From the Wall Street Journal:
By SUSAN SCHMIDT and MAURICE TAMMAN
California Rep. Joe Baca has long pushed legislation he said would "open the doors to the American Dream" for first-time home buyers in his largely Hispanic district. For many of them, those doors have slammed shut, quickly and painfully.
Mortgage lenders flooded Mr. Baca's San Bernardino, Calif., district with loans that often didn't require down payments, solid credit ratings or documentation of employment. Now, many of the Hispanics who became homeowners find themselves mired in the national housing mess. Nearly 9,200 families in his district have lost their homes to foreclosure.
For years, immigrants to the U.S. have viewed buying a home as the ultimate benchmark of success. Between 2000 and 2007, as the Hispanic population increased, Hispanic homeownership grew even faster, increasing by 47%, to 6.1 million from 4.1 million, according to the U.S. Census Bureau. Over that same period, homeownership nationally grew by 8%. In 2005 alone, mortgages to Hispanics jumped by 29%, with expensive nonprime mortgages soaring 169%, according to the Federal Financial Institutions Examination Council.
An examination of that borrowing spree by The Wall Street Journal reveals that it wasn't simply the mortgage market at work. It was fueled by a campaign by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos.
What about President Bush and his 2002 White House Conference on Minority Homeownership, where he called for adding 5.5 million Hispanic and black homeowners via cutting back on barriers to the American Dream, such as down payments?
The network included Mr. Baca, chairman of the Congressional Hispanic Caucus, whose district is 58% Hispanic and ranks No. 5 among all congressional districts in percentage of home loans not tailored for prime borrowers. The caucus launched a housing initiative called Hogar -- Spanish for home -- to work with industry and community groups to increase mortgage lending to Latinos. Mortgage companies provided funding to that group, and to the National Association of Hispanic Real Estate Professionals, which fielded an army to make the loans.
In years past, minority borrowers seeking loans were often stopped cold by a practice called red-lining, in which lenders were reluctant to lend within particular geographical areas, often, it appeared, on the basis of race. But combined efforts to open the mortgage pipeline to Latinos proved successful.
"We saw what we refer to in the advocacy community as reverse red-lining," says Aracely Panameno, director of Latino affairs for the Center for Responsible Lending, an advocacy group. "Lenders were seeking out those borrowers and charging them through the roof," she says.
Ms. Panameno says that during the height of the housing boom she sought to present the Hispanic Caucus with data showing how many Latinos were being steered into risky and expensive subprime loans. Hogar declined her requests, she says.
A very large fraction of the people steering Hispanics into risky and expensive subprime loans were Hispanics, so it's hardly surprising that their political representatives weren't interested in hearing about predatory lending abuses. Hispanic mortgage brokers, real estate agents, and construction workers were making a killing off easy credit, so why kill the goose that laid the golden egg?
When the national housing market began unraveling, so did the fortunes of many of the new homeowners. National foreclosure statistics don't break out data by ethnicity or race. But there is evidence that Hispanic borrowers have been hard hit. In part, that's because of large Hispanic populations in areas where the housing bubble was pronounced, such as Southern California, Nevada and Florida.
And why was the Housing Bubble pronounced in those areas with large Hispanic populations? In the propaganda of the time, population growth was constantly cited as justifying rising home prices, but there was no mention of whether these new people had the earning capacity to pay back their mortgages.
In U.S. counties where Hispanics account for more than 25% of the population, banks have taken back 6.7 homes per 1,000 residents since Jan. 1, 2006, compared with 4.6 per 1,000 residents in all counties, according to a Journal analysis of U.S. Census and RealtyTrac data.
Hispanic lawmakers and community groups have blamed subprime lenders, who specialize in making loans to customers with spotty credit histories. They complain that even solid borrowers were steered to those loans, which carry higher interest rates.
In a written statement, Mr. Baca blamed the foreclosure crisis among Hispanics on borrowers' lack of "financial literacy" and on "lenders and brokers eager to make a bigger profit." He declined to be interviewed for this story.
But a close look at the network of organizations pushing for increased mortgage lending reveals a more complicated picture. Subprime-industry executives were advisers to the Hogar housing initiative, and bankrolled more than $2 million of its research. Lawmakers and advocacy groups pushed hard for the easy credit that fueled the subprime phenomenon among Latinos. Members of the Congressional Hispanic Caucus, who received donations from the lending industry and saw their constituents moving into new homes, pushed for eased lending standards, which led to problems.
Mortgage lenders appear to have regarded Latinos as a largely untapped demographic. Many were first or second-generation U.S. residents who didn't own homes. Many Hispanic families had multiple wage earners working multiple cash jobs, but had no savings or established credit history to allow them to qualify for traditional loans.
