Add to the collateral damage caused by the recession and the implosion of the housing market a devastating blow to the economic progress Blacks and Hispanics had made during the past two decades.
The median wealth of white households is now 20 times that of Blacks and 18 times that of Hispanics, a study by the Pew Research Center has found. That represents the largest gap since the Census Bureau began compiling household wealth statistics in 1984, when the White-Black ratio was about 12 to 1. In 1995, the low point before the current downturn, the ratio was 7-1 for both Blacks and Hispanics.
Although whites and minorities lost ground during the downturn, minorities suffered disproportionately, the study explains, because they derive a disproportionate share of their wealth from the housing market. Whites are more likely to have retirement accounts and other non-housing investments in addition to home equity. Without non-housing investments to cushion their declining home values, inflation-adjusted median wealth declined by 66 percent for Hispanic households and by 53 percent for Blacks, compared to a 16 percent decline for whites.
The housing boom accounted for most of the economic gains minorities made over the past decade and the housing crash was responsible for most of their losses. Although home equity, declined across racial lines, it declined more steeply for Blacks and Hispanics, who saw the median value of their homes decline by 23 percent and 60 percent, respectively between 2005 and 2009, compared with an 18 percent decline for Whites. And while the housing market has remained mired in a deep slump, the stock market has largely recovered, benefitting Whites far more than Blacks, the Pew report noted.
"The findings are a reminder — if one was needed — of what a large share of Blacks and Hispanics live on the economic margins," Paul Taylor, director of Pew Social & Demographic Trends, told reporters. "When the economy tanked, they're the groups that took the heaviest blows."
The report also recalls the 1960 report of the Kerner Commission, describing “two societies – [one Black and one White] — separate and unequal,” with one key difference, Roderick Harrison, former chief of racial statistics at the Census Bureau, told USA Today. “The second society has now become both Black and Hispanic.”
PREEMPTION REDUX
Rekindling a long-simmering debate, the Office of the Comptroller of the Currency (OCC) has released final rules asserting the agency’s authority to preempt the enforcement of state laws against national banks.
Complaining that the OCC did a poor job of protecting consumers from predatory lending practices while impeding the ability of states to do, a group of state attorneys general challenged an earlier version of the OCC’s preemption authority in court. That dispute, which began before the financial meltdown, continued after it, as Congress began drafting the Dodd-Frank financial reform bill legislation, aimed at strengthening bank regulation. An original proposal to prohibit federal preemption entirely was softened during the legislative debate, leaving the preemption authority in place, but allowing the agency to exercise it only if a state law “prevents or significantly interferes” with a bank’s ability to engage in activities permitted by federal law.
The OCC’s initial draft of the regulation implementing that provision allowed preemption of laws that “obstruct impair or condition” national bank powers. But that wording drew furious objections from state officials, consumer advocates and (in an unusual public airing of an internal dispute) the Treasury Department, which said the language violated both the language and clear intent of Dodd-Frank.
The agency withdrew the controversial wording from its final rules, but also asserted that it stood behind a broad interpretation of the preemption authority – the interpretation that states had challenged in court.
The OCC’s final rule extends the preemption umbrella over federally chartered thrift institutions – now regulated by the OCC following the elimination of the Office of Thrift Supervision. The final rule specifies that the agency will consult with the new Consumer Financial Protection Bureau before taking preemption actions, but does not require CFPB approval for those actions.
The American Bankers Association praised the OCC rule for “clarify[ing] the rules of the road for national banks and how they serve their customers,” avoiding the need for banks to comply with disparate consumer protection requirements in different states. “This means that bank customers, regardless of where they live or work, will have a consistent, high-level set of consumer protections nationwide,” the ABA statement said.
A SHAKIER LADDER
“Who will buy?” an old song asks. When it comes to houses, the answer over the next decade is a bit murky.
Rod Dubitsky, an analyst with PIMCO, posed the question in a recent report, asking “Are There Any Rungs Left on the Housing Ladder?” He finds that the two groups that have driven home sales in the past – existing owners and first-time buyers -- aren’t likely to provide much momentum in the future. Baby boomers, the largest group of existing owners by far, are looking to down-size in retirement while younger first-time buyers are leaving college with huge debts and uncertain job prospects that will delay their entry into the market indefinitely, Dubitsky says. Student debt loads (now averaging $23,000) have been increasing and starting salaries for recent graduates have been declining. The PIMCO report sees both trends as part of a “longer-term phenomenon that could serve to limit college graduate home purchasing power for the foreseeable future.”
