The New Poor - Blacks in Memphis Lose Decades of Gains

Josh Anderson for The New York Times

Tyrone Banks in his home in Memphis. He is in danger of losing it after the payments on his mortgage rose and he lost his job at FedEx. More Photos »

By MICHAEL POWELL

MEMPHIS — For two decades, Tyrone Banks was one of many African-Americans who saw his economic prospects brightening in this Mississippi River city.

A single father, he worked for FedEx and also as a custodian, built a handsome brick home, had a retirement account and put his eldest daughter through college.

Then the Great Recession rolled in like a fog bank. He refinanced his mortgage at a rate that adjusted sharply upward, and afterward he lost one of his jobs. Now Mr. Banks faces bankruptcy and foreclosure.

“I’m going to tell you the deal, plain-spoken: I’m a black man from the projects and I clean toilets and mop up for a living,” said Mr. Banks, a trim man who looks at least a decade younger than his 50 years. “I’m proud of what I’ve accomplished. But my whole life is backfiring.”

Not so long ago, Memphis, a city where a majority of the residents are black, was a symbol of a South where racial history no longer tightly constrained the choices of a rising black working and middle class. Now this city epitomizes something more grim: How rising unemployment and growing foreclosures in the recession have combined to destroy black wealth and income and erase two decades of slow progress.

The median income of black homeowners in Memphis rose steadily until five or six years ago. Now it has receded to a level below that of 1990 — and roughly half that of white Memphis homeowners, according to an analysis conducted by Queens College Sociology Department for The New York Times.

Black middle-class neighborhoods are hollowed out, with prices plummeting and homes standing vacant in places like Orange Mound, White Haven and Cordova. As job losses mount — black unemployment here, mirroring national trends, has risen to 16.9 percent from 9 percent two years ago; it stands at 5.3 percent for whites — many blacks speak of draining savings and retirement accounts in an effort to hold onto their homes. The overall local foreclosure rate is roughly twice the national average.

The repercussions will be long-lasting, in Memphis and nationwide. The most acute economic divide in America remains the steadily widening gap between the wealth of black and white families, according to a recent study by the Institute on Assets and Social Policy at Brandeis University. For every dollar of wealth owned by a white family, a black or Latino family owns just 16 cents, according to a recent Federal Reserve study.

The Economic Policy Institute’s forthcoming “The State of Working America” analyzed the recession-driven drop in wealth. As of December 2009, median white wealth dipped 34 percent, to $94,600; median black wealth dropped 77 percent, to $2,100. So the chasm widens, and Memphis is left to deal with the consequences.

“This cancer is metastasizing into an economic crisis for the city,” said Mayor A. C. Wharton Jr. in his riverfront office. “It’s done more to set us back than anything since the beginning of the civil rights movement.”

The mayor and former bank loan officers point a finger of blame at large national banks — in particular, Wells Fargo. During the last decade, they say, these banks singled out blacks in Memphis to sell them risky high-cost mortgages and consumer loans.

The City of Memphis and Shelby County sued Wells Fargo late last year, asserting that the bank’s foreclosure rate in predominantly black neighborhoods was nearly seven times that of the foreclosure rate in predominantly white neighborhoods. Other banks, including Citibank and Countrywide, foreclosed in more equal measure.

In a recent regulatory filing, Wells Fargo hinted that its legal troubles could multiply. “Certain government entities are conducting investigations into the mortgage lending practices of various Wells Fargo affiliated entities, including whether borrowers were steered to more costly mortgage products,” the bank stated.

Wells Fargo officials are not backing down in the face of the legal attacks. They say the bank made more prime loans and has foreclosed on fewer homes than most banks, and that the worst offenders — those banks that handed out bushels of no-money-down, negative-amortization loans — have gone out of business.

“The mistake Memphis officials made is that they picked the lender who was doing the most lending as opposed to the lender who was doing the worst lending,” said Brad Blackwell, executive vice president for Wells Fargo Home Mortgage.

Not every recessionary ill can be heaped upon banks. Some black homeowners contracted the buy-a-big-home fever that infected many Americans and took out ill-advised loans. And unemployment has pitched even homeowners who hold conventional mortgages into foreclosure.

Federal and state officials say that high-cost mortgages leave hard-pressed homeowners especially vulnerable and that statistical patterns are inescapable.

“The more segregated a community of color is, the more likely it is that homeowners will face foreclosure because the lenders who peddled the most toxic loans targeted those communities,” Thomas E. Perez, the assistant attorney general in charge of the Justice Department’s civil rights division, told a Congressional committee.

