More Bust from the last Boom for Blacks, Hispanics

Homeownership Rates by Race 1995 - 2008

In a study by the Pew Research Center, published May 12th 2009, from 1995 to 2008, Black and Hispanic families were more likely to borrow from the Sub Prime markets for a mortgage to finance the purchase of their home.

Corresponding to that same period, from 1995 to 2007, was the explosive growth in the issuance of Collateralized Debt Obligations, or CDO’s, a financial trading product whose value was derived from Mortgage Backed Securities, which represent a claim on the interest payments from a pool of mortgages.

It was financial engineering that created cheap money for home buyers to use.

Wall Street Eyes Opportunity

After the Savings and Loan banking crisis of the 1980′s, the bank mergers of the 1990′s and the exodus of bank branch offices in minority communities, consumers were left with few choices to shop for a mortgage.

To fill the growing demand for mortgage financing the Mortgage Brokerage industry saw it’s greatest opportunity unfold as Wall Street began directly funding mortgages and packaging financial derivative products with exotic features to attract investors.

The Financing Choices before Minorities

When people ask, why would anyone knowingly decide to borrow from the Sub Prime markets to finance their home purchase?, isn’t fully aware of how strong the incentives were compared to conventional financing from banks during that same period.

Here are just some of the exotic mortgage products made available to the 1st time home buyers in minority communities:

• Stated Income – a mortgage product in which you can simply write down the income you earned without verification
• No-Document Loans – a mortgage product whose underwriting process did not require standard documentation from borrowers for verification and disclosure (ex: pay stubs, tax returns, etc…)
• 100% Financing: a mortgage product designed for home buyers who didn’t want to have an equity stake in the property they were purchasing.  This product could be tailored to fit the financing needs of the purchaser but carried a portion of the balance in a Home Equity Loan with a floating interest rate.

The startling statistic from the research was that more college educated home buyers chose the sub prime market to finance their purchase.  In fact, lower income families with high school educations were more apt to attend home buyer seminars and seek advice and counsel from not for profit organizations like Neighborhood Housing Services or Neighbors Helping Neighbors.

Education, it seems, did not insulate the economically mobile segments of the black and latino communities from the mortgage meltdown.

Unfortunately, the current foreclosure crisis is teaching an important lesson:

Always Read The Fine Print!