By Gabi Sanchez-Stern, a PSARA member
As Seattleites struggle to recover from the recession, the foreclosure crisis is continuing. It has disproportionately impacted communities of color, exacerbated income inequality and is delaying our chances at full economic recovery. The median wealth of white households is now 20 times that of African-American households and 18 times that of Latino households.
Dixie Mitchell, a longtime resident of Seattle’s Central District, has lived with her husband in their home for over 46 years. Dixie and her husband raised a family and dozens of foster children in their home.
Though they paid off their mortgage years ago, the Mitchell’s took out a second mortgage to help one of their foster children. Like homeowners across the country, the Mitchell’s got offers from multiple banks who assured them that a new mortgage was a safe deal. Instead, they fell victim to predatory lending practices, and became part of a grim statistic: people of color across the country were much more likely than white borrowers to be targeted by banks with high-cost, subprime loans.
When the economy tanked, the Mitchell’s mortgage payments shot up by $400 a month. They did everything they could to get a loan modification – talked to housing counselors, went to classes, and filled out all of the paperwork. After a long fight their modified loan application was approved.
However, what the bank offered was not fair or sustainable. Dixie and her husband are like many retiring seniors;: they depend on a fixed income. Because the modification did not include principal reduction (reducing their mortgage to the fair market value of their home) their monthly payments eat up over two thirds of their fixed incomes. Moreover, the mortgage includes a balloon payment. In a few years when this payment is due, the Mitchell’s are all but certain to lose their home.
Unfortunately, Dixie’s story isn’t unique. More than one in three Seattle homeowners (42,000 total) are underwater on their mortgages, meaning they owe more than their homes are worth. The average underwater homeowner in Seattle owes $92,000 in excess of their home’s actual value.
Not only does the overhang of underwater debt prolong the foreclosure crisis, but it also prevents an economic recovery. As the equity in their homes disappears, people feel less financially secure and cut back on consumer spending. Instead, they spend a larger share of their modest recession-era paychecks on their inflated boom-era mortgages just so they can stay in their homes.
Economists and experts agree that principal reduction is the key to immediate economic recovery. A study published last month by the Alliance for a Just Society shows that a widespread principal reduction program could save homeowners in Seattle an average of $9,300 annually. If these savings are spent on goods and services, it will translate into an economic stimulus of more than $510 million, which will create over 7,500 jobs. Ending the foreclosure crisis isn’t just about righting the wrongs of the banking industry or preventing families from becoming homeless; it has tangible economic benefits that could set entire neighborhoods, cities, and ultimately the whole country on the path to recovery.