OPINION: Good Enough for Subprime, But Not Good Enough For Prime

Latinos were hit harder than most other Americans when the collapse of subprime mortgages burst the housing bubble in 2007-2008, and we’re bearing more than our share of the aftermath now. Some of us saw this coming, but our warnings weren’t heeded. We hope history won’t repeat itself. 

In 2004, the Greenlining Institute warned then-Federal Reserve Chairman Alan Greenspan that predatory lenders were using deceptive practices to lure Latinos, African-Americans and immigrants into subprime loans they could not afford. We could see that this had the potential to threaten the stability of the whole system.

As it turns out, we were right on all counts.

California, one of the states hit hardest by the foreclosure crisis, is a good example. According to the data from the Federal Feserve, Latinos received just 17 percent of prime loans in 2008, but 38 percent of high-cost subprime loans. More disturbingly, among borrowers with the best FICO credit scores, 720 or higher, Latinos were over five times as likely as whites to receive high-cost loans. This strongly suggests that many Latinos who could have qualified for prime loans were steered into high-cost subprime mortgages.

A policy brief released by the Greenlining Institute this month found, “Latinos received an overwhelming portion of high cost loans in California in 2008, near the peak of the housing bubble. Nearly all of the mortgages are underwater today, leading to a dangerous wave of foreclosures for Latinos.”

Efforts to mitigate the foreclosure crisis and stabilize neighborhoods by making homeownership readily available to qualified purchasers have hit a wall. Lending has tightened and credit standards are now making homeownership prohibitive.

Some tightening of standards was clearly necessary after the wild-west atmosphere of the housing bubble. But now we fear that the pendulum has swung too far, as artificial barriers are preventing the same communities from reaching the dream of homeownership. Whereas Latinos were once flooded with subprime loan offers, we are now in a prime loan drought. The consequences for Latinos could be especially severe, given the population growth and relative youth of our community.

Implementation of the Dodd-Frank financial regulatory reform bill will play a key role in this situation. If implemented wrongly, the law could lead to the artificial creation of a credit box, a set of arbitrary standards that don’t adequately reflect a borrower’s creditworthiness and that could make homeownership impossible for otherwise qualified purchasers.

Especially concerning is the overreliance on FICO scores, which many consider to be an outdated tool for assessing one’s ability to pay. Unfortunately, the credit agencies refuse to disclose how Latinos and African Americans are disproportionately impacted by this outdated score.

Emergency action must taken to either reform FICO or to find alternative forms of credit that better meet the needs of Latinos. We can have a safe, sound banking and mortgage system without slamming the doors of opportunity in the face of hard-working Americans who have waited too long for their chance to step through.

Orson Aguilar is Executive Director and Preeti Vissa is Community Reinvestment Director at The Greenlining Institute,