Horne grew up in Harlem and says gentrification made her housing search “laughable” because she couldn’t afford to purchase any properties. “I could be in a poor neighborhood and right across the street from me the places would be $800,000 to $1 million. Then I saw lotteries available for people with medium incomes, and that’s how I got the co-op,” explains Horne who is single, has no children, and earns an annual salary of $52,000.

Since graduating from Buffalo State College in 1999, Horne has been living at home with her parents and paying them rent. In recent years, while living at home, she was able to save at least $400 per month and accumulated savings of more than $10,000. Less than a month after purchasing her home, Horne’s savings has decreased to only $1,300 after making a 10% down payment and paying closing costs. She worries, however, that the $400 she had been socking away each month will be devoured by expenses such as utilities and furnishing the house.

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Horne’s estimated payments from the closing documents say she will pay $1,000 per month now on mortgage, maintenance, and insurance for her new co-op—a few hundred dollars more than she was paying in rent. “Now I feel like I need to earn more money because I am going to be paying more,” Horne says.

Her next goal is to learn how to invest in stocks and start the process of building an investment portfolio. Currently, Horne’s only investment account is her employer’s pension retirement account. As a teacher in New York state, Horne is required to contribute to the state’s retirement plan and has amassed $9,000 during her eight years on the job. Her contribution to the plan is 3%.

Horne’s debt is made up of a revolving credit card balance of less than $200 and a student loan balance of $1,400. The new homeowner had plans of paying off those accounts this year but now realizes that may not happen with the home purchase.

The Advice
Black Enterprise and advisers Dawn Brown, a senior financial adviser at Altfest Personal Wealth Management, and Harrine Freeman, CEO of H.E. Freeman Enterprises, agree that Horne needs to create a budget and effectively manage her new expenses before making any major purchases or paying off the remainder of her debt.

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• Create a budget. Brown cautions that Horne is in a good position but she must be very shrewd with her next financial steps. “She’s in flux because she closed on her apartment but she hasn’t moved in yet,” Brown says. “She got this really good deal with a $67,000 purchase price and her debt is only $1,400 which is not really a problem. She has a 4.1% rate on her mortgage, which is unbelievably low,” says Brown.  However, experts agree that Horne must keep track of all expenses and make cash payments for any new homeowner items such as furniture. “She can use free services such as Mint.com to track spending and use online banking to pay bills and track monthly payments. Mint.com also imports your bank financial data which makes it easier to create a budget,” says Freeman. “I recommend she delay any major furniture expenses. It’s the easiest way to get into debt by buying such items on credit cards. She should pay cash and buy furnishings in stages instead,” adds Freeman.

• Build an emergency fund. Horne’s savings is now depleted, so Brown and Freeman agree she should rebuild her emergency fund to at least six months of expenses, taking into account the purchase of her home. “She should put at least $400 a month in a savings account,” Freeman recommends. “She should move all the money in her savings account to a higher interest savings account such as ING, Ally Bank, Capital One, or Discover Bank,” adds Freeman.

Brown adds that “she should put her savings in a money market or someplace she can’t touch it so easily, although money markets aren’t paying so much right now. It is still better in a separate account or a short-term CD so you don’t have access to it so easily.” Brown and Freeman agree that Horne should use the $2,000 contest winnings toward her emergency fund.

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• Become educated about finance. Brown says that Horne should educate herself about the financial planning process, and advises visiting www.cfp.net/learn, a website that offers financial literacy information and a listing of certified financial planners, or www.nypl.org/financialliteracynow for local resources. Horne should also speak with the retirement plan representative at her job to learn more about investment options through her employer. Freeman also suggests that Horne enroll in a financial literacy course.

• Start investing for retirement. “She should invest in her work retirement plan first and see how the money grows before she goes to IRAs or brokerage accounts,” says Brown. With 30 plus years to plan for retirement, Horne can afford to be aggressive. Brown recommends that she place 10% of her salary in her employer’s retirement plan every year for the next 30 years. Assuming a salary increase of 3.5% every year and an asset allocation of 65% in equities and 35% in fixed income, with an investment return of 5%, Brown estimates that Horne would have $544,000 after 30 years.

According to Freeman’s projections, Horne would have approximately $50,000 in her retirement account to date if she had been following this model of investing 10% of her income since she began her job.

Together, African-Americans and Hispanics were able to borrow 62 percent less to buy or refinance homes in 2009 than in 2004, before the market crashed, the computerized analysis finds. With lenders imposing tighter credit standards, mortgage dollars going to non-Hispanic white borrowers also declined, though by considerably less, 17 percent. Asians fared best, obtaining nearly an equal amount in mortgages.

