The subprime mortgage crisis provides a chance for black-owned banks to restore financial credibility

Howard Manly

In normal times, a bank offering a 30-year fixed at 5.75 percent wouldn’t register a blip on the national mortgage Richter scale.

But these aren’t normal times. At last count, the costs of the subprime mortgage crisis are in the billions, CEOs of major financial institutions are resigning or cost-cutting thousands of jobs, and the number of foreclosures in Massachusetts alone has ballooned 76 percent from last year.

About 1,000 of those foreclosures occurred in the last six months and were concentrated in minority and low-income neighborhoods in Mattapan, Roxbury, Dorchester and Hyde Park. The saddest part is that industry analysts say the worst is yet to come.

In the context of the overall crisis, the recently announced 30-year fixed mortgage at an interest rate of 5.75 percent by OneUnited Bank is not the silver bullet to make the entire problem disappear.

But it is a potential start for first-time homebuyers, a chance for transitioning homeowners with adjustable rate mortgages to avoid ever-escalating monthly payments and, most important, yet another example of a black-owned bank serving the community in a time of need.

“This is an opportunity for us,” said Robert Patrick Cooper, senior vice president and general counsel of OneUnited Bank. “OneUnited has the credibility in the community and has served as a safe haven from these financial scam artists and predatory lenders.

“As such,” Cooper continued, “it is more important than ever that black banks, which traditionally have been the bulwark of our inner cities by providing both access to capital and financial leadership, must offer a compelling platform to combat this crisis.”

A major factor contributing to the crisis are the lenders who made extremely risky loans using questionable underwriting practices.

The Center for Responsible Lending has estimated that 19 percent of loans made in 2005 and 2006 will lead to foreclosures across the country. The group estimated that since the beginning of 2006, 1.7 million families have lost their homes to foreclosures.

In Massachusetts, the numbers are alarming. According to a recent study by The Boston Foundation, between 2001 and 2006, the rate of prime mortgage lending increased by 28 percent in the state. During that same time period, the rate of subprime lending increased by almost 700 percent.

These loans, the foundation’s report said, “appeared” to target vulnerable low-income and ethnic minority populations, with a sharp increase in loans to black and Latino homeowners in 2005, while loans to white and Asian homeowners dropped during the same time period.

Subprime lenders accounted for 16.2 percent of total home-purchase loans across the state, but include more than one-third of all loans in Everett, Revere, Chelsea, Randolph, Lynn and in specific Boston neighborhoods with substantial percentages of black and Latino residents.

During recent hearings convened by U.S. Rep. Barney Frank, D-Mass., chairman of the House Committee on Financial Services, testimony clearly demonstrated that race — and the lack of financial sophistication among many borrowers — played a significant factor in subprime lending.

In published reports, Jim Campen, executive director of Americans for Fairness in Lending, explained during his testimony that among borrowers making more than $152,000 per year, 71 percent of African Americans and 56 percent of Latinos received high-interest loans. That number was only 9 percent for white borrowers.

Lynn Browne, a Federal Reserve senior economist in Boston, testified in published reports that many of those loans were adjustable rate mortgages, which accounted for half of those that went into foreclosure. She further pointed out that from the start, many of those borrowers agreed to rates between 7 and 8 percent — one or two percentage points higher than conventional loans — and agreed to pay rates of as much as 11 percent, or several hundred dollars more a month, as the rates adjusted upward, usually in the second year of the loan.

The cost of foreclosures is not only felt by those who lose their houses. A recent study by the Association of Community Organizations for Reform Now (ACORN) details the impact of foreclosures on neighborhoods. It has been estimated that a single foreclosure depresses all property values within a city block, and a single foreclosure in a low- to moderate-income neighborhood causes property values to decrease even more.

For example, the report stated, citing a study on Chicago neighborhoods, if the average house value in a low- to moderate-income area is $150,000, then each foreclosure in the area costs each of the homeowners $2,100. If the neighborhood has 10 foreclosures, then each remaining homeowner has lost $21,000 in value.

What this means, the ACORN reported concluded, is that the home can no longer be sold for an amount sufficient to pay off an existing home loan, regardless of whether the loan was subprime or conventional.

It gets worse. A 2005 study prepared for the Homeownership Preservation Foundation estimated that each foreclosure has the potential to generate as much as nearly $20,000 in direct costs to cities in the form of increased costs of code enforcement, greater police expenses due to higher rates of crime, and, when a borrower walks away from a property before foreclosure, a loss of property taxes.

Cooper is pretty blunt when talking about the mortgage crisis.

“It’s a disaster,” he said. “There’s no other way to put it.”

He is also blunt about the role of black-owned banks in stabilizing minority neighborhoods across the country.

“The subprime meltdown represents yet another unprecedented challenge to the stability of our nation’s inner-city communities,” said Cooper, the incoming president of the National Bankers Association, the nation’s oldest and largest trade organization representing minority- and women-owned banks. “Our banks must usher in a new era of financial accountability.”

Part of that accountability, at least to OneUnited, is offering the most competitive mortgage packages in Boston. As the nation’s largest African American bank, with assets of $638 million, OneUnited is not in business to lose money on bad debt.

But it is in a position to help. Cooper said that qualifications for new mortgages will not be as strict and restrictions on down payments are more relaxed. For example, Cooper said, it’s not required that a borrower have, on their own, the usual 20 percent down payment required for most conventional loans. Cooper said that money could come from relatives or other sources.

Cooper was quick to point out that not everyone will qualify for these loans. Good credit scores are needed, but Cooper explained that mitigating circumstances could help offset a score that normally would not be approved. The main thing, Cooper explained, is homeowners who fear that they are in financial trouble should seek help as soon as possible.

Gov. Deval Patrick has offered some help. His plan is aimed at helping out homeowners who cannot afford the mortgage payments required to keep their houses or, failing that, preventing foreclosures by letting those owners sell their properties before a lender seizes them. Under the plan, the state would provide counseling or financial assistance to homeowners and recruit neighborhood organizations to work with homeowners and lenders to resolve delinquent mortgages in danger of foreclosure.

“Don’t just sit there and wait until somebody bails you out,” Cooper said. “Don’t wait until it’s too late or you have received a foreclosure notice. Everyone needs to be proactive — and that means sitting down with your banker and working things out.”