A Racial Legacy of the Subprime Crisis: Damaged Credit Scores

Photograph by Justin Sullivan/Getty Images

The Washington Post has a great piece out today looking at how the subprime credit bust is creating lasting damage to the credit scores of black Americans—something that may hamper their ability to rebound from the crisis that erased a “generation of economic progress.” While the story focused on black Americans, the same can probably said even more forcefully about Hispanic borrowers, who the Pew Research Center found suffered the greatest financial setback in the crisis. The median net worth of Hispanic households fell by 66 percent from 2005 to 2009, compared with a 53 percent decline for black Americans. Both are far worse than the 16 percent decline for white Americans. For Hispanics—many living in California, Arizona, and other epicenters of the bust—home equity was cut in half.

The declines aren’t a coincidence—lenders often sold minorities mortgages that had riskier features. Hispanics were 1.7 times more likely than non-Hispanic whites to have hybrid or option adjustable-rate mortgages, while black borrowers were 2.8 times more likely to have higher-rate loans than non-Hispanic whites, according to a 2011 report by the Center for Responsible Lending. The disparity held true even when adjusting for credit scores. Those riskier loans have in turn meant minorities have disproportionately faced foreclosure. Nearly 12 percent of Latinos have lost their homes after defaulting on their loans, according to the report. The figure for black homeowners is 10 percent, almost double the foreclosure rate for non-Hispanic whites.

Those foreclosures will haunt their credit scores for years. “According to FICO, a foreclosure can remain on a consumer’s credit report for seven years. It can lower a score by 85 to 160 points, a hit second only to bankruptcy,” the Post wrote. With the days of loose lending over, having pristine credit is essential for borrowing. As the Wall Street Journal reported recently, there’s a growing divide between people who have good credit and those who don’t. With banks still scared to lend, people with good credit scores can get loans, while those with lower scores are shut out. Nearly 90 percent of new mortgages now go to borrowers with at least a 700 credit score.

There’s a tragic logic to all of these stats—minorities got the riskiest loans in the boom years, have faced higher rates of foreclosure—and now may have damaged credit scores that will make it even harder for them to rebuild their net worth.

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