The study, to be released this week, was conducted by Maurice Jourdain-Earl, founder and managing director of ComplianceTech in Arlington, Va., which advises financial institutions on fair lending practices. The study also found wide racial-ethnic disparities in how often financial institutions approved mortgage applications and made mortgage loans during the six-year period.

Whites were about twice as likely as African-Americans and Hispanics to be approved for prime mortgages with the lowest interest rates, while members of the two largest minority groups were two to four times more likely to receive subprime loans, which have higher rates. By contrast, the disparities were much narrower for loans insured by the government’s Federal Housing Administration, which has attracted a growing number of borrowers during the credit crunch.

The study concluded that a “dual mortgage market” has emerged, with white and Asian borrowers having better access to lower-cost mortgages than African-Americans and Hispanics, who on average pay more to own or refinance a home—if they can obtain a mortgage.

“The higher cost for mortgage credit translates into less money for basic necessities,” Jourdain-Earl writes. “The higher cost for mortgage credit also translates into African Americans and Latinos having lower homeownership rates and lower opportunities to build wealth, lower educational achievement and higher unemployment.”

Reasons for the lending disparities are not directly reflected in the national data, which do not include credit scores of borrowers or ratios of loan amounts to values of homes. Nor does the Federal Reserve Bank collect information on foreclosures by race and ethnicity.

Jourdain-Earl blames a cycle of higher cost loans being made to minorities for leading to higher levels of defaults and foreclosures, ultimately causing “greater disparities in access to credit.” He raises the possibility of an unknown degree of discrimination, noting an “erroneous notion” that minorities caused the housing market’s collapse, despite the relatively low amount in mortgages they received, compared with those for white borrowers.

The Mortgage Bankers Association declined to comment on the report because, spokeswoman Melissa Key says in an e-mail, “The author does not control for any of the factors that could lead to rate or approval differences across borrowers.”

Barry Zigas, director of housing policy for the Consumer Federation of American, agrees with Jourdain-Earl that a dual market exists. Zigas says it is unclear whether the causes have to do with lower credit scores of African-Americans and Latinos, private investors being reluctant to buy mortgages made in minority communities or the disproportionate subprime loans representing an “unsustainable volume” of borrowing.

“Since the meltdown, there is no question that credit has constricted across the board,” Zigas says. “It’s even more difficult for minorities and low-income people.”

The report, entitled “The Foreclosure Crisis and Racial Disparities in Access to Mortgage Credit 2004-2009,” illustrates disparities by race and ethnicity. The study uses data banks submitted to the Federal Reserve under the Home Mortgage Disclosure Act and analyzes racial-ethnic patterns in prime, subprime and FHA loans, which together constitute the vast majority of the market.

Mortgages made to Hispanics have decreased the most, by 63 percent, to $78 million in 2009 from $214 million in 2004. Lending to African Americans has dropped to $49 million from $122 million, or 60 percent.

Whites have been affected much less and Asians barely. New mortgages to white borrowers declined to $1.1 billion from $1.3 billion, or 17 percent. Lending to Asians stayed almost the same at about $128 million, with the difference being equivalent to one modest mortgage.

“Analyzing the issue of access to mortgage credit by race is significant because of the central role homeownership plays in building personal wealth,” Rep. Maxine Waters (Calif.), ranking Democrat on the House subcommittee on capital markets and government sponsored enterprises, says of the report in an e-mail. “As a 2010 study from Brandeis University illustrates, for example, the wealth gap between African-Americans and whites is only growing larger, having quadrupled over the course of the last 23 years.”

The financial stresses that accompanied the recession meant many Americans from all racial-ethnic groups did not apply for mortgages. When they did, applications by African-Americans and Hispanics for the best loans were approved or, in bankers’ language, “originated” much less often. On average, whites were twice as likely as blacks to obtain prime loans, and one-and-a-half times more likely as Hispanics. Almost no disparity existed between whites and Asians.

The disparities extended even to subprime loans which, despite concentrations in minority neighborhoods, went mostly to white borrowers. During the six-year period, whites received more than 60 percent of these high-cost loans, which are most likely to lead to defaults and foreclosures.

But disproportionate numbers of subprime loans did go to minorities. African-Americans were three-and-a-half times more likely to have one as whites, and Hispanics about twice as likely. By 2009, even the subprime market had dried up for the two minority groups, with lending to African-Americans since 2004 down by 95 percent and to Hispanics by 92 percent, compared with 87 percent for Asians and 81 percent for whites.

Jourdain-Earl concedes that the big drops in subprime loans to the largest minorities could be interpreted as a positive development, but he adds: “At this point, African-Americans and Latinos are not even able to get high-cost subprime loans.”

