NAACP Seeks a Moratorium on Sub-prime Foreclosures
FARAI CHIDEYA, host:
I'm Farai Chideya and this is NEWS & NOTES.
Earlier in the show, we spoke to a woman who lost everything to Hurricane Katrina. Thousands more Americans may lose their homes soon, this time to a wave of high-interest subprime mortgage loans. Defaults have lead to a sharp rise in foreclosures.
Now the NAACP and other civil rights groups want lenders to put a six-month moratorium on subprime foreclosures. They say blacks and Latinos are disproportionately affected, and the groups hope they can help borrowers find affordable loans and keep their homes.
I spoke with Hilary Shelton, who directs the NAACP's Washington bureau. He's helping push for the moratorium.
Let me throw you a question that has come at us, as a show, from some of our listeners. Someone said, you know what, we can't focus on this as a black or Latino issue without talking about the stereotype that black folks can't manage their money. Do you worry that your moratorium campaign is going to further a stereotype about African-Americans and spending?
Mr. HILARY SHELTON (Director, Washington Bureau, NAACP): No, not at all. As a matter of fact, as we look at this issue, we know this is an issue that affects people across the board. Even if you look at the Washington Post more recently: one weekend they did a piece on a white family in Virginia that was having exactly the same problem as an African-American family in Maryland, here in D.C., of course, in Maryland, D.C. and Virginia area.
So as such, we know that it affects everyone. The problem is a disproportionate effect on racial minorities, particularly African-Americans and Latinos. And it's not because of an inability to manage money; it's because of the steering that so often occurs across the board in which African-Americans and Latinos are steered into these more dangerous loans at a higher proportion than white Americans in our society.
CHIDEYA: So there are so many lenders out there from huge commercial banks that have, you know, individual divisions that deal with homeowners to kind of fly-by-night companies. Who were you requesting a moratorium from? And tell me exactly how you see this playing out?
Mr. SHELTON: Well, the moratorium is focused on those high-stakes loans; that is, loans that were issued that have what we call exploding ARMs. These are loans that began with a very affordable teaser rate, you know, introductory rate, for the first three years - four percent. But in three years it will increase to seven percent or whatever the market can very well demand.
As such, what happens is, based on their income, they're going into a loan that they can afford initially, say $1,400, but in three years it explodes to go up to $2,300.
CHIDEYA: So when you talk about a moratorium, are you talking about eventually lowering the adjustable rate mortgage, the ARM, or are you not certain what the outcome would be in the long run?
Mr. SHELTON: Well, we would hope to see bankers and other lending institutions sitting down with people who are in peril, those whose homes are now being threatened, to catch them before they go into the foreclosure period, to find an opportunity to help put them into a package they know they can actually afford.
Because clearly what we're seeing is something that's not only affecting those who have the loans, but we're also talking about what's happened to our economy across the board. We know that 52 percent of African-American borrowers and 40 percent of Hispanics receive subprime loans.
So again, there's that disproportionality as we're talking about these racial and ethnic minority communities. But again, it's an issue that affects America across the board.
CHIDEYA: So Hilary, let's put it into concrete terms. Suppose that you have a family of four: two working parents, not a great credit record, you know, making less than the average income in their neighborhood. So can you walk me through the process that starts with them looking for a loan and ending up with a subprime loan and possibly even going into foreclosure?
Mr. SHELTON: Very good. They're looking for a home because, as we know, homeownership is one of the most surefire ways for Americans to actually garner economic stability, to actually accumulate wealth. They look around, they find a home that looks like it's within their price range. They're talking to not only with the real estate broker but the mortgage broker. They're sitting down and talking about what they can afford.
If we talk about how much we'd have to pay out for this and other expenditures at home, they come up with a number; say it's $1,500 a month. But the $1,500 a month, again, is based on an introductory rate of somewhere around four percent. They go into that for a while. They have not looked at the fine print.
They find out that in a couple of years the loan is going to explode; that is, it's going to increase to somewhere around $2,400 a month. They realize they can't afford that, but then go to say, well, perhaps I can refinance.
So they go back to the broker, they go back to a different bank or a different lending institution and say to them, listen, I'd like to refinance my loan because it's going to increase significantly to a point I can't afford in the next three years. What they also didn't tell him is that for most subprime loans there's also something called an early payment penalty. An early payment penalty on an average $300,000 home these days is right around six or seven thousand dollars.
So indeed, in order to be able to get out of the loan they're in right now, they're going to have to pay a penalty just to be able to get out of the loan and go into something that could very be more affordable. So they'll locked in.
Now you're at the point where you're going to be strained by an increase in the cost of your monthly note on your home, be getting hit with a $6,000 penalty if you want to be able to go into a different loan. And we find people trying to work hard at more jobs and other things to try to be - to try to hold on to what they had.
CHIDEYA: When it comes down to it, is there going to be any massive change without federal intervention? And if so, what are going to do about that?
Mr. SHELTON: There needs to be a role for the federal government. There needs to be a role for an average American citizen. And there also needs to be a role for these lending institutions. Quite frankly, what we're finding is you can't isolate one from the other.
The Congress needs to intervene because they're, after all, those who are supposed to advocate on behalf of the American people. This trend could very well damage our economy across the board. They have to be engaged to address those concerns. We can't allow our friends in the mortgage banking community to say that, well, we'll let the market dictate. Because what happens when you just allow the market to dictate is it becomes an after-the-fact fix.
CHIDEYA: So you've just had your shoulder against the wheel for a little while on this one, but has anyone in the commercial lending arena said, okay, sure, we'll do it. What kind of conversations are you actually having with people?
Mr. SHELTON: We're reaching out to those who actually own the loans and could very well find themselves in the position of having to foreclose and then actually losing revenue and lose profits. So the Freddie Macs and the Fanny Maes or those who we work moving to sit down, which we sent letters to, to go down and visit and hope that their boards will reconsider how they're going to address these concerns so they can become more actively engaged in the process of bringing some solution.
But stopping a foreclosure isn't enough. The next step has to be how do we move towards making these loans manageable, these Americans can very well hold on to their homes and the dreams they have for our society. So the push is still on, the negotiations are going on.
Now the discussions with the institutions, the discussions on Capitol Hill with the Congress, just looking for whatever solution we can, but understanding that we just can't wait for the market to adjust itself. Because again, what happens in those cases is people will be out on the streets, out of their homes, and very well their futures could be crushed.
CHIDEYA: Well, Hilary, thank you so much.
Mr. SHELTON: Oh, thank you.
CHIDEYA: Hilary Shelton is director of the NAACP's Washington Bureau.
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