though private MBS small % of holdings, big risk

Note: GSE-issued prime securities performing fine

Source: Chris Peterson, U. of Utah Law School

http://upload.wikimedia.org/wikipedia/en/9/97/Holc_redlining_map.jpeg�

“Wall Street has gotten a lot of mileage out of the accusation that the political system simply doesn't understand how Wall Street works…The problem is that Wall Street also doesn't understand how Wall Street works… Bankers didn't understand the tail risk of collateralized debt obligations. Ratings agencies didn't understand the subprime mortgage market. Alan Greenspan didn't understand the risks posed by derivatives. Robert Rubin, the former co-chair of Goldman Sachs and one of Citigroup's directors, told the Financial Crisis Inquiry Commission that "all of us in the industry failed to see the potential for this serious crisis."

Ezra Klein, “Wall Street says Washington doesn't understand finance. Well, neither does Wall Street.” The Washington Post, April19, 2010.

CRL estimates that from 1998 – 2006, only 9% of all subprime loans went to first time homebuyers Majority were refinance loans Refinance loans disproportionately marketed to

African American neighborhoods

Photo and story credit:Baltimore Finds Subprime Crisis Snags Women--New York Times 1/15/08

Estimated cost of subprime lending to all homeowners: $2.7 trillion

Loss of accumulated wealth in home equity over generations…????

WHAT WILL THE EFFECTS BE ON ALREADY LOW OPPORTUNITY NEIGHBORHOODS?

Financial Reform

Consumer Protection Bureau

Source: Pastor et. al, Program for Environmental and Regional Equity

“the whole financial system has been riggedagainst lower income communities in general and communities of color in particular”

“our financial system has a distinctly racial character, one that requires a response rooted in racial and social justice”

“if we are going to turn the financial industry back into something that benefits the consumer … WE HAVE TO SHIFT THE UNDERLYING BALANCE OF POWER”

Source: Pastor et. al, Program for Environmental and Regional Equity

Need for social movements for financial equity

“… the focus should not be simply on foreclosure relief, but on a new financial frame that has at its heart the restoration of opportunity for all”

Federal housing finance policy must align with and support longstanding federal housing goals to protect against discrimination.

The federal government has a responsibility to ensure that the secondary market serves all borrowers in a fair and equitable manner and to foster the equalization of homeownership rates.

A reformed housing finance system must eliminate the dual credit market.

Regulatory oversight of the housing finance system must be rigorous and comprehensive and must include effective fair lending enforcement.

Secondary market transactions must be transparent and accountable to the public.

The system must have an affirmative obligation to offer capital and credit in communities devastated by the foreclosure crisis and offer access to families who were targeted for inappropriate and unsustainable mortgages.

The housing finance system must provide capital for sustainable rental and ownership development in all communities.

The housing finance system must support product flexibility and sustainable innovation and offer access to institutions of all sizes and in all geographic areas.

www.KirwanInstitute.org

KirwanInstituteon:

www.race-talk.org

Kirwan’s Fair Housing and Fair Credit work

Unequal credit markets and segregated housing happened together. Fair credit and fair housing will only happen together.

Global finance has evolved against – and plays out in – racially and economically segregated neighborhoods. Advocates need to know more about banking and finance

Fair housing and fair credit is an issue for all of us, but attention needs to be targeted to marginalized communities. Otherwise, policies miss key opportunities and challenges

and miss those most affected by the crisis.

AFTER THE SUBPRIME LENDING CRISIS…WHAT DO WE DO FROM HERE?

Summary Findings Fair housing and fair credit are about local places,

people, relationships, and histories

Federal policy must support (and not undercut) both anti-discrimination efforts and affirmative commitments to fair housing and fair credit

What is a fair and just 21st Century economic system, and what kind of financial system is needed to support it?

Recognize that the paths to fair credit and fair housing will differ according to regional context and local history. Take local impediments to fair housing and fair credit – racially discriminatory history, proliferation of predatory credit, resistance to mainstream institutions – seriously.

Assist local and regional fair housing and community reinvestment activists in their efforts to organize, mobilize, and lobby.

Promote local, multi-partner pilot projects that are mission driven to affirmatively promote fair credit (like the National League of Cities’ “Bank On Cities” initiative).

Connect fair housing, fair lending, community reinvestment, civil rights and other advocacy groups (financial reform, faith-based, labor, etc.)

Support the creation of a Consumer Protection Financial Agency and give it adequate resources and enforcement power.

Promote regulatory reform of the product, rather than the institution.

Recognize and enforce the duty to affirmatively further fair housing in relevant federal agencies and programs.

Press for better and more comprehensive data for all federal spending programs, including stimulus funding. Expand HMDA data reporting requirements to include loan term information.

Enact a comprehensive, nationwide plan to protect renters from foreclosure.

Contribute to a national communications effort around the danger of excluding a majority of American workers from a solid financial future.

Explore the potential for fundamental changes to regulation and financial incentives. Current incentives are perverse – they promote credit products inherently more likely to fail or result in punitive fees to those least able to manage them.

Support the national networks of fair housing, community reinvestment, fair lending and financial reform movements.