The reversal of economic fortune in Memphis is particularly grievous for a black professional class that has taken root here, a group that includes Mr. Wharton, a lawyer who became mayor in 2009. Demographers forecast that Memphis will soon become the nation’s first majority black metropolitan region.

That prospect, noted William Mitchell, a black real estate agent, once augured for a fine future.

“Our home values were up, income up,” he said. He pauses, his frustration palpable. “What we see today, it’s a new world. And not a good one.”

Porch View

“You don’t want to walk up there! That’s the wild, wild west,” a neighbor shouts. “Nothing on that block but foreclosed homes and squatters.”

To roam Soulsville, a neighborhood south of downtown Memphis, is to find a place where bungalows and brick homes stand vacant amid azaleas and dogwoods, where roofs are swaybacked and thieves punch holes through walls to strip the copper piping. The weekly newspaper is swollen with foreclosure notices.

Here and there, homes are burned by arsonists.

Yet just a few years back, Howard Smith felt like a rich man. A 56-year-old African-American engineer with a gray-flecked beard, butter-brown corduroys and red sneakers, he sits with two neighbors on a porch on Richmond Avenue and talks of his miniature real estate empire: He owned a home on this block, another in nearby White Haven and another farther out. His job paid well; a pleasant retirement beckoned.

Then he was laid off. He has sent out 60 applications, obtained a dozen interviews and received no calls back. A bank foreclosed on his biggest house. He will be lucky to get $30,000 for his house here, which was assessed at $80,000 two years ago.

“It all disappeared overnight,” he says.

“Mmm-mm, yes sir, overnight,” says his neighbor, Gwen Ward. In her 50s, she, too, was laid off, from her supervisory job of 15 years, and she moved in with her elderly mother. “It seemed we were headed up and then” — she snaps her fingers — “it all went away.”

Mr. Smith nods. “The banks and Wall Street have taken the middle class and shredded us,” he says.

For the greater part of the last century, racial discrimination crippled black efforts to buy homes and accumulate wealth. During the post-World War II boom years, banks and real estate agents steered blacks to segregated neighborhoods, where home appreciation lagged far behind that of white neighborhoods.

Blacks only recently began to close the home ownership gap with whites, and thus accumulate wealth — progress that now is being erased. In practical terms, this means black families have less money to pay for college tuition, invest in businesses or sustain them through hard times.

“We’re wiping out whatever wealth blacks have accumulated — it assures racial economic inequality for the next generation,” said Thomas M. Shapiro, director of the Institute on Assets and Social Policy at Brandeis University.

The African-American renaissance in Memphis was halting. Residential housing patterns remain deeply segregated. While big employers — FedEx and AutoZone — have headquarters here, wage growth is not robust. African-American employment is often serial rather than continuous, and many people lack retirement and health plans.

But the recession presents a crisis of a different magnitude.

Mayor Wharton walks across his office to a picture window and stares at a shimmering Mississippi River. He describes a recent drive through ailing neighborhoods. It is akin, he says, to being a doctor “looking for pulse rates in his patients and finding them near death.”

He adds: “I remember riding my bike as a kid through thriving neighborhoods. Now it’s like someone bombed my city.”

Banking on Nothing

Camille Thomas, a 40-year-old African-American, loved working for Wells Fargo. “I felt like I could help people,” she recalled over coffee.

As the subprime market heated up, she said, the bank pressure to move more loans — for autos, for furniture, for houses — edged into mania. “It was all about selling your units and getting your bonus,” she said.

Ms. Thomas and three other Wells Fargo employees have given affidavits for the city’s lawsuit against the bank, and their statements about bank practices reinforce one another.

“Your manager would say, ‘Let me see your cold-call list. I want you to concentrate on these ZIP codes,’ and you knew those were African-American neighborhoods,” she recalled. “We were told, ‘Oh, they aren’t so savvy.’ ”

She described tricks of the trade, several of dubious legality. She said supervisors had told employees to white out incomes on loan applications and substitute higher numbers. Agents went “fishing” for customers, mailing live checks to leads. When a homeowner deposited the check, it became a high-interest loan, with a rate of 20 to 29 percent. Then bank agents tried to talk the customer into refinancing, using the house as collateral.

Several state and city regulators have placed Wells Fargo Bank in their cross hairs, and their lawsuits include similar accusations. In Illinois, the state attorney general has accused the bank of marketing high-cost loans to blacks and Latinos while selling lower-cost loans to white borrowers. John P. Relman, the Washington, D.C., lawyer handling the Memphis case, has sued Wells Fargo on behalf of the City of Baltimore, asserting that the bank systematically exploited black borrowers.

