Melvin B. Miller
Editor & Publisher

Predators of the poor

The sudden rise in mortgage foreclosures has caused a stir in Boston’s black community. Foreclosures in 2006 were four times higher than the year before, and the rate so far this year is outpacing 2006. Most of the foreclosures in 2006 were in Dorchester, Roxbury, Mattapan and Hyde Park, the places where the black population is the greatest.

The number of home foreclosures was much greater back in 1992 when people lost their jobs because of the collapse of the Route 128 technology-based businesses. However, today’s problems have resulted not from massive unemployment, but from unfavorable mortgage interest rates.

Many of the mortgage loans that are delinquent were made by subprime lenders to prospective homeowners who could not qualify for a conventional loan. They failed primarily because their loan reviews revealed prior bad debts, which gave them a low credit score.

In earlier times, such an applicant would simply be rejected, and he would have to rent, save for a future substantial down payment, and cure his credit defaults. The rationale for this approach was that people with low incomes did not constitute an attractive source of new business.

That attitude has changed. Savvy business corporations realize that the 40 million U.S. households with an income of $30,000 or less represent an attractive market in the aggregate. The objective has been to develop financing plans with a sufficiently high rate of interest to cover the loss in revenue from the expected higher rate of delinquency.

While it is counterintuitive to expect that the working poor can reasonably be assessed a higher rate of interest on loans, that is precisely what has happened. According to Federal Reserve data, the gap in mortgage interest rates paid by households earning $30,000 or less and those earning $90,000 or more increased from 6.4 percent in 1989 to 25.56 percent in 2004.

Low-income homeowners have been induced to assume mortgages they ultimately cannot afford because the initial rate is attractive. The major culprit has been the 2/28 ARM, a 30-year adjustable rate mortgage that is fixed for two years, and then can leap upward by a substantial amount over the next 28, depending upon the terms of the loan. The jump in interest after two years can make the loan unaffordable. It is difficult to refinance the loan to avoid the higher rate because of substantial prepayment penalties.

A number of other high-cost financing instruments directed toward low-income families have emerged. These include loans on tax refunds, payday loans, rent-to-own stores, subprime credit cards, check cashing stores and in-house auto dealer financing. Companies providing these alternative financing services might not have highly regarded brands, but they are able to operate only because of the financial backing of major banks and Wall Street institutions.

Wages have been stagnant for the working poor for three decades. Rising prices have forced workers to borrow more to maintain their standard of living. Federal Reserve data have established that between 1989 and 2004, debt owed by families earning $30,000 per year or less has grown 247 percent to $691 billion.

In 1970, Americans saved more than 8 percent of their income. They now spend 1 percent more than they earn. One of seven of their take-home dollars was spent last year to repay debt. Banks and credit card companies have induced passage of a law to make it more difficult for debtors to escape their obligations through bankruptcy.

There is something inherently unfair about retarding the appropriate growth of wages and thus forcing the working poor to borrow while the moneylenders grow fat on the exorbitant interest the poor are forced to pay.

“I guess that’s what they
mean when they say you are
getting buried in debt…”