The Congressional Hispanic Caucus created Hogar in 2003 to work with industry and community groups to increase mortgage lending to Latinos. At that time, the national Latino homeownership rate was 47%, compared with 68% for the overall population. Hogar called the figure "alarming," and said a concerted effort was required to ensure that "by the end of the decade Latinos will share equally in the American Dream of homeownership."
Hogar's backers included many companies that ran into trouble in mortgage markets: Fannie Mae and Freddie Mac, both now under federal control; Countrywide Financial Corp., sold last year to Bank of America Corp.; Washington Mutual Inc., taken over by the government and sold to J.P. Morgan Chase & Co.; and New Century Financial Corp. and Ameriquest Mortgage Corp., both now defunct.
Hogar's ties to the subprime industry were substantial. A Washington Mutual vice president served as chairman of its advisory committee. Companies that donated $150,000 a year got the right to place a research fellow who would conduct Hogar's studies, which were used by industry lobbyists. For donations of $100,000 a year, Hogar offered to provide news releases from the Hispanic Caucus promoting a lender's commercial products for the Latino market, according to the group's literature.
Hogar worked with Freddie Mac on a two-year examination of Latino homeownership in 63 congressional districts. The study found Hispanic ownership on the rise thanks to "new flexible mortgage loan products" that the industry was adopting. It recommended further easing of down-payment and underwriting standards.
Representatives for Hogar declined repeated requests for comment.
The National Association of Hispanic Real Estate Professionals, one of Hogar's sponsors, advised the group, shared research data and built a large membership to market loans to Latinos. By 2005, its ranks had grown to 16,000 agents and mortgage brokers.
The association, called Nahrep, received funding from some of the same players that funded Hogar. Some 22 corporate sponsors, including Countrywide and Washington Mutual, together paid the association $2 million a year to attend conferences and forums where lenders could pitch their loan products to loan brokers.
While home prices were rising, the lending risk seemed minimal, says Tim Sandos, Narhep's president. "We would say, 'Is he breathing? OK, we'll give him a mortgage,' " he recalls.
Nahrep's 2006 convention in Las Vegas was called "Place Your Bets on Home Ownership." Countrywide Chairman Angelo Mozilo spoke, as did former Housing and Urban Development Secretary Henry Cisneros, a force in Latino housing developments in the West.
The words "Las Vegas" constantly pop up in these kind of articles.
Countrywide and other sponsors contracted with Nahrep to set up regional events where they could present loan products to loan brokers and their customers. Mr. Sandos says his organization doesn't get paid to promote particular lenders.
At the height of the subprime lending boom, in 2005, banking and finance companies gave at least $2.3 million in campaign contributions to members of the Hispanic Caucus, according to data from the Center for Responsive Politics.
In October 2008, a charitable foundation set up by Mr. Baca received $25,000 from AmeriDream Inc., a nonprofit housing company and Hogar sponsor. Mr. Baca has long backed AmeriDream's controversial seller-financed down-payment assistance program. AmeriDream provided down-payment money to buyers, a cost that was covered by home builders in the form of donations to the nonprofit.
This is a tax evasion scam, often organized through minority charities, such as churches. The Bush Administration tended to push it as "compassionate conservatism."
New housing legislation last fall outlawed the program. Mr. Baca is cosponsoring a bill that would allow AmeriDream and similar nonprofits to resume arranging seller-financed down-payment assistance to low-income Federal Housing Administration borrowers.
Such seller-financed loans comprise one-third of the loans backed by the FHA, and have defaulted at nearly triple the rate of other FHA-insured loans, according to agency spokesman William Glavin.
In a news release, AmeriDream said the donation to Mr. Baca's foundation was intended to fund the purchase of gear for firefighters in his district. Local news reports say the foundation gave away $36,000 in scholarships this year.
Internal Revenue Service records indicate that Mr. Baca's son, Joe Baca Jr., has an annual salary of $51,800 as executive director of the Joe Baca Foundation, which is run out of the congressman's home. Joe Baca Jr. says he currently is taking only about half that listed salary.
Mr. Baca's office declined to comment on the AmeriDream contribution.
Mr. Baca remains opposed to strict lending rules. "We need to keep credit easily accessible to our minority communities," he said in a statement released by his office.
Mortgage lending to Hispanics took off between 2004 and 2007, powered by nonprime loans. The biggest jump occurred in 2005.
