Wealth Gap Creates More Foreclosures and Short Sales

The worst of the foreclosure crisis seems over, if you can accept the idea that today’s foreclosure levels are in any way acceptable. Many of the foreclosures and short sales seen today actually have their roots in the period between 2000 and 2008 when lending standards went out the window. Today, with the better underwriting required under Wall Street Reform, foreclosure levels have fallen to levels which are actually below those seen before the mortgage meltdown.

But while much of the foreclosure crisis now seems over and done that is not the case for everyone. The odds are overwhelming that blacks and Hispanics will continue to feel the sting of the foreclosure crisis for some time to come. Why? Not because of less income, though such groups have less income than whites, but because there is also a wealth gap.

“Income inequality understates the size of the economic gap between whites and minorities in the United States,” says a new study from the Urban Institute. “In 2010, whites on average had two times the income of blacks and Hispanics, but six times the wealth. Analyses of wealth accumulation over the life cycle show that the racial wealth gap grows sharply with age. Wealth isn’t just money in the bank, it’s insurance against tough times, tuition to get a better education and a better job, savings to retire on, and a springboard into the middle class.”

The problem here is really threefold:

First, there are large income gaps in the US. While the average household income was $50,054 in 2011 not everyone was likely to have the same earnings: According to the Census Bureau, Asian households had the highest median income ($65,129) versus $55,412 for non-Hispanic white households, $38,624 for Hispanic households and $32,229 for black households,

Second, many of the people who were sold subprime loans actually qualified for better mortgages. For instance, according to the Wall Street Journal, 61 percent of all subprime borrowers qualified for FHA loans, VA mortgages and conventional financing in 2006. (See:Subprime Debacle Traps Even Very Credit-Worthy, December 3, 2007).

Michael Hudson, in his exceptional book, The Monster, explains how subprime lenders aimed their financial products at minority households, especially elderly black women. In other words, much of the financial crisis was both unnecessary and directed toward minority households.

Third, black and Hispanic households have less wealth and therefore less ability to weather economic downturns, according to the Census Bureau. “There is extraordinary wealth inequality between the races. In 2010, whites on average had six times the wealth of blacks and Hispanics. So for every $6.00 whites had in wealth, blacks and Hispanics had $1.00 (or average wealth of $632,000 versus $103,000).

“The income gap, by comparison, is much smaller. In 2010, the average income for whites was twice that of blacks and Hispanics ($89,000 versus $46,000), meaning that for every $2.00 whites earned, blacks and Hispanics earned  $1.00.”

For details, see: Less Than Equal: Racial Disparities in Wealth Accumulation.

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