29 September 2010

Financial Crisis Slams Blacks in Denver

The financial crisis began with a housing bubble collapse in California, Florida, Nevada and Arizona. This unraveled a house of cards involving the mortgage backed securities that funded the mortgages that made the housing bubble possible, and derivatives based upon them which all of the major