Older homeowners, meanwhile, are less likely to be trading up or purchasing second homes or investment properties, the report says, because they are feeling more urgency about boosting retirement savings in the face of uncertain prospects for the economy and the Social Security fund. Renting will become a more appealing prospect for older workers and a longer-term necessity for younger ones, the report predicts, pointing toward “downsized housing choices, [which] could serve to reduce the dollars committed to housing investment.”
A separate report by Morgan Stanley also describes an accelerating shift from an “ownership” to a “rentership” society, driven, this report suggests, by record foreclosures, tighter credit standards and economic uncertainty. The U.S. homeownership rate has declined from a high of 69.2 percent in 2004 to 66.4 percent and would be even lower, the Morgan Stanley report says, if the statistics included the more than 7.5 million homeowners who are behind on their mortgage payments and may lose their homes to foreclosure.
But a recent study published by the Research Institute for Housing America points out that, viewed in perspective, homeownership rates have declined from what were really unsustainable levels to something closer to the historic average of 64 percent to 65 percent that prevailed from the late 1960s through the mid-1990s. “The question of why homeownership rates are falling now is really a question of why they were so high during the middle of the last decade,” according to Stuart Gabriel, an economist at UCLA’s Anderson School and a co-author of the report.
DREAM ON
The housing downturn that has put something of a dent in the American Dream (see above), has also left many homeowners stuck in something of a dream world, unwilling to recognize how much the value of their homes has declined.
An analysis of the listings on Zillow, an online real estate site, found that sellers who purchased their homes in 2007 or later are over-pricing them by an average of 14 percent. Sellers who bought before or during the housing bubble are somewhat more realistic, but “not much” according to the Zillow report, which found overpricing by 12 percent for those who bought before 2002 and 9 percent for those who bought between 2002 and 2006.
The difference, according to Stan Humphries, Zillow’s chief economist, is that those who bought after the bubble assume they escaped the worst of the housing decline, when, in fact, the downturn began in 2006 and continues today.
Underwater mortgages make it difficult for some owners to reduce their selling price, Humphries acknowledged in the Zillow report, but others, he said, are simply unwilling to sell for less than they think their homes should be worth. “They could price more aggressively, but there’s a psychological hurdle. They don’t want to realize a loss,” he told the New York Times.
Owners determined to wait for prices to recover will have a long wait, according to Humphries, who expects home values will continue to fall through the middle of next year, at least, and possibly longer, depending on when and how quickly the unemployment rate begins to fall. He doesn’t expect to see anything resembling a “normal” market for another three years.
TARGETING FRAUD
Mortgage fraud is escalating and so are efforts to combat it. Financial institutions filed 70,472 suspicious activity reports (SARs) involving mortgage fraud in 2010, 5 percent more than the previous ear and the largest number since the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) began tracking this data. That trend continued in the first quarter of this year, with SARs filings up 10 percent compared with the same period last year and mortgage fraud, again, responsible for most of the increase, according to FinCEN.
Many of the fraudulent transactions lenders are reporting occurred several years ago and are surfacing now as borrowers default and lenders undertake pre-foreclosure loan documentation reviews. These belated discoveries indicate that “the industry is slowly making its way through the most problematic mortgage,” James Freis, director of FinCEN, said in the agency’s report.
A separate report by LexisNexis Mortgage Asset Research Institute (MARI) shows a 41 percent decline in verified reports of fraud and material misrepresentation – the first such decline in more than five years. (The MARI report reflects verified instances of fraud, while the FinCEN report tallies activities deemed suspicious, where wrong-doing has not been verified.) Jennifer Butts, manager of data processing for MARI, attributed the downward trend in that report to a continuing decline in loan originations, a reduction in the resources available to investigate fraud, and the increasing complexity of fraudulent transactions, making them more difficult to identify.
Even so, efforts to identify and prosecute fraud are intensifying. MARI reports that the FBI obtained 1,531 indictments resulting in 970 convictions related to mortgage fraud last year. Through February of this year, FBI officials were reporting 3,020 pending investigations, nearly three-quarters of them involving losses of more than $1 million.
Separately, the Financial fraud Enforcement Task Force, coordinating the efforts of U.;S. Attorneys’’ Offices, more than 25 federal agencies, federal regulators and state and local law enforcement officials, charged more than 1,200 defendants with mortgage fraud, double the number in 2009 before the task force was created. The task force also doubled the number of defendants sentenced to more than two years in prison.
“While we have accomplished much in the first year of the Task Force, our work is far from complete,” U.S. Attorney General Eric Holder, who chairs the task force, said in a press statement. “A healthy economy and, in these times, a full economic recovery, requires our continued vigilance in protecting American businesses and consumers from financial fraud.”
