Helene Pearson’s belief in homeownership was shattered in Roseland, the mostly black Chicago neighborhood where President Barack Obama got his start as a community organizer.
Pearson, who bought her two-bedroom, red-brick bungalow on South Calumet Avenue in Roseland for $160,000 in 2006 with a high-interest loan, put it on the market a year ago for $55,000 and didn’t attract a single offer. Her bank has agreed to take it back.
“I was so excited to buy my first house right down the street from my mother but they got me good,” said Pearson, a 35-year-old guidance counselor and mother of two girls. “This scarred me so badly that I never want to buy again.”
For most Americans, the real estate crash is finally behind them and personal wealth is back where it was in the boom. For blacks in the U.S., 18 years of economic progress has vanished, with a rebound in housing slipping further out of reach and the unemployment rate almost twice that of whites. The homeownership rate for blacks fell from 50 percent during the housing bubble to 43 percent in the second quarter, the lowest since 1995. The rate for whites stopped falling two years ago, settling at about 73 percent, only 3 percentage points below the 2004 peak, according to the Census Bureau.
When Obama, the country’s first black president, took office in 2009, he inherited an economic and housing crisis that disproportionately affected minorities. In a speech last week on the 50th anniversary of Martin Luther King Jr.’s March on Washington, he called for expanding King’s dream of racial equality to include economic opportunity for all.
“Dr. King explained that the goals of African-Americans were identical to working people of all races: decent wages, fair working conditions, livable housing, old age security, health and welfare measures -- conditions in which families can grow, have education for their children and respect in the community,” Obama said at the Lincoln Memorial in Washington.
In Roseland, among the hardest hit neighborhoods in the country during the housing bust, many of the causes of the crash and obstacles to rebuilding black homeownership are found, according to Spencer Cowan, vice president of research at Woodstock Institute, a Chicago-based nonprofit group that researches fair lending, foreclosures and wealth creation.
Almost 40 percent of borrowers there took out high-cost loans in 2005 and 2006 as mortgage lenders backed by Wall Street targeted minority home buyers across the country for loans that required lower credit scores, reduced down payments, or featured interest rates that would start low and rise over time, contributing to an unsustainable bubble that popped when defaults rose and they cut off lending.
Now, almost one in 10 Roseland properties is vacant and the area’s homeownership rate fell to 57 percent in 2010 from 64 percent in 2000, according to the Woodstock Institute. The median home price meanwhile has dropped to $28,000 in the second quarter from $119,000 in 2005, according to Midwest Real Estate Data LLC.
The remaining homeowners, many of them elderly, live surrounded by vacant, boarded-up houses and gang violence that has led to 16 murders this year as of Aug. 30, which is a 30 percent drop from the same period in 2012.
Ernest Washington Jr., 63, bought his South Forest Avenue home for $25,000 in 1974 and had paid the mortgage down to $13,000. Now, after refinancing the house multiple times to finish the basement and make other improvements to the property, he owes $150,000 -- about $20,000 more than it’s worth. His mortgage rate is 8.5 percent.
“Being that this was a stable community, what they did was put people in the area further into debt,” Washington said.
The Rev. Alvin Love remembers the day in the mid-1980s that a young community organizer named Barack Obama rang the doorbell at his Lilydale First Baptist Church Roseland. Unemployment was on the rise in the predominantly black neighborhood in those days after local steel mills had closed and Obama, who worked with a church-based community group, was looking for allies to support job training programs.
In 1986, a year after Obama arrived in the community, the Woodstock Institute released a study of 500 Chicago-area financial institutions, showing “huge inequalities” in the distribution of housing credit, favoring suburbs over poor city neighborhoods like Roseland, which had become increasingly segregated.
The area’s history of mortgage discrimination mirrors that of urban enclaves from Boston to Los Angeles. The practice of “redlining” began eight decades ago when the Federal Housing Administration drew up maps using red ink to delineate inner-city neighborhoods considered too risky for lending.
Congress passed the Fair Housing Act in 1968 and the Equal Credit Opportunity Act in 1974, which banned discrimination in lending and home sales based on race and national origin. Lawmakers followed in 1977 with the Community Reinvestment Act, to ensure banks were actively lending to credit-worthy borrowers in low-income areas.
The housing boom of the last decade, spurred on by the successive Clinton and Bush administrations that unleashed ambitious programs to widen buying, also brought about a practice known as “reverse redlining” or steering residents of minority neighborhoods into high-cost mortgages, which led to a flood of foreclosures when the market crashed. Many of the minority borrowers who were given subprime loans would have qualified for prime loans with better terms, according to the U.S. Justice Department.
Borrowers like Washington Jr., who had nearly paid off their traditional mortgages, instead got caught up in the craze of easy lending, refinancing into loans that were twice the original balance to pay college tuition for a child, fix their home or catch up with bills, Love said.
“It’s going to take a generation to get back to the point where homeownership can build wealth in this community,” Love said.
The Obama administration’s first programs to help homeowners were geared toward keeping them in place through loan modifications, refinancing into lower-cost loans and $7 billion in neighborhood stabilization funding, 60 percent of which has been used in minority communities. The grants paid to rebuild once uninhabitable homes for first-time buyers on the south side of Chicago and Baltimore and demolish others in Detroit and Cleveland.
“Given that African Americans and Latinos were particularly hard hit by the crisis, and even in some cases targeted for the worst loan products, we must hold financial institutions who made those loans accountable,” Housing and Urban Development Secretary Shaun Donovan said in a telephone interview. We “must make sure we’re doing everything we can to help responsible families recover and become future homeowners.”
