Rebuilding the Dream: Foreclosure Prevention and Financial Education

A few years ago, it seemed that more and more Americans were achieving the American dream. Between 2000 and 2007, homeownership nationally grew by 8 percent. It grew even faster for one of the nation’s fastest growing populations- the Hispanic community-increasing by 47 percent, from 4.1 million to 6.1 million, according to the U.S. Census Bureau.

But for too many Americans, predatory lending and sub-prime mortgages have turned what was once a dream into a nightmare. This is especially true in California, where 1 in 200 households is in foreclosure. And it’s especially true for certain Californians.

A new study by the Center for Responsible Lending shows that people of color have been subject to the majority of foreclosures in California since 2006. The study, which has received much media coverage, analyzed half a million foreclosures statewide and determined that Latino and African-American borrowers were almost twice as likely to face foreclosure as white Californians, even when controlling for other factors such as income and education.

According to the study, titled “Dream Deferred: Impacts and Characteristics of the California Foreclosure Crisis”, 48 percent of foreclosures have been in the Latino community, even though Latinos only make up about 36 percent of the state’s population and 21 percent of homeowners. And 8 percent of those foreclosed upon have been African-American, even though African-Americans make up about 6 percent of the population.

A different study titled “Foreclosures by Race and Ethnicity: The Demographics of a Crisis” by the Center found similar results on a national level, and it postulates that people of color will continue to be the hardest hit.

We all know the negative impact mass foreclosures have had on our state and country’s economic stability in recent years. But for advocates of wealth building, loss of homeownership should be even more of a concern because a home can be such a significant portion of a family’s assets. As stated in the report:

“Homeownership has been the primary source of economic mobility and financial security in this country. Home equity is often tapped to start a new business, pay for higher education and secure retirement. In addition, home equity provides a financial cushion against unexpected financial hardships, such as job loss, divorce or medical expenses. Homeownership is also the primary means by which wealth is transferred to future generations. The foreclosure crisis therefore threatens the financial stability and mobility of families across the country, not just now but also in the future.”

What’s most surprising about the report is that it found many foreclosed homes to be modest properties, as opposed to the “McMansions” popularly assumed to be at the root of the foreclosure crisis. The question remains: why have foreclosures affected people of color in California so disproportionately?

The study finds that Latinos and African-Americans were more likely to acquire sub-prime mortgages with loans terms leading to a high risk of default, and that minority populations were targeted by sub-prime lenders with the most dangerous and expensive loans because they may have been less financially literate.

Latinos and African-Americans have also been the focus of efforts by lawmakers, low-income housing groups and mortgage brokers to increase homeownership, long defined as the American dream.

Homeownership is an admirable goal. The trouble is that these days, anyone without a PhD in Economics can easily be in the dark when it comes to the nuances of loan agreements and the workings of the financial market. The bottom line is that we could all benefit from more financial education.

In California, lawmakers have recognized that. The Senate and Assembly recently sent to the Governor’s desk AB 2457 (Salas), which would establish a financial literacy fund in the state Treasurers office. The fund could be used by organizations that wish to partner with the state to provide consumers with the information they need to make sound financial decisions.

This week, Republican lawmakers argued that the state shouldn’t be passing a financial literacy bill at a time when the government can’t budget. But that argument makes little sense. Just because the state can’t get its finances together doesn’t mean average Californians shouldn’t have increased access to financial education. If anything, the state’s problems should be a lesson as to why sound economic planning is so important for the public good.

The passage of AB 2457 represents an understanding by lawmakers that even though the housing crisis may pass, the root causes that lead to financial struggles remain. To further mitigate the foreclosure crisis, the California Legislature should support SB 1275 (Leno/Steinberg),the Homeowner’s Bill of Rights,  currently on the Assembly Floor. The bill essentially requires banks to consult with, and provide full alternatives to, borrowers at risk of foreclosure—before they foreclose. The measure would greatly expand homeowner’s access to information in the face of foreclosure. By making information on rights available, this bill will empower consumers to make the most informed decision possible when struggling to save their home. The bill would also protect consumers from non-responsive banks and loan providers by providing remedies for those whose rights were violated under the act.

Both SB 1275 and AB 2457 are common sense measures that empower consumers now and into the future. Financial education and defense of homeowner’s rights encourage smart decisions, and that means a stronger economy for all.