Paula McGee counsels first-time homebuyers to make sure they understand what they’re agreeing to when they sign mortgage loan papers.
As the Fort Wayne Urban League’s director of development and program research, McGee knows that predatory lending practices sent more black borrowers into foreclosure than whites during the Great Recession.
The local woman also knows first-hand the agony of having a home loan that requires payments so high they couldn’t be met on her income.
Thousands of loans like that were made during the housing bubble. After it burst in 2008, thousands of people lost their homes.
Although both blacks and whites were affected by the economic downturn, blacks have suffered greater lingering effects, according to a recent study.
The study commissioned by the American Civil Liberties Union found that blacks have lagged significantly behind whites in rebounding financially following the recession. As a result, their children and grandchildren will likely have limited opportunities for success, experts said.
Sarah Burd-Sharps, co-author of the study "Impact of the U.S. Housing Crisis on the Racial Wealth Gap across Generations," said when communities struggle with home foreclosures, those parents can’t help their children pay for college or technical training.
Without post-high school education, the next generation struggles to find decent jobs. And the cycle continues, Burd-Sharps said. Lack of education in black communities leads to both economic and safety issues, she said.
"We all suffer," she said. "But it really is a drain on their kids and their kids’ kids, who start life with a strike against them. The wealth of your parents really predicts the wealth of kids."
Life on the edge
Going into the study, Burd-Sharps knew that the average white family isn’t living as close to the edge financially as the average black family. But she was still surprised by the study’s results, which project how extensive the gap will be in future years.
By 2031, white wealth is forecast to be 31 percent below what it would have been without the Great Recession, while black wealth will be down almost 40 percent, according to the study, which was released in June.
For a typical black family, median wealth in 2031 will be almost $98,000 lower than it would have been without the Great Recession. Wealth includes home equity, retirement savings and all other investments.
Because blacks tended to have more of their total wealth tied up in their homes before the recession than whites, they were hit extra hard when housing values plummeted, the study shows.
The ACLU has identified the wealth gap as a continuing result of racial inequality, said Dennis Parker, director of the ACLU’s Racial Justice Program.
Opportunities to break from that cycle of poverty are limited, he said. His organization wanted to find out how it affects people now and in the future. That’s why the ACLU commissioned the study performed by Burd-Sharps and the Social Science Research Council.
Americans resist thinking that family wealth and status laid the groundwork for their individual success, Parker said.
"Everyone would prefer to think that the good things that happen to them are the result of their hard work and character," he said.
Meanwhile, they think anything bad that happens is the result of outside, uncontrollable forces, said Parker, whose office is in New York.
"This is a way to try to find a way to talk about it," he said, adding that it helps to remove the idea of fault, making it easier to have a rational discussion about why blacks have less wealth than whites on average.
NAACP officials started studying predatory lending to minorities before the recession and forecast the housing bubble would burst.
Hilary O. Shelton, director of the NAACPs Washington bureau, said his organization’s prediction that more than 50 percent of blacks would lose homes to foreclosure came true.
Shelton was deeply affected by the testimony before Congress of a widow who owed $110,000 on a $25,000 home improvement loan. He sat beside her as she described taking out the loan to increase insulation and reduce energy costs at the suggestion of an unethical broker.
Adjustable rate mortgages or ARMs caught many borrowers off guard when the interest rates on the money owed started climbing higher and higher, said Shelton, who will visit Fort Wayne Thursday as keynote speaker for the 70th Annual Marjorie D. Wickliffe Freedom Fund Banquet.
But the financial fallout didn’t affect just those who signed up for loans they couldn’t repay.
As foreclosures swept through predominantly black neighborhoods, the vacancies drove down the value of the homes that were still occupied, affecting those families’ wealth, too, Shelton said.
As a result, the NAACP has supported new programs that would help restore some of what people lost. One example is a principal reduction plan that would lower loans so people don’t owe more than their homes are worth.
To fight or not
Local officials are also working to help black families get housing they can afford.
Heather Presley-Cowen, deputy director of Fort Wayne’s Housing and Neighborhood Development Services, said racial concentrations in some areas of the city create a barrier to fair housing choice.
Federal banking disclosure forms have shown that mortgage applications by black Fort Wayne residents have been rejected at higher rates than applications by whites, she said. Those decisions were based on financial and credit histories, which are often weaker for blacks than whites.
McGee, who works at the Urban League and has a law degree, said she’s been frustrated by the local rate of loan denials.
"You know the discrimination is happening," she said. "It’s a question of do we have the time to fight this? To prove it?"
The Justice Department has reached settlements with two major banks after the financial institutions were accused of violating fair lending rules. Wells Fargo Bank agreed in 2012 to pay more than $175 million to settle claims.
Bank of America in 2011 agreed to pay $335 million to settle claims that Countrywide Financial Corp. discriminated against minorities when approving home loans. BofA acquired financially troubled Countrywide – and its debts – in 2008.
Jonathan Boyd wants people to know that not all banks took advantage of loan applicants. Based in Evansville, Boyd is Fifth Third Bank’s senior vice president of mortgage banking.
"They have been champions of responsible lending the whole time," he said of officials with the Cincinnati bank.
Boyd acknowledged that some "crazy lending products" caused the housing collapse, but he worries that some of the regulations now being enforced are keeping some potential homebuyers out of the market, including millennials.
New requirements say borrowers have to document where every penny of their income comes from, he said. That’s a challenge for restaurant servers and bartenders, who rely primarily on tips, he said.
"I think everyone should have the opportunity to be a homeowner," he said. "We have to be able to convince (banking regulators) the loans are doable."
Meeting a need
Presley-Cowen sees multiple problems, including minorities’ limited access to credit.
Creative programs are needed, she said, to help blacks increase home ownership rates.
Her office has been working with builders in the city’s southeast quadrant. In some areas, she said, it costs more to build a house than the finished building is appraised for.
Renaissance Pointe is an example of what officials can do to make housing more affordable, she said. Three- and four-bedroom homes rent for $274 to $674 a month, depending on income and family size.
After establishing a solid track record of making monthly payments, residents can apply to buy the properties at a reduced price with the help of down payment assistance.
"We’re not helping you forever," Presley-Cowen said. "We’re helping you so that you can vacate the space and leave it for someone else who needs it."
The lease-to-own properties are so popular locally that demand has overwhelmed supply, however. Builders receive tax credits for participating in the program, but the Indiana Housing & Community Development Authority has chosen to divert much of the federal money that paid for the tax credits into other programs, Presley-Cowen said in July.
One element of the lease-to-own program is mandatory homebuyer classes.
McGee, of the Urban League, wishes she had taken one. Now she reminds clients that bankers make money by making loans. They don’t necessarily recommend loan terms that are going to be most manageable for the borrower to pay back.
"You are the one," she emphasizes to clients. "You know your budget better than anyone else. You going to have emergencies. Have you planned for them?"
In the past 11 months, 24 families have attended a first-time homebuyers’ workshop at the Urban League compared with 193 who went to the nonprofit for foreclosure prevention counseling, said McGee, an attorney.
Despite the negative trend, she can point to some successes.
A single mother of two who lost her job sought counseling after receiving a formal foreclosure notice.
With McGee’s help and financial assistance from Indiana’s Hardest Hit Fund, the local woman is still in her home. The single parent successfully applied for two years of government assistance to pay her monthly mortgage up to a total of $30,000.
McGee believes the break might be just what that local woman needs to get back on her feet.