By Doug Miller

African-American and Latino borrowers – already staggering under greater financial losses than whites in the wake of the U.S. mortgage foreclosure scandal – face an additional loss of an estimated $360 billion in cumulative family wealth from an associated decrease in neighborhood property values, according to recent testimony before Congress.

Citing massive spillover costs from what she called a “foreclosure crisis that has devastated families, destroyed neighborhoods and triggered a global financial crisis,” Julia Gordon, senior policy counsel for the Center for Responsible Lending (CRL), told the House Subcommittee on Housing and Community Opportunity recently that “tens of millions of households where the owners have paid their mortgages on time every month are suffering a decrease in their property values just because they are located near a property in foreclosure.”

The CRL estimates that foreclosures projected to occur between 2009 and 2012 will result in $1.86 trillion in lost wealth for U.S. homeowners of all races and ethnicities. But since black and Latino borrowers have been impacted more by foreclosures, “these spillover costs will disproportionately be borne by communities of color,” according to Gordon.

Earlier studies by the CRL show that African Americans and Latinos have lost homes at significantly greater rates than whites through foreclosures, even after controlling for income. Gordon told House members that, when looking at rates within racial and ethnic groups, nearly 8 percent of both African Americans and Latinos already have lost a home, compared to 4.5 percent of white mortgagees.

“From 2009 to 2012,” she added, “those living near a foreclosed property in African-American and Latino communities will have seen their home values drop more than $350 billion.”

Widening the gap

Home ownership is the primary means by which wealth is transferred from one generation to another, Gordon reminded committee members. Since most minority families already are less wealthy than white families, “this crisis is not only threatening the financial stability of individual families, but is also exacerbating an already enormous wealth gap between whites and communities of color.”

Based on figures from the financial services sector, CRL estimates that more than 2.5 million homes have been lost to subprime loan-related foreclosures so far; in addition, Wall Street analysts predict as many as 11 million more could be lost before the current crisis abates. “Millions of homeowners ended up in dire straits,” Gordon testified, “due to abusive mortgage originations, incompetent and predatory mortgage practices, ineffective government oversight and a complex securitization system that lacks accountability all the way up and down the chain.”

The Home Affordable Modification Program (HAMP), the federal government’s principal response to the crisis, has been ineffective, she continued, producing fewer than half a million permanent mortgage modifications aimed at helping struggling homeowners avoid foreclosure and keep their houses. “More than 60 percent of borrowers have not even been evaluated for a modification,” said Gordon, and servicers of mortgages have “routinely failed to follow the loss mitigation guidelines in the HAMP program. Foreclosures continue to take place, she noted, before loan modifications even have been considered – in some cases even after a modification agreement with a mortgagor has been reached.

Speaking on behalf of CRL, Gordon recommended that Congress change the current bankruptcy code to permit mortgage modifications on principal residences, and mandate procedures to ease the loss a mortgagee faces before any foreclosure proceedings take place. She also recommended aggressive enforcement of HAMP guidelines through the imposition of serious penalties on mortgagors, as well as high-priority regulation of mortgage services by the new Consumer Financial Protection Bureau.

“The mortgage servicing system should serve as a resource for both homeowners and investors harmed by unscrupulous originators and securitizers,” the financial institutions which bundle mortgages and sell them as securities to investors, she said. “Instead, (it’s) compounding the problem.”

Doug Miller is a writer living in Westchester County, New York