The Two-Income Trap - Elizabeth Warren [69]
Subprime lending has an even more pernicious effect. It ensnares people who, in a regulated market, would have had access to lower-cost mortgages. Lenders’ own data show that many of the families that end up in the subprime market are middle-class families that would typically qualify for a traditional mortgage. At Citibank, for example, researchers have concluded that at least 40 percent of those who were sold ruinous subprime mortgages would have qualified for prime-rate loans.42 Nor is Citibank an isolated case: A study by the Department of Housing and Urban Development revealed that one in nine middle-income families (and one in fourteen upper-income families) who refinanced a home mortgage ended up with a high-fee, high-interest subprime mortgage.43 For many of these families there is no trade-off between access to credit and the cost of credit. They had their pockets picked, plain and simple.
Why would middle-class families take on high-interest mortgages if they could qualify for better deals? The answer, quite simply, is they didn’t know they could do any better. Many unsuspecting families are steered to an overpriced mortgage by a broker or some other middle-man who represents himself as acting in the borrower’s best interests, but who is actually taking big fees and commissions from subprime lenders.44 In some neighborhoods these brokers go door-to-door, acting as “bird dogs” for lenders, looking for unsuspecting homeowners who might be tempted by the promise of extra cash. Other families get broadsided by extra fees and hidden costs that don’t show up until it is too late to go to another lender. One industry expert describes the phenomenon: “Mrs. Jones negotiates an 8 percent loan and the paperwork comes in at 10 percent. And the loan officer or the broker says, ‘Don’t worry, I’ll take care of that, just sign here.’”45
Every now and then a case comes to the forefront that is particularly egregious. Citibank was recently caught in one of those cases. In 2002, Citibank’s subprime lending subsidiary was prosecuted for deceptive marketing practices, and the company paid $240 million to settle the case (at the time, the largest settlement of its kind).46 A former loan officer testified about how she marketed the mortgages: “If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the [additional costs] CitiFinancial offered.”47 In other words, lending agents routinely steered families to higher-cost loans whenever they thought there was a chance they could get away with it.
Such steering hits minority homeowners with particular force. Several researchers have shown that minority families are far more likely than white families to get stuck with subprime mortgages, even when the data are controlled for income and credit rating.48 According to one study, African-American borrowers are 450 percent more likely than whites to end up with a subprime instead of a prime mortgage.49 In fact, residents in high-income, predominantly black neighborhoods are actually more likely to get a subprime mortgage than residents in low-income white neighborhoods—more than twice as likely.50
In many cases, these lenders don’t just want families’ money; they also want to take people’s homes. Banks have been caught deliberately issuing mortgages to families that could not afford them, with the ultimate aim of foreclosing on these homes. This practice is so common it has its own name in the industry: “Loan to Own.”51 These lenders have found that foreclosing can be more profitable