If this had been merely a cynical re-election ploy by the Bush Adminstration, Bush could have pulled the plug on it the day after the November 2004 election. But, instead, this was a practically universal delusion among the Great and the Good. To Karl Rove, it was a permanent good idea that would bring about long-term realignment by making Hispanics into home-owning Republicans. To Democrats, it was pork for their constituents.
The 169% increase in nonprime mortgages to Hispanics that year outpaced a 122% gain for blacks, and a 110% increase for whites, according to a Journal analysis of mortgage-industry and federal-housing data. Nonprime mortgages carry high interest rates and are tailored to borrowers with low credit scores or few assets.
Between 2004 and 2007, black borrowers were offered nonprime loans at a slightly higher rate than Hispanics, but the overall number of Hispanic borrowers was much larger. From 2004 to 2005, total nonprime home loans to Hispanics more than tripled to $69 billion from $19 billion, and peaked in 2006 at $73 billion.
Tricks of the Trade
Mortgage brokers became a key portion of the lending pipeline. Phi Nguygn, a former broker, worked at two suburban Washington-area firms that employed hundreds of loan originators, most of them Latino. Countrywide and other subprime lenders sent account representatives to brokerage offices frequently, he says. Countrywide didn't respond to calls requesting comment.
Representatives of subprime lenders passed on "little tricks of the trade" to get borrowers qualified, he says, such as adding a borrower's name to a relative's bank account, an illegal maneuver. Mr. Nguygn says he's now volunteering time to help borrowers facing foreclosure negotiate with banks.
Many loans to Hispanic borrowers were based not on actual income histories but on a borrower's "stated income." These so-called no-doc loans yielded higher commissions and involved less paperwork.
Another problem was so-called NINA -- no income, no assets -- loans. They were originally intended for self-employed people of means. But Freddie Mac executives worried about abuse, according to documents obtained by Congress. The program "appears to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed," said a staff memo to Freddie Mac Chairman Richard Syron. "It appears they are disproportionately targeted toward Hispanics."
Freddie Mac says it tightened down-payment requirements in 2004 and stopped buying NINA loans altogether in 2007.
"It's very hard to get in front of a train loaded with highly profitable activities and stop it," says Ronald Rosenfeld, chairman of the Federal Housing Finance Board, a government agency that regulates home loan banks.
Regions of the country where the housing bubble grew biggest, such as California, Nevada and Florida, are heavily populated by Latinos, many of whom worked in the construction industry during the housing boom. When these markets began to weaken, bad loans depressed the value of neighboring properties, creating a downward spiral. Neighborhoods are now dotted with vacant homes.
By late 2008, one in every nine households in San Joaquin County, Calif., was in default or foreclosure -- 24,049 of them, according to Federal Reserve data. Banks have already taken back 55 of every 1,000 homes. In Riverside, Calif., 66,838 houses are owned by banks or were headed in that direction as of October. In Prince William County, Va., a Washington suburb, 11,685 homes, or one in 11, was in default or foreclosure.
Gerardo Cadima, a Bolivian immigrant who works as an electrician, bought a home in suburban Virginia for $330,000, with no money down. "I said this is too good to be true," he recalls. "I'm 23 years old, with a family, buying my own house."
When work slowed last year, Mr. Cadima ran into trouble on his adjustable-rate mortgage. "The payments were increasing, and the price of the house was starting to drop," he says. "I started to think, is this really worth it?" He stopped making payments and his home was sold at auction for $180,000.
In the wake of the housing slump, some participants in the Hispanic lending network are expressing second thoughts about the push. Mr. Sandos, head of Nahrep, says that some of his group's past members, lured by big commissions, steered borrowers into expensive loans that they couldn't afford.
Nahrep has filed complaints with state regulators against some of those brokers, he says. Their actions go against Nahrep's mission of building "sustainable" Latino home ownership.
These days, James Scruggs of Northern Virginia Legal Services is swamped with Latino borrowers facing foreclosure. "We see loan applications that are complete fabrications," he says. Typically, he says, everything was marketed to borrowers in Spanish, right up until the closing, which was conducted in English.
"We are not talking about people working for the World Bank or the IMF," he says. "We are talking about day laborers, janitors, people who work in restaurants, people who do babysitting."
Two such borrowers work in Mr. Scrugg's office. Sandra Cardoza, a $28,000-a-year office manager, is now $30,000 in arrears on loans totaling $370,000. "Her loan documents say she makes more than me," says Mr. Scruggs.
Nahrep agents are networking on how to negotiate "short sales" to banks, where Hispanic homeowners sell their homes at a loss in order to escape onerous mortgages. The association has a new how-to guide: "The American Nightmare: Strategies for Preventing, Surviving and Overcoming Foreclosure."—Louise Radnofsky contributed to this article.