Women in Foreclosure: How We Got Here
| May 21, 2014
In the first of a two-part series, the author describes the origins of the mortgage crisis and its impact on women. This feature is based on her March article in the University of Chicago’s journal Social Service Review.
The housing crisis is not over. The largest U.S. mortgage securities firm projects that by the end of 2014, one in every five homeowners will be in default. The AARP reports that one out every 30 Americans over 80 are currently experiencing foreclosure, and 3.5 million Americans over 50 owe more on their homes than their properties are worth. Embedded in this ongoing crisis are the lives of single women, who are more likely than anyone in the U.S. to have risky loans that are highly likely to default. Even when controlling for credit score, income, and wealth, women are 30 percent more likely than their male peers to own a risky mortgage, and single black women are 259 times more likely than white men with the same financial characteristics to have a risky subprime loan. Although research shows that women take fewer financial risks than men, their ability to remain financially stable is evaporating under the weight of subprime lending. If women are more cautious than men, why do they bear the burden of risk in the current economy?
In 1986 Eve, a black homeowner from Philadelphia, purchased a small row house with her new husband. They were, she said, “the first of our people to own property. Being a black family and buying your own house—other than my kids it was the greatest thing I’ve ever done. We didn’t get to go to college, but we still put together that down payment.” Like most home buyers at the time, they signed what is commonly known as a traditional, prime mortgage, meaning the interest was fixed. The new couple had full confidence that the terms and costs of their home loan would not rise and fall over time. Unbeknownst to Eve and the rest of the public, the stable mortgage market this couple shopped in would soon be a relic of the past. Gaps in protective housing laws, deregulation, and financial innovations like securitization were creating a toxic combination that left a generation of women at risk.
Before the passage of the Equal Credit Opportunity Act of 1974 (ECOA), it was extraordinarily difficult for unmarried women to become homeowners. Banks assumed pregnancy would eventually leave all women unable to work, so they routinely denied single women mortgages regardless of how much money they made. If married couples wanted to include a woman’s income on their mortgage application, they would frequently need a doctor’s note proving infertility or the use of birth control. In some states, where abortion was legal, women were required to provide banks with “baby letters” in which they pledged to get an abortion if they became unexpectedly pregnant. Men, regardless of health status or medical history, did not have to provide any medical proof of their ability to continue working. The ECOA eliminated all of these rules, stating that banks could not deny anyone a mortgage on the basis of gender. But it said nothing about which types of loan products banks could legally sell.
Just six short years later, the federal government began deregulating the financial industry in an effort to stimulate the economy and pull the U.S. back from a brutal recession. The new laws’ specific purpose was “to provide for the gradual elimination of all limitations on the rates of interest” and to override state laws that placed a ceiling on the interest rates lenders were allowed to charge. The introduction of unusually high or fluctuating interest rates set the stage for a new form of housing inequity fueled by risky subprime lending.
Unlike the traditional prime loan Eve signed in 1986, the interest on a subprime loan moves up and down with the market, includes expensive additional fees, and often contains a deceptive teaser rate that unexpectedly rises in the future. These features cause dramatic spikes in monthly mortgage payments, drastically increasing the likelihood of foreclosure. At the peak of the housing boom, more than one third of subprime borrowers qualified for fixed prime loans but were offered risky ones instead. In some cases homeowners knowingly signed those risky mortgages, but untold numbers of others were duped or mislead by predatory brokers who made more money selling risky loans than safe ones.
Predatory lending includes deceptive and fraudulent activities that knowingly take unfair advantage of a borrower’s lack of financial knowledge. According to the National Consumer Law Center, the predatory loan market is a “push market.” Lenders are shopping for customers, rather than customers shopping for mortgages. Risky brokers used tactics like door-to-door solicitation to target elderly people and neighborhoods of color where they believed they would find buyers of subprime loans. One finance manager hid his identity by wearing a paper bag over his head when telling the U.S. Senate his perfect customer was “an uneducated widow who is on a fixed income—hopefully from her deceased husband’s pension and Social Security—who has her house paid off, is living off credit cards, but having a difficult time keeping up with her payments and who must make a car payment in addition to her credit card payments.”
The push for deregulation and new loan products, coupled with financial innovations like securitization, changed the ways banks turned a profit. Under securitization, which involves bundling together multiple loans into one larger unit that can be traded in the stock market, loans remain with the original banker for only a short period of time. Since the lender does not keep the loan on their balance sheet, they do not lose money if a homeowner cannot pay their debt. Instead, they have tremendous financial incentive to sell as many risky subprime loans as possible regardless of how safe they are for the customer. When Christopher Cruise, a top loan marketing trainer, testified before Congress, he put it this way: “You had no incentive whatsoever to be concerned about the quality of the loan, whether it was suitable for the borrower, or whether the loan performed. In fact, you were in a way encouraged not to worry about those macro issues.”
In 1997, Eve’s husband died suddenly, leaving her with two children in college, a mom with failing health, and a roof badly in need of repair. She remembers “the rain pouring into the upstairs attic where my son was living. We had mold and he had asthma, so I had to do something.” Eve depleted her meager savings on her mom’s health care. She said when she called city agencies for help, she was told, “There’s nothing we can do for you. You own a house and you got a job. We don’t help people like that.” Out of options, Eve drew on her only asset—their home. “The house was totally paid off, but I had no idea I was signing a death warrant. I just knew my kids needed college and a roof, so I signed.” Eve’s broker promised her the interest on her new home loan was fixed, but, she later learned, “everything he said was a lie. Before I knew it, I was losing my house.”
Eve’s experience is not unusual. Her story reflects the lived experience of untold numbers of women who are trapped in a poorly regulated mortgage industry without a legislative safety net. Before the rise in risky lending, gender inequity was linked to locking women out of homeownership. Now, instead of being excluded from mortgages, women are super-included in risky ones. Single women, of all ages, were ideal targets for risky loans because they are often the heads of households in the neighborhoods where subprime loans were heavily marketed, because brokers had tremendous incentive to peddle risk, and because protective housing laws such as ECOA are useless against deregulated financial markets.
In Part 2, the author reports on how the lack of paid sick and family leave also contributed to women’s vulnerability to foreclosure and reports on the federal government’s foreclosure intervention programs, which are set to expire this year. She will also outline steps women can take to guard against fraud in the current economy.
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