Latinos and the Mortgage Crisis: Implications for Asset Building

1. Latinos and the Mortgage Crisis: Implications for Asset Building Carolina Reid, Ph.D. and Vivian Pacheco Federal Reserve Bank of San Francisco September 4, 2008 Analysis of First American LoanPerformance data provided by the Federal Reserve Board of Governors. Do not cite or reproduce without permission. The views expressed in this presentation are my own and not necessarily those of the Federal Reserve Bank of San Francisco or the Federal Reserve System.

2. A rosy start to the decade • Between 2002 and 2006, most indicators pointed to increasingly prosperous conditions for low-income families • Low unemployment rate • Increased uptake of Earned Income Tax Credit • Increased homeownership • Homeownership rate among Latinos rose from 46.3 to nearly 50 percent between 2000 and 2006, an addition of more than 1.6 million Latino homeowners • CFED: nationwide, between 2002 and 2004 median net worth jumped 25.8 percent, to $65,150

3. Unstable foundation • These wealth gains, however, were built on a shaky foundation • Irresponsible mortgage lending products • Predatory, and certainly unaffordable

4. Distribution of High Cost Lending: Los Angeles HMDA 2004 Source: Home Mortgage Disclosure Act

5. Distribution of High Cost Lending: Los Angeles HMDA 2005 Source: Home Mortgage Disclosure Act

6. Distribution of High Cost Lending: Los Angeles HMDA 2006 Source: Home Mortgage Disclosure Act

7. Latinos and subprime lending • Black and Hispanic borrowers are more likely to obtain higher priced—i.e. subprime—loans than are non-Hispanic white borrowers • In 2006, 46.6 percent of loans made to white Hispanic borrowers were higher priced, compared to 17.7 percent for white, non-Hispanics • While some of these differences may be due to different borrower profiles, a study by CRL found that these disparities remained true even after controlling for a variety of factors

8. Percent of Hispanic Population Census 2000 Source: Census 2000

9. Unstable foundation • These wealth gains, however, were built on a shaky foundation • Irresponsible mortgage lending products • Predatory, and certainly unaffordable • Unsustainable growth in house values • According to Case-Shiller index, US house prices have dropped 18.8 percent since their peak in July 2006

10. U.S. house values Case Shiller Index (2000=100)

11. Unstable foundation • These wealth gains, however, were built on a shaky foundation • Irresponsible mortgage lending products • Predatory, and certainly unaffordable • Unsustainable growth in house values • According to Case-Shiller index, US house prices have dropped 18.8 percent since their peak in July 2006 • Over-reliance on credit • 40 percent of families carry credit card balance • Savings rate is a mere .04 percent • Cash-out refinances: loss of equity • Rising foreclosures threaten to undermine homeownership gains

12. Foreclosures concentrated in subprime ARM market Source: Mortgage Bankers Association, National Delinquency Survey, 1st Quarter 2008

13. Percent of Mortgage Loans in Foreclosure or REO (by zip code) April 2008 Source: McDash Analytics, LLC and FRBSF calculations

14. Percent of Mortgage Loans in Foreclosure or REO (by zip code) September 2007 Source: McDash Analytics, LLC and FRBSF calculations

15. Percent of Mortgage Loans in Foreclosure or REO (by zip code) April 2008 Source: McDash Analytics, LLC and FRBSF calculations

16. Who is affected? • Key question, but no easy quantifiable answer • Oakland “drill down” • More than 50 percent have Hispanic surnames • Interview results • Preliminary analysis of California data • Using census data at the zip code level significantly underestimates the proportion of families that are Latino • SF Fed trying to develop better measures of who is affected, early results show disproportionate impact on Latinos and some Asian groups

17. Key challenges • Housing market instability • Negative spillover effects on the neighborhood • Labor force vulnerability • While Latinos comprise about 14 percent of the U.S. labor force, they represent 33 percent of workers who involuntarily shifted to part-time work • Because more than half of Latino workers are immigrants and are more likely to be young and less skilled, they are more susceptible to economic cycles • State budget crisis • 29 States face significant budget shortfalls, and propose to cut programs such as public health, education, and programs for the elderly and disabled

18. Implications for asset building • Expand current asset building programs: critical to remember that families who went through nonprofits have not seen widespread defaults • Bridge the divide between the poverty/income support and asset building fields • Many low-income families will need access to critical income supports, a broad based coalition could help to create a policy framework that supports both financial stability and asset building • Innovate in how we broker access to financial services and knowledge • Develop and market other asset building products that don’t rely on access to credit • Is there a way for us to close the wealth gap that takes into account current demographic, social, and economic realities?

19. For more information, www.frbsf.org/community