The lending field was more level for mortgage loans backed by the Federal Housing Administration, which spokesman Brian Sullivan says has seen its share of the mortgage market jump from 3 percent to 30 percent since 2006. Compared with those for whites, loan approval rates were 19 percent lower for African-Americans, 13 percent for Hispanics and 9 percent for Asians.

On the other hand, the report found that the rapid growth has changed the racial composition of FHA-backed borrowers, with the higher percentages going to whites and Asians, and lower percentages to African-Americans and Hispanics. Jourdain-Earl questions whether FHA was acting in accord with its affordable housing goals.

Sullivan says the shifting racial balance of FHA borrowers merely reflected that whites predominate in the mortgage market and have turned to the agency in increasing numbers.

“That’s not because of any application of unfair lending practices, he says, speaking generally. “It was a consequence of what was happening in the marketplace.”

Sullivan notes, though, that the U.S. Department of Housing and Urban Development is investigating 22 lenders to determine whether their imposition of higher credit standards than FHA’s minimums has had a discriminatory impact on African-Americans and Hispanics.

Chris Herbert, research director of the Joint Center for Housing Studies at Harvard University, says the report has limitations in explaining why minorities fare less well in the housing market, a trend he acknowledges.

For instance, he says focusing only on first mortgages and comparing borrowers in the same income levels would provide a sharper picture of home-buying trends in particular, since African-Americans and Hispanics, on average, earn less than whites.

Academics at Harvard’s housing center and elsewhere are examining whether current credit standards are unduly restrictive and not justified by the economic situation.

In response to criticism from Herbert and the Mortgage Bankers Association, Jourdain-Earl says his focus was the flow of credit to different racial-ethnic groups, not the reasons behind the disparities.

“I wasn’t trying to ascertain the why but to shine a bright light on the outcome and the effects on wealth and homeownership rates,” he says.

In the study, Jourdain-Earl urges the FHA to study “the potential of adverse effects” from its credit standards and proposed that federal laws should require lenders to report on foreclosures, defaults, short sales and loan modifications, including the race and other demographics of those borrowers.

He also calls for implementing financial reform legislation enacted last year “in a way that promotes sustainable diverse lending.”

Reported by America’s Wire

For more on credit, lending and money management, read:

• 10 Power Moves to Better Manage Your Money
• How to navigate stricter homebuying guidelines
• 4 Things You Might Not Know about Your Credit
• You Get-Out-of-Debt Checklist

Foreclosing on purpose seems to be a trend mortgage lenders don't like

More than ever, there are mixed messages out there for homeowners thinking about walking away from their mortgage obligations.

The Federal National Mortgage Association, better known as Fannie Mae, recently announced that it would penalize borrowers who purposely forego their home loan payments and go into default—even when they can afford them—because the value of their home has fallen below the amount they owe the bank. Fannie Mae, in an effort to discourage these so-called “strategic defaults,” said it would prevent borrowers who walked away from obtaining “a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.” Of course, the rules only apply to homeowners who have the capacity to pay and choose not to.

At the same time in California, state lawmakers are debating proposed legislation that would protect homeowners who strategically default from debt collectors. The California state Senate passed a bill earlier this month that would prevent lenders from seeking recourse for the amount of the borrower’s original home loan. If the borrower subsequently refinanced and took cash out of their equity in the home, however, the homeowner would be liable for what they borrowed above the original loan amount. The legislation is still pending and has yet to be reviewed by California’s State Assembly.

Though media reports have noted the rise of strategic defaults as the U.S. housing market attempts a recovery, the exact number of purposeful foreclosures are hard to come by. One Morgan Stanley analysis released in February estimated that these defaults accounted for about 12% of all foreclosures in the U.S.

Critics argue that California’s proposed law creates an incentive for homeowners to walk away. Here at Black Enterprise, we’ve advised that it’s almost never a good idea to engage in a strategic default. (See “Don’t Walk Away,” April 2010 issue) The repercussions are too steep.

John Simons is an editorial director and personal finance editor at Black Enterprise.

Millions of homes across the nation are worth less than their mortgages.

The nation may be in recovery mode but millions are still stuck in a financial quagmire. Over the past few years, far too many were careless in managing one of their most precious assets: their home.

Let’s step back a few years to when this nation was in the middle of the biggest housing boom in more than a half century. Just six years ago, the Federal Deposit Insurance Corp. reported that 15% of the nation’s metro areas experienced real estate price hikes of a staggering 72%. During that period, hundreds of thousands bought their slice of the American Dream as financial institutions made them affordable and accessible, offering subprime loans, zero-interest loans, zero-down payment arrangements, and low-interest adjustable rate mortgages, to get virtually anyone into a home. For legions of newly minted homeowners, gaining shelter wasn’t enough; with skyrocketing home values, many got caught up in irrational exuberance and converted their homes into ATMs, using home equity lines of credit to borrow a lifestyle. Instead of making repairs and enhancements to boost the value of their properties, they purchased expensive cars, took exotic vacations, and bought other luxury items they simply could not afford.

