The Subprime Color Line

Rich people don't particularly mind talk about helping poor people -- unless that talk starts linking the wealth of the one to the poverty of the other. Suggest that link and the cheerleaders for grand fortunes go apoplectic. How dare you intimate, they will huff, that the wealthy get wealthier by exploiting the poor!

This sort of bombast can be intimidating. But we can't let ourselves be intimidated, not if we want to understand how our society really operates. Some phenomena that impact our lives, we need to remember, simply make no sense unless we contemplate the ongoing interplay between rich and poor.

Take, for instance, the mess around subprime mortgages.

That's just what United for a Fair Economy has done in Foreclosed: State of the Dream 2008, this Boston-based group's latest annual analysis of how fares the legacy of Dr. Martin Luther King, Jr.

This newest State of the Dream zeroes in on the subprime crisis for a single powerful reason. This subprime lending debacle, as the report bluntly puts it, "has caused the greatest loss of wealth to people of color in modern U.S. history."

And this awesome loss of wealth to people of color, Foreclosed patiently details, has its roots in the reckless behavior of people in power suits -- from mortgage brokers and bank executives to Wall Street underwriters and hedge fund managers.

These players created a financial house of cards that offered fabulous rewards for turning a mortgage tool "intended to be used sparingly and discerningly to help people with poor credit" into a "ruthlessly hawked" con game "disproportionately and systematically aimed at people of color."

All this unfolded virtually overnight. In 1994, subprime lending -- the making of high-interest loans to households considered too risky for conventional mortgages -- amounted to a mere $35 billion market. By 2005, subprime mortgages had become a $665 billion bonanza.

In 1998, only one out of every 10 new mortgages ranked as a subprime. By 2006, nearly a quarter of all new mortgages would be subprimes.

What drove the demand for these subprime loans? Above all else, inequality. The vast transfer of income and wealth up the American economic ladder since the 1970s, Foreclosed relates, had left working households with stagnating incomes -- and affordable housing in short supply. Developers were too busy building mansions to worry about ordinary families.

"The higher profit margins that come with building expensive homes," Foreclosed points out, "have made the affordable housing market less attractive for private home development companies."

In deeply unequal early 21st century America, no new affordable Levittowns would arise to offer working families entry into the middle class. Instead, mortgage brokers steered families into high-interest, high-commission subprime loans. The more they steered, the more they raked in.

But the raking -- note Foreclosed authors Amaad Rivera, Brenda Cotto-Escalera, Anisha Desai, Jeannette Huezo, and Dedrick Muhammad -- went far beyond the brokers.

Banks and other finance firms "securitized" the subprime loans. They bundled them up into high-yielding investments for hedge funds and the like, creating, in the process, powerful incentives to cajole -- by any means necessary -- still more families into taking out subprime loans. The financial industry's great subprime money-making machine needed to be fed.

Foreclosed introduces us to the tricks of the subprime trade: the pre-payment penalties, the teaser rates, the interest-only loans, and, most of all, the calculated targeting of "asset-poor communities whose members were eager to acquire homes."

In most cases, these would be communities of color. Almost half of all African-American households with mortgages, Foreclosed notes, now hold subprime loans.