Underwater in Chicago’s Communities Of Color

Last week, the Woodstock Institute released their report “Struggling to Stay Afloat: Negative Equity in Communities of Color in the Chicago Six County Region.” The report found that Chicago homeowners with mortgages in predominantly African American neighborhoods are twice as likely to be underwater than homeowners with mortgages in predominantly white neighborhoods.

A home with negative equity means that the homeowner owes more than their home is currently worth – referred to as being underwater.

Chicago’s communities of color have been disproportionately impacted by the foreclosure crisis. According to the Woodstock report, “64% of Chicago’s vacant, lender-owned properties were concentrated in highly in African American communities and those properties remained on the market 25% longer and lost more value than did similar properties in other communities.” The impact of these vacant properties and higher levels of foreclosure rates is a decline in home values across the community.

As a result, we are seeing a significant increase in the number of properties that are underwater in communities of color. The report found that:

• Nearly 1 in 4 homes in the Chicago region is underwater with close to $25 billion of negative equity
• In African American communities, 40.5% of borrowers are underwater while 40.3% of homeowners in Latino communities are underwater. In comparison, only 16.7% of properties in predominantly white communities are underwater.
• In African American and Latino communities about 30% of homes have loan-to-value (LTV) ratios that exceed 110%. A borrower with a LTV greater than 110% is more likely to default on her or his loan.

While these numbers are a call for immediate attention, they are in line with what we are seeing across the country – an expanding racial wealth gap. A report in July of last year from the Pew Research Center found that the average wealth of white households is 20 times that of black households and 18 times that of Hispanic households. We see similar asset inequality in Illinois where close to 50% of households of color are asset poor compared to less than 20% of white households.

Much of the increase in asset poverty among communities of color and the widening of the racial wealth gap is due to the decline in home values. The decline in home values and the prevalence of homes with negative equity, described in the Woodstock report,  has an impact on and can be influenced by other factors that contribute to the racial wealth gap, including the credit gap, education gap and the savings gap.

As we think about asset building policy, it’s important to note that having wealth is not the same as being wealthy. Modest assets, including savings, retirement accounts, or a home can bring financial stability to a family and a community.

The recent economic crisis has revealed that racial disparities continue to exist. Without wealth, families and communities cannot become and remain economically secure. Public policies have and continue to play a major role in creating and sustaining the racial wealth gap, and they must play a role in closing it. In an effort to address negative equity, the Woodstock Institute recommends the following policy changes:

1. Mortgage services should use principal reduction 9rather than rate reduction or loan extension) as a foreclosure prevention tool more broadly.
2. The Federal Housing Finance Authority should permit loans backed by Fannie Mae and Freddie Mac to be eligible for principal reduction.
3. Mortgage servicers should streamline the processes for short sale.

Policies, such as those recommended by the Woodstock Institute, can begin to address wealth inequalities. Moving forward, we need to continue to create asset building opportunities that will close the wealth gap.