Initiatives to help people avoid foreclosure came too late for many borrowers who got their loans at the height of the boom. One in 10 black borrowers has already lost their home to foreclosure in the worst housing crash since the Great Depression, double the rate for whites, according to a 2012 Center for Responsible Lending report.
“The President remains deeply concerned about the uneven recovery,” according to a White House statement. He’s consistently called on Congress to act on mortgage refinancing legislation, provide more help to communities rebuilding and confirm Representative Mel Watt, a North Carolina Democrat, to head the Federal Housing Finance Agency, the statement said.
The administration is also cracking down on discriminatory lending and trying to expand homeownership at a time when banks’ underwriting standards are tightest for those rebuilding from the recession. Lenders have raised down payment and credit score requirements and debt-to-income thresholds, which has had a disproportionate impact on minority communities, said Cowan at Woodstock.
“This is a new form of redlining,” Cowan said. “The same communities that bore the initial brunt of the foreclosure crisis, targets of the toxic lending, are now finding it more difficult to access credit as the economy starts to improve.”
Obama last month introduced new housing reforms targeted at middle-class communities. Borrowers with foreclosures or bankruptcies resulting from a job or income loss will be able to finance a home purchase with a Federal Housing Administration mortgage as long as they demonstrate 12 months of timely payments, complete housing counseling and otherwise qualify. The FHA, a government mortgage insurer, now requires a three-year wait.
“Places facing a longer road back from the crisis should have their country’s help to get there,” Obama said during a speech on housing in Phoenix last month.
The Justice Department under Obama has cracked down on both redlining and reverse-redlining.
Wells Fargo & Co. and Bank of America Corp. agreed to pay a combined $569 million during the past two years, in the two biggest residential cases in the history of the Fair Housing Act and the Equal Credit Opportunity Act. Borrowers with loans from Wells Fargo and Countrywide Financial Corp., the biggest U.S. mortgage lender acquired by Bank of America in 2008, were more likely to be put in subprime loans if they were black or Hispanic, even when they qualified for lower-cost mortgages.
Bank of America spokesman Rick Simon, who declined to comment for the story, referred to a statement the bank released at the time of the $335 million Countrywide settlement.
“When we acquired Countrywide, we immediately discontinued origination of subprime and other higher cost mortgage products that were not in keeping with our commitment to responsible lending and sustainable homeownership,” the 2011 statement said.
Tom Goyda, a spokesman for San Francisco-based Wells Fargo, said, “We’ve denied the claims made by the Department of Justice from the beginning and stand behind our record as a fair and responsible lender.”
The Wells Fargo and Countrywide settlements did not include admissions of wrongdoing, according to the Justice Department.
Lenders are in a tough position because “when they don’t lend to minorities they’re accused of discrimination and when they do lend and there are foreclosures they’re accused of predatory lending,” said Paul Willen, a senior economist at the Federal Reserve Bank of Boston.
Credit scores and other automated underwriting criteria help prevent discrimination by taking the loan officer’s judgment out of the transaction, Willen said. Allowing more discretion based on an individual borrower’s circumstance makes lenders vulnerable to unconscious prejudice, he said.
“After 40 years of trying to get lenders’ judgment out of the equation, policymakers are trying to put it back in,” Willen said.
Credit already is loosening for the wealthiest Americans. While applications for jumbo mortgages of at least $729,000 increased 59 percent in the first four months from a year earlier, loans of less than $150,000 fell by 2.1 percent, according to the Mortgage Bankers Association.
The median wealth of white households was 20 times that of blacks and 18 times the Hispanic rate, a record gap in data going back three decades that is twice the pre-recession size, according to a 2011 Pew study.
“African Americans are starting way behind into this recovery,” Cowan said. “Because African American buyers were last into the market and bought at the most inflated prices, when the market deteriorated, they were the ones who lost the most.”
As prices recover, cheap properties are in short supply because they’re being purchased by flippers, private equity firms such as Blackstone Group LP, and other cash buyers.
Nationally, the median price rose 13.7 percent in July from a year earlier as nearly 1 in 3 properties were purchased with cash, according to the National Association of Realtors. The share of first-time buyers, which historically averaged about 40 percent, has fallen to 29 percent, according to the Realtors’ group.
Dajeune Tillman, 26, who works in the insurance billing department at a Los Angeles area hospital, has been looking for a larger place with a backyard for herself and her 5-year-old son since she qualified a year ago for a $109,000 Neighborhood Assistance Corporation of America mortgage that allows low-to-moderate income borrowers to purchase without a down payment and without paying closing costs. She keeps losing out to investors paying cash and buyers with traditional mortgages.
“I get beat out even before I get a chance to make an offer,” Tillman said. “All the investors do is they come in fix the houses and flip them up and crank the prices above what anybody can afford.”
The difficulty in Roseland is finding buyers willing to invest in the community of 45,000 people.
Pearson sees her home as a liability and will be happy when the bank takes it. She’s locked into a mortgage with a more than 8 percent rate and it’s a struggle to keep up with the payments. And her house, which sits on the same block as about five abandoned homes, has been broken into four times, she said.
“It’s sad because Roseland is where I was born and raised and I wanted to keep the tradition of homeownership going,” said Pearson, whose parents became homeowners two years before she was born. “It’s a great community. But I just can’t do it.”