No other recent economic crisis better illustrates the saying when America catches a cold, African Americans get pneumonia" than the sub-prime mortgage meltdown. African Americans, along with other minorities and low-income populations, have been the targets of the sub-prime mortgage system. Blacks received a disproportionate share of these loans, leading to a "stripping" of their hard-won home-equity gains of the recent past and the near future. To fully understand how this has happened, we need to place this in the context of the continuing racial-wealth gap, the importance of home equity in the wealth portfolios of African Americans, and its intersection with the new financial markets of which sub-prime is but one manifestation.
Family financial assets play a key role in poverty reduction, social mobility, and securing middle-class status. Income helps families get along, but assets help them get and stay ahead. Those without the head start of family assets have a much steeper climb out of poverty. This generation of African Americans is the first one afforded the legal, educational, and job opportunities to accumulate financial assets essential to launching social mobility and sustaining well-being throughout the life course.
Despite legal gains in civil rights, however, asset inequality in America has actually been growing rapidly during the last 20 years. The assets that current generations own are heavily dependent on the legacies of their families of origin. Today's blacks still suffer from the fact that their parents and grandparents grew up in a rigidly segregated America, where opportunities to accumulate human and financial capital were strictly limited. So housing wealth is a disproportionate share of total black wealth.
Despite some income gains, African Americans own only 7 cents for every dollar of net worth that white Americans own; for Hispanics the figure is only slightly higher at 9 cents for every dollar. Even when middle-class accomplishments like income, job, and education are comparable, the racial-wealth gap is stuck stubbornly at about a quarter on the dollar.
HOUSING WEALTH: LAST IN, FIRST OUT
Prior to the sub-prime meltdown, the advances of African Americans in accumulating wealth depended heavily upon housing wealth. Home equity is the most important reservoir of wealth for average American families and disproportionately so for African Americans. For black households, home equity accounts for 63 percent of total average net worth. In sharp contrast, home equity represents only 38.5 percent of average white net worth. According to the Economic Policy Institute's State of Working America 2008/2009, black homeownership rates dropped a full percentage point between 2005 and 2007--the largest decrease for any racial or ethnic group.
Even though homeownership rates for African Americans are lower, and even though a "segregation tax" is in play because homes appreciate far more slowly in minority or even integrated neighborhoods, housing wealth is still a more prominent engine of wealth for African American families. Given this centrality of homeownership as a source of wealth accumulation for black families, and the racialized dynamics of housing markets, sub-prime has been a special disaster for black upward mobility.
Families use home equity to finance retirement, start small businesses, pay for college educations, and tide themselves over during hard times. Information from the Federal Reserve Flow of Funds on home equity cashed out during refinancing (loans refinanced above 105 percent of the balance on the original loan) tells a dramatic story. Refinancing resulting in cash pullouts skyrocketed from $15 billion in 1995 to $327 billion in 2006. This is housing wealth converted, potentially, into other investments, used to launch social mobility, pay down credit-card and store debt, or finance consumption. …