A federal judge in Baltimore dismissed that lawsuit, saying it had made overly broad claims about the damage done by Wells Fargo. City lawyers have refiled papers.

“I don’t think it’s going too far to say that banks are at the core of the disaster here,” said Phyllis G. Betts, director of the Center for Community Building and Neighborhood Action at the University of Memphis, which has closely examined bank lending records.

Former employees say Wells Fargo loan officers marketed the most expensive loans to black applicants, even when they should have qualified for prime loans. This practice is known as reverse redlining.

Webb A. Brewer, a Memphis lawyer, recalls poring through piles of loan papers and coming across name after name of blacks with subprime mortgages. “This is money out of their pockets lining the purses of the banks,” he said.

For a $150,000 mortgage, a difference of three percentage points — the typical spread between a conventional and subprime loan — tacks on $90,000 in interest payments over its 30-year life.

Wells Fargo officials say they rejected the worst subprime products, and they portray their former employees as disgruntled rogues who subverted bank policies.

“They acknowledged that they knowingly worked to defeat our fair lending policies and controls,” said Mr. Blackwell, the bank executive.

Bank officials attribute the surge in black foreclosures in Memphis to the recession. They say that the average credit score in black Census tracts is 108 points lower than in white tracts.

“People who have less are more vulnerable during downturns,” said Andrew L. Sandler of Buckley Sandler, a law firm representing Wells Fargo.

Mr. Relman, the lawyer representing Memphis, is unconvinced. “If a bad economy and poor credit explains it, you’d expect to see other banks with the same ratio of foreclosures in the black community,” he said. “But you don’t. Wells is the outlier.”

Whatever the responsibility, individual or corporate, the detritus is plain to see. Within a two-block radius of that porch in Soulsville, Wells Fargo holds mortgages on nearly a dozen foreclosures. That trail of pain extends right out to the suburbs.

Begging to Stay

To turn into Tyrone Banks’s subdivision in Hickory Ridge is to find his dream in seeming bloom. Stone lions guard his door, the bushes are trimmed and a freshly waxed sport utility vehicle sits in his driveway.

For years, Mr. Banks was assiduous about paying down his debt: he stayed two months ahead on his mortgage, and he helped pay off his mother’s mortgage.

Two years ago, his doorbell rang, and two men from Wells Fargo offered to consolidate his consumer loans into a low-cost mortgage.

“I thought, ‘This is great! ’ ” Mr. Banks says. “When you have four kids, college expenses, you look for any savings.”

What those men did not tell Mr. Banks, he says (and Ms. Thomas, who studied his case, confirms), is that his new mortgage had an adjustable rate. When it reset last year, his payment jumped to $1,700 from $1,200.

Months later, he ruptured his Achilles tendon playing basketball, hindering his work as a janitor. And he lost his job at FedEx. Now foreclosure looms.

He is by nature an optimistic man; his smile is rueful.

“Man, I should I have stayed ‘old school’ with my finances,” he said. “I sat down my youngest son on the couch and I told him, ‘These are rough times.’ ”

Many neighbors are in similar straits. Foreclosure notices flutter like flags on the doors of two nearby homes, and the lawns there are overgrown and mud fills the gutters.

Wells Fargo says it has modified three mortgages for every foreclosure nationwide — although bank officials declined to provide the data for Memphis. A study by the Neighborhood Economic Development Advocacy Project and six nonprofit groups found that the nation’s four largest banks, Wells Fargo, Bank of America, Citigroup and JPMorgan Chase, had cut their prime mortgage refinancing 33 percent in predominantly minority communities, even as prime refinancing in white neighborhoods rose 32 percent from 2006 to 2008.

For Mr. Banks, it is as if he found the door wide open on his way into debt but closed as he tries to get out.

“Some days it feels like everyone I know in Memphis is in trouble,” Mr. Banks says. “We’re all just begging to stay in our homes, basically.”

Banks 'Too Big to Fail' Have Grown Even Bigger - washingtonpost.com

Image via Wikipedia

By David Cho
Washington Post Staff Writer
Friday, August 28, 2009

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."

Regulators' concerns are twofold: that consumers will wind up with fewer choices for services and that big banks will assume they always have the government's backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.

This problem, known as "moral hazard," is partly why government officials are keeping a tight rein on bailed-out banks -- monitoring executive pay, reviewing sales of major divisions -- and it is driving the Obama administration's efforts to create a new regulatory system to prevent another crisis. That plan would impose higher capital standards on large institutions and empower the government to take over a wide range of troubled financial firms to wind down their businesses in an orderly way.

