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The Color of the Mortgage Crisis

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As the lessons of the mortgage crisis are studied by historians in the coming years, a significant and widely overlooked consequence that will no doubt emerge is how it's set back the economic mobility of minorities in this country by at least 20 years.

The statistics are astonishing. A recent study found that 20 percent of Latino homeowners and 11 percent of African-American homeowners have either already lost their homes or are at high risk of doing so. Add it all up, and Latinos and African Americans are expected to lose an estimated $273 billion in wealth because of foreclosures.

Visit majority-minority cities such as Atlanta, Baltimore, Cleveland, Detroit, and Memphis and you'll see these statistics come to life. For starters, you won't find many people in these places. Yesterday, for instance, I was at a conference here in Washington listening to the Tax Collector of Cuyahoga County, Ohio. He's forecasted that the 2010 Census will reveal Cleveland to be facing the largest population decline (by percentage) of any urban area in the survey's 220-year history. More than 40,000 properties in the city are vacant right now, and about half will need to be demolished because no one can afford to maintain them. Brookings Metropolitan Policy Program data show similar trends in dozens of majority-minority cities across the country.

To be sure, the impact of the mortgage crisis is devastating all around. Overall, Federal Reserve data indicate that Americans lost 15 percent of their wealth between the peak of the housing boom and mid-2009. Put another way, U.S. households have about as much wealth relative to their income as they did in the 1990s. The culprit? More than 2.5 million foreclosures have been completed since 2007, and another 10 to 13 million are expected over the next four years. Similarly, about 25 percent of all mortgage borrowers are underwater right now, owing more on their mortgages than their homes are actually worth. Take a drive around your neighborhood and consider these facts; one out of every home with a mortgage that you pass is likely to have a family in financial crisis living in it.

The effects on minorities are disproportionate, however. And the roots of those effects go back much farther than the mortgage crisis. The segregated housing once sponsored by the federal government is partly to blame. As the late Jack Kemp passionately argued while he was Secretary of HUD in the first Bush administration, the government's public housing projects created racially segregated neighborhoods, which depressed home values, job opportunities, the quality of schools, and basic public infrastructure. Over time that neighborhood profile bred a perfect target for unscrupulous lenders. A study by the Urban Institute and HUD found, for instance, that Latinos were provided with less information from mortgage brokers about available financial products, loan terms, and underlying home values.

The real tragedy that all these data point to is the fact that millions of upwardly mobile minorities, after having fought against the historical tides of discrimination and unequal opportunity, are now back where they started. In fact, many are worse off because their credit has been ruined and with it the hopes they had for their kids to continue climbing up the economic ladder. These effects will last at least a generation, possibly longer.

It's hard to know how to start addressing such a broad, complicated problem. Many of the available policy tools are simply not up to scale. And, to be frank, policymakers aren't quite sure what to do about that. Every big idea out of Washington is fiscally, financially, and/or politically unrealistic (a Marshall Plan for cities is one example that comes to mind).

In the meantime, we're trying to do our small part. On Tuesday, we visited Norfolk, VA, one of the communities still reeling from the effects of the crisis, and distributed over 2,000 free memberships to our financial guidance service to needy families. One woman, who had recently lost her job because of back problems, broke down crying at the prospect of being able to afford the pain medication she had been needing for the past two months, and being able to look for other work as a result. The average HelloWallet member, before joining, unnecessarily loses about $600 a year because of his or her difficulty using financial products.

Ours was a small effort but its effects were immediate and, having spent years listening to policymakers in DC grapple with this problem, I think there's something to be said for that. It's clear, however, that there is plenty left to do to prevent future crises. At HelloWallet, we believe that a new, independent resource that helps U.S. households better evaluate the housing options and the mortgage terms available to them is one big solution. But there are lots of other interesting efforts underway.

The Treasury Department, for instance, is looking at ways to use behavioral economics to improve the mortgage product choices of prospective homeowners. The Federal Reserve has moved to change the incentive structure for brokers, so they no longer have incentives to sell borrowers mortgages that cost more than they need to. And a number of major players in the mortgage market are experimenting with new ideas to improve the sustainability of the loans they originate. What do you think should be done?