When the bubble finally burst, the caviar lifestyle disappeared for some and the faux safety net evaporated for others. The collapse of the housing market wiped out roughly $7 trillion in housing value from the third quarter of 2006 to the end of 2009, according to the Federal Reserve. This past March, USA Today reported that more than 11 million homes across the nation are worth less than their mortgages, while some borrowers with negative home equity may not realize any positive gains until as late as 2020. (According to a Pew Research Center survey in February 2009, 12% of African Americans said their mortgages were “underwater.”)

My advice to those waiting for the market to rebound to pre-2008 levels is quite simple: Wake up! We must realize that although property can and should serve as a valuable wealth-building tool, it also serves a practical purpose—your house is a home.

Black Enterprise has reported on scores of individuals who have opted not to take serious action to correct their finances or sell their homes due to an emotional attachment to their property or a false idea of what it’s worth. As a result, their families suffer through staggering costs as they remain caught in a debt trap. Shortcuts or quick fixes are as effective as repairing a leaky roof with duct tape. I urge you, with the help of a financial adviser, to make a clear-eyed evaluation of your finances and recalibrate your life.

For one, adjust your expectations: It’s highly unlikely that your home will ever again increase in value 5% to 10% every couple of years as it did during the past decade. (In February, home prices fell 0.9% on a seasonally adjusted basis, according to the Standard & Poor’s/Case-Shiller index. This was the fifth-straight monthly decline.) If you manage your affairs so you can make monthly mortgage payments with no more than 30% of after-tax income and you’re not drowning in debt, hold on to your property for the long haul and anticipate an increase in wealth as the home makes slow but steady gains in value.

If you face the possibility of default, seek a loan modification through such programs as Making Home Affordable. You may find, however, that selling your home is the only option to remain whole. There’s not a bit of shame in rightsizing—eliminating unmanageable debt, scaling back on nonessentials, boosting your savings, and preserving your credit. Done right, you’ll position yourself to purchase an affordable home, sock away emergency funds, and develop a comprehensive retirement plan. Lastly, don’t ever treat your property like a piggy bank again.

My parents’ generation believed when you bought a home, you didn’t try to time the real estate market. You scrimped and saved until eventually you owned the property outright. It may seem old school, but we all need to embrace the basics of homeownership.

Earl “Butch” Graves Jr. is the president and CEO of Black Enterprise.

A common scam is the foreclosure “rescue” scheme. This usually often begins with a someone promising to pay off your delinquent mortgage, allowing you to stay in the home as a renter with the option to purchase the home back when your financial situation improves. But the so-called rescuer’s real objective is to cash out the equity in your home and disappear. Here are some of the characteristics of this scam:

-As part of the “rescue,” the homeowner will be required to deed the property to a new borrower who is often “investing” in a rental property but is really part of the scam.

-The proceeds of the sale pay off the delinquent loan and the new borrower removes all the equity in the house, never to be seen again.

-The distressed homeowner is now merely a renter in a home they no longer own, unaware that the new borrower is not making payments.

-When the new borrower defaults on the loan, the homeowner is evicted from the home — they have lost the house and all the equity in it.

What are some of the signs of these and other foreclosure scams? They are the same for most schemes to con you out of your money:

-The terms of the deal are complicated and difficult to understand, but you are pressured to trust in the expertise and honorable intentions of your “rescuer” and go along with it anyway.

-You are asked to sign blank documents or documents with incomplete or false information.

-Your rescuer plays on your feelings of victimization, or desperate need for a solution, by harping on the unfairness of your situation. They may even appeal to you based on racial solidarity (They’re just trying to help “our people”) or religious grounds (For example, they want to be “a blessing” to their fellow Christians).

-The rescue is unsolicited, either by mail, e-mail or phone, or a direct approach from a stranger. In other words, you didn’t reach out to them– they found you.

Once again, if it sounds too good to be true, it usually is. The first people you should contact when you think you are in danger of defaulting on your mortgage is your lender. The biggest mistake homeowners make is ducking the lender, as opposed to informing them of potential problems immediately as they arise, to try to work out a solution that will help them keep their homes and maintain their mortgage commitment. Also, reach out to organizations such as NeighborWorks America, which offers foreclosure solutions and counselors for homeowners who get in trouble with their mortgage.

Finally, to learn more about other types of foreclosure scams, go check out the following links at FreddieMac.com and AllForeclosure.com.