Blacks and Hispanics to Suffer Most from Subprime Crisis

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“Housing nightmare tarnishes the American dream,” says a report from Reuters.

Meanwhile, the Financial Times quotes Martin Eakes – chief economist at Self-Help, who estimates that 2.2 million Americans could lose their homes to foreclosure.

That’s the general narrative. But now for the plot twist.

What we will soon hear more about is the way that the pain of all this falls disproportionately on Blacks and Hispanics. These two groups already tend to be poorer than white people, which means they tend to suffer more from the slings and arrows that drop down to the bottom of the wealth pyramid. They die younger. They take fewer vacations. And they pay more for credit.

And the reason is obvious. A member the Federal Reserve Bank pays the prime rate for overnight funds, so there is little risk that the money won’t be paid back. But a janitor with an old truck and a new girlfriend is a credit risk, and lenders protect themselves by charging high rates of interest.

Mr. Eakes even tells us that this will become “the largest loss of African- American wealth in American history.”

Indeed, figures that came out last week showed that blacks are nearly four times as likely to get stuck with “high cost” home loans. More than half the loans made to black people in 2005 were subprime. And 80% of them were “exploding” ARMS – adjustable rate mortgages with much higher monthly payments after the initial teaser rate period expired.

Just ask a good lender in a bad neighborhood. He will charge as much as 50% or 100% on a one-month I.O.U. And if you don’t pay on time, he might double the interest… or smash your face

Subprime mortgage lenders typically enticed customers with low initial rates. But after adjustment, the rates often shot up to 10% or more. These were the ‘2 and 28’ mortgages, where the monthly payment was put up sharply after the first two years. This not only put the borrower in a squeeze, it practically guaranteed the lender more fees when the customer came back to refinance.

Still, there is a funny side to this story. For many decades, meddlers have been urging the credit industry to provide more loans and encourage home ownership among poor people. Now they’ve gotten what they wanted. In the last few years, after lenders figured out how to make a buck at it by laying the risk onto other investors, they complied. The poor got home ownership in spades. Bad credit? No problem. Low income? Who asked? No savings? Don’t worry about it.

But now that the industry has done as it was bid, do you think it will get any thanks? Not likely. Instead, the busybodies are likely to come around with a subpoena in their hands… if not a rope.

We have no doubt that a lot of people are going to whine and moan about it. Nor do we doubt that the fools in Congress will rush in with promises of mortgage abatement and other subsidies.

Corrections involve pain… and Americans hate pain. They count on their elected representatives to protect them from it. But not all pain is bad. Suffering the pain of a small correction now, for example, can help prevent the pain of a larger one, down the line.

But who will really suffer from the subprime crisis remains to be seen. People with neither money nor savings to begin with may complain when the houses they couldn’t afford are taken away from them. But they are wiser, and probably not really too much poorer. The real pain will be felt elsewhere… where the lesson will be that much more expensive.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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8 Comments on "Blacks and Hispanics to Suffer Most from Subprime Crisis"

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jandone
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Well after reading this article, I was very upset. How stereotypical is this??? Not ALL black people are at risk. I was very offended. There are alot of african americans that are wealthier then white people.. you should not put everyone in one group. “They die younger. They take fewer vacations. And they pay more for credit.” WHAT IS THIS?? I am an african american and I take lots of vacations, I dont have alot of debt, I dont pay alot for credit cards, and I believe that I will live longer then most white people, because I take care… Read more »
GetStucco
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Bill — Good post! You reinforce a point I have made on Ben Jones’ Housing Bubble Blog in recent weeks — that word will quickly spread in the coming months that blacks and hispanics were disproportionately targeted for subprime loans. This sets the stage for some great future political theatre, as newly empowered Democratic Congressfolk fall all over themselves to hotwire other peoples’ money into the hands of otherwise-financially-doomed subprime borrowers. This serves at least three political ends: 1) It shows how much the Democrats care about the downtrodden (never mind that they stood back and watched while the problems… Read more »
Mrs Tee
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I think that more importantly what bill is trying to point out is the majority population of African Americans. Statistically he is telling the truth thier are more African Americans in poverty than anyother race. (Source US Census) and we cannot ignore the effects of sub prime mortgaege on the African American community. Please don’t be so personally offended believe it or not you are an exception to the overwhelming majority. PS I am an African Amrican Law Student and I don’t fit into that category either but I understand the dynamics.
Great Post!

SiamHann
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Thanks Bill for a decent report. If used wisely, sub-prime loans can help individuals regain credit worthiness and act as a catalyst to further financial freedom by enabling the individuals raise funds to finance business ventures or further property purchases. I know of many Black people in both America and the UK who have benefitted from such financial wisdom before the down-turn in the Housing sectors. For those who bucked the “herd-mentality” without having a decent form of income I can only wish them well. Owning a home is not for everyone. It’s just a pity that the sub-prime financial… Read more »
D Jeff Bell
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I am a wealty African American who is not really offended by the article because it makes some points but here is what I would have added. How many of the creditworthy folks who were steered into the ARM’s that would have easily qualified for a conventonal mortgage? That is what should be investigated. I am a capitalist by business but I believe some mortgage brokers really did the soft shoe and made people think that they were working in their best interests. Shameful.

Anonymous
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I was a real estate appraiser in Chicago for seven years. I am just now learning of business practices of some of my old clients – practices I new nothing about at the time – such as “at closing if the borrower asks a question before signing, ask them an open ended question” (i.e. manipulate). The homeowners whose houses I appraised all seemed as naive (an innocent) as I now feel. Investigations into mortgage brokerages in Chicago, Illinois, might be worthwhile.

Cader Abdullla
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I am digusted at the way debt is extended to people across the world, who in the first instance dont understand the financial implications of long term debt(which is also never properly explained to them). They also dont have the have the financial resources to sustain the repayments. I would actually only grant a loan to a person if the current interest rate is say 10 % and tell then that they must currrently be able to service the debt at say 12.% 5 (a form of cushion).Simply stated people must also learn to live within their financial means and… Read more »
Ism Skism
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Black Americans, wake up. This was a plan to get you right back where they had you 200 years ago. Back into slavery. They are sending all the Hispanics home, They are making sure you lose your house, your car and any money you may have slaved for and saved for. They are making sure that you are so desperate that when their baby boomers need someone to look after them they can get cheep if not free Slave labor again. Don’t be fooled. All the Jamaicans, and Island people are going back home so they are not goint to… Read more »
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