When Banks Become an Obstacle to Lending

By Guest Columnist Jul 02, 2009

Written by: Anusuya Sivaram Sandra Hines tells the story of her painful foreclosure in the Applied Research Center’s Race and Recession Report. “They busted up my mother’s antique furniture, our belongings that we had accumulated for 40 years. We lost the home our parents bought,” she said. “Now we’ve lost all of it.” Soon after the family moved into a rental, their landlord’s foreclosure forced them out of yet another home. Sadly, the Hines family is only one of many that are suffering from the result of years of predatory lending. Together with the recession, the negative impact on communities of color is spiraling out of control. According to the Bureau of Labor Statistics, the May 2009 unemployment rate for Blacks or African Americans is a staggering 14.9%, compared with 9.7% a year ago; for Latinos, it is 12.7%, up from 7.0% last May. The New York Times reported that homeownership, which had increased over the past few years due to predatory subprime lending, was decreasing faster among Blacks and Latinos than whites. It isn’t hard to see what’s happening: Black and Latino homeowners are seeing a sharp decrease in income, which affects their ability to pay off their skyrocketing mortgages, resulting in more foreclosures. So given this snowballing housing crisis, what do you do if you’re a lender? Well, if you’re anything like the firms Peter Goodman investigated in a recent article published in the New York Times, you simply lose the paperwork that would help your clients out. Under the Obama Administration’s Recovery Plan, the Treasury would provide lenders with substantial incentives to help keep families in their homes. The Treasury agreed to pay lenders a share of each borrower’s mortgage reduction; additionally, lenders are eligible to receive $1000 for each mortgage they agreed to modify. If that weren’t enough, banks are able to receive an additional $1000 per mortgage every year for up to 3 years. Apparently, these incentives don’t seem to be enough for lenders. The New York Times reported 3 separate incidents in which homeowners who were trying to modify their mortgage payments were met with insurmountable obstacles and incompetence from their lenders. Granted, errors in the loan modification process came from both sides. Banks repeatedly “lost” paperwork, even while confirming they had received the documents a few weeks earlier. In some cases, homeowners had failed to submit all necessary paperwork, or were unaware of the bank’s policies after renegotiating their mortgages. Still, given the large governmental incentives, banks have absolutely no reason to deny their customers workable solutions. Allowing clients to temporarily decrease their mortgage payments instead of repossessing homes or forcing bankruptcies seems more profitable for banks in the long run. So why are banks shooting themselves in the foot? Lenders claim that they aren’t; the program is still in its infancy, so their new hires aren’t well trained, and problems are more apt to occur. Additionally, they insist that the sheer volume of paperwork makes tracking individual claims difficult. I’m still skeptical—even if these problems exist, they shouldn’t create bureaucratic black holes that make it impossible for individuals to obtain any sort of financial respite. Regardless of what the problem is, one thing is clear: people of color are disproportionately affected by the housing crisis. Any solution needs to reflect the racial discrepancies in lending policies that caused the crisis. The Obama administration’s solution needs to be implemented more effectively and more quickly. People of color were the first to be affected in the housing crisis, and were affected most severely. Aid needs to first go to communities of color, where it is needed most. To do this, the bureaucratic process needs to be simplified, more advocates need to be available for people of color, and outreach efforts need to increase significantly. Banks need to keep up their end of the bargain, and work effectively with the government to fix the mess that they’ve created.