"The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy," Treasury Secretary Timothy F. Geithner said in an interview.

The worry for consumers is that the bailouts skewed the financial industry in favor of the big and powerful. Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.

Those mergers were largely the government's making. Regulators pushed failing mortgage lenders and Wall Street firms into the arms of even bigger banks and handed out billions of dollars to ensure that the deals would go through. They say they reluctantly arranged the marriages. Their aim was to dull the shock caused by collapses and prevent confidence in the U.S. financial system from crumbling.

Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow, Federal Reserve documents show.

"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."

"The oligopoly has tightened," he added.

Consumer Choice

Federal officials and advocacy groups are just beginning to study the impact of the crisis on consumers, but there is some evidence that the mergers are creating new challenges for ordinary Americans.

In the last quarter, the top four banks raised fees related to deposits by an average of 8 percent, according to research from the Federal Reserve Bank of Dallas. Striving to stay competitive, smaller banks lowered their fees by an average of 12 percent.

"None of us are saying dismember these institutions. But you do want to create a system that allows for others to grow, where no one has an oligopolistic power at the expense of others who might be able to provide financial services to consumers," said Richard Fisher, president of the Federal Reserve Bank of Dallas.

Normally, when faced with price increases, consumers simply switch. But industry officials said that is not so easy when it comes to financial services.

In Santa Cruz, Calif., Wells Fargo, Bank of America and J.P. Morgan Chase hold three-quarters of the deposit market. Each firm was given tens of billions of dollars in bailout funds to help it swallow other banks.

The rest of the market, which consists of a handful of tiny community banks, cannot match the marketing power of the bigger banks. Instead, presidents of the smaller companies said, they must offer more personalized service and adapt to technological changes more quickly to entice customers. Some acknowledged it can be a tough fight.

Wells Fargo is "really, really good at the way they cross-sell and get their tentacles around you," said Richard Hofstetter, president of Lighthouse Bank, whose only branch is in Santa Cruz. "Their customers have multiple areas of their financial life involved with Wells Fargo. If you have a checking account and an ATM and a credit card and a home-equity line and automatic bill payments . . . to change that is a major undertaking."

Wells Fargo, J.P. Morgan and Bank of America declined to comment for this article.

Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.

Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government's preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.

"To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market," he said. "We will never have free markets again if you have the government picking winners and losers."

Moral Hazard

Before the crisis, many creditors thought that the big institutions were a relatively safe investment because they were diversified and thus unlikely to fail. If one line of business struggled, each bank had other ventures to keep the franchise afloat. And even if the entire house caught fire, wouldn't the government step in to cover the losses?

With executives comforted by that thinking, risk came unhinged from investment decisions. Wall Street borrowed to make money without having enough in reserves to cover potential losses. The pursuit of profit was put ahead of the regard for safety and soundness.

The federal bailouts only reinforced the thought that government would save big banks, no matter how horrible their decisions.

Today, even with the memory of the crisis fresh in their minds, creditors are granting big institutions more favorable treatment because they know the government is backing them, FDIC officials said.

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

Many of the largest banks reported a surge in profit during the most recent quarter, including J.P. Morgan Chase and Goldman Sachs. They are prospering while many regional and community banks are struggling. Nearly three dozen of the smaller institutions have failed since July 1, including Community Bank of Nevada and Alabama-based Colonial Bank just last week.

If the government continues to back big firms over small, regulators worry that reckless behavior could return to Wall Street.

The administration's regulatory reform plan takes aim at this problem by penalizing banks for being big. It would require large institutions to hold more capital and pay higher regulatory fees, as well as allow the government to liquidate them in an orderly way if they begin to fail. The plan also seeks to bolster nontraditional channels of finance to create competition for large banks. If Congress approves the proposal, Geithner said, it would be clear at launch which financial companies would face these measures.

Economists and officials debate whether these steps would address the too-big-to-fail problem. Some say, for instance, that determining the precise amount of capital big financial companies should hold in their reserves will be difficult.

Geithner acknowledged that difficulty but said the administration would probably lean toward being more strict. Taken together, the combination of reforms would be a powerful counterbalance to big banks, he said.

"Our system is not going to be significantly more concentrated than it is today," Geithner said. "And it's important to remember that even now, our system remains much less concentrated and will continue to provide more choice for consumers and businesses than any other major economy in the world."

Related articles by Zemanta

• FDIC's Bair: No bank is too big to fail (money.cnn.com)
• Dallas Fed's Fisher: Mega-Banks Hurt Monetary Policy's Effectiveness (blogs.wsj.com)