A housing rescue nears – but for whom?

Minority neighborhoods would especially benefit from a $3.9 billion aid package.

– As Congress heads into a critical week of votes on how to relieve America's home-foreclosure crisis, one of the toughest issues will be how to deal with the racial and ethnic dimensions of the problem. Minorities will be watching closely to see who gets the help.

There's broad support on Capitol Hill for shoring up government-sponsored home-mortgage giants Fannie Mae and Freddie Mac: They're too big to fail, many say. But there's much less consensus over what to do about people who are losing their homes, especially in poor, inner-city neighborhoods – or even over how to understand their plight.

The racial overtones of the foreclosure crisis are taking on a higher profile as Congress wrestles with the shape of a fix this week.

At issue is a proposed $3.9 billion in block grants to help states or local governments buy and demolish or rehabilitate foreclosed properties to try to stem urban blight. The money is expected to flow to minority neighborhoods, in particular.

While there are big gaps in available data, industry analysts expect that black and Hispanic homeowners will bear the brunt of the foreclosure crisis. But is it because they overextended and should not have been in the housing market to begin with? Or were they the unsuspecting victims of predatory lending?

"Black and Hispanic families have gotten a disproportionate share of subprime lending, and subprime loans are the driving force behind the foreclosures," says Katheen Day, spokeswoman for the Center for Responsible Lending, a nonprofit research and policy group based in Durham, N.C. "We know that black and Hispanic communities are hardest hit."

Subprime loans – loans made to homebuyers with less-than-perfect credit – were responsible for a large share of the foreclosures that started last year. And minorities received a hefty share of those loans. Just over half of African-Americans and 4 in 10 Hispanics who got a mortgage in 2006 had a subprime loan, according to a 2007 analysis by the Center for Responsible Lending.

Also, the areas hardest hit by home-loan crisis are heavily Hispanic. In seven of the 10 metro areas with the highest foreclosure rates last month, they represent at least one-third of the population; in two of them – Merced and Salinas-Monterey, Calif. – Hispanics make up more than half of the population. Their rates of home­ownership are also high: More than half of Hispanic households owned their home in eight of the top 10 foreclosure cities, according to the latest census data.

African-Americans are also hit hard by the crisis, although they aren't concentrated in cities with the highest foreclosures. In only two of the top 10 metro areas – Fort Lauderdale, Fla., and Vallejo-Fairfield, Calif. – did they make up more than 10 percent of the population. Their homeownership rates also trailed those of Hispanics in all but Vallejo-Fairfield.

Still, African-Americans made up more than 20 percent of the population in metro Detroit, No. 13 on the list of top foreclosure cities by RealtyTrac, and in Miami, No. 15.

It is cities such as these – along with Cleveland, which felt the brunt of the housing crisis early – where the pressure is building for local politicians to come up with a solution.

Activist groups say this racial dimension to the problem puts a special responsibility on the federal government to relieve distress in these neighborhoods.

"The subprime lending debacle has caused the greatest loss of wealth to people of color in modern US history," says Amaad Rivera, lead author of a 2008 report by United for a Fair Economy. The Boston-based research group estimates that black/African-American borrowers will lose between $71 billion and $92 billion in the current foreclosure crisis, while Latino borrowers will lose between $75 billion and $98 billion.

"The difficulties have been concentrated in 'subprime' loans, which generally go to borrowers with limited or damaged credit, although there is evidence that some borrowers are shifted into the subprime category because they are African-American or Hispanic," said Rep. Barney Frank (D) of Massachusetts, who chairs the House Financial Services Committee, in a statement last week.

House Democrats say a new $3.9 billion federal program to help state and local governments buy up foreclosed properties would be part of the solution. The Bush administration has opposed such block grants on the grounds that "the principal beneficiaries of this type of plan would be private lenders – who are now the owners of the vacant or foreclosed properties – instead of struggling homeowners who are working hard to stay in their homes."

Still, House Speaker Nancy Pelosi said last week she doubts Mr. Bush will veto the housing-rescue package, which contains a separate provision he wants to strengthen the financial positions of faltering mortgage companies Fannie Mae and Freddie Mac. The disputed funds enable communities to buy up properties once on the revenue rolls that are now "taking the value of their neighbors' homes," she said.

Conservative Republicans worry that Democrats and the Bush administration are trying to resolve today's foreclosure crisis at too high a cost – now and in the future.

"Everyone realizes that it would be calamitous for Fannie and Freddie to fail, but give me a legislative package to ensure we're not here with a bigger bailout five years later, and I haven't seen that," says Rep. Jeb Hensarling (R) of Texas, who chairs the Republican Study Committee, the conservative wing of the Republican caucus.

In a bid to address the race-based fallout of the subprime mortgage crisis, the Federal Reserve Board is working with community groups to help stabilize neighborhoods where foreclosure rates are high. Home-vacancy rates increased sharply in 2006 and hit 2.9 percent in the first quarter of 2008, according to the US Census Bureau, diminishing the value of nearby homes and adding to the burden of local governments dealing with the fallout.

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