The report, “Struggling to Stay Afloat: Negative Equity in Communities of Color in the Chicago Six County Region,” used data from a major provider of mortgage and home value data to examine patterns of underwater homes in communities of various racial and ethnic compositions in the Chicago six county region in 2011. It found that:
Nearly one in four residential properties in the Chicago six county region is underwater, with just under $25 billion of negative equity. The average underwater property has 31.8 percent more outstanding mortgage debt than the property is worth.
Borrowers in communities of color are much more likely to be underwater than are borrowers in white communities.
Borrowers in communities of color are more than twice as likely as are borrowers in white communities to have little to no equity in their homes. In highly African American communities in the Chicago six county region, 40.5 percent of borrowers are underwater, while another 5.4 percent are nearly underwater. Similarly, 40.3 percent of properties are underwater in predominantly Latino communities and 5.3 percent are nearly underwater. In contrast, only 16.7 percent of properties in predominantly white communities are underwater, with another 4.4 percent nearly underwater.
Almost three times as many properties in communities of color are severely underwater compared to properties in white communities. In predominantly African American communities, 30.1 percent of properties have loan-to-value (LTV) ratios—a comparison of outstanding mortgage debt to home value—exceeding 110 percent, while that figure is 30 percent in predominantly Latino communities. In contrast, just 10.1 percent of the properties in predominantly white communities have LTVs exceeding 110 percent.
Borrowers in communities of color have much less equity in their homes than do borrowers in white communities, resulting in a significant wealth gap.
Only about one-third of homeowners in communities of color have significant equity in their homes. In predominantly African American communities, 34.5 percent of borrowers have more than 25 percent equity in their homes, while 33.1 percent of borrowers in Latino communities have more than 25 percent equity in their homes. Fifty-five percent of borrowers in predominantly white communities have more than 25 percent equity.
Borrowers in communities of color have much higher average loan-to-value ratios than do borrowers in predominantly white communities. The average LTV ratio is 92.1 in predominantly African American communities and 87.4 in Latino communities, compared with an average LTV ratio of 67.7 in predominantly white communities.
Negative equity contributes to community decline by potentially leading to increased foreclosure activity, threatening the success of foreclosure prevention programs, and draining neighborhood wealth. In addition, the destruction of assets caused by negative home equity may disproportionately threaten the economic security of people of color because home equity is a larger proportion of their net worth than it is for white people.
“As policymakers design and allocate resources for foreclosure prevention and neighborhood stabilization programs, concentrated negative equity will impact the outcomes of these initiatives,” says Cowan. “Reducing negative equity will be an important step towards stabilizing communities hit hard by the foreclosure crisis.”
The report concluded with a number of policy recommendations to reduce the negative impacts of concentrated negative equity, including:
Servicers should use principal reduction as a foreclosure prevention tool more broadly.
The Federal Housing Finance Authority should permit loans backed by Fannie Mae and Freddie Mac to be eligible for principal reductions.
Servicers should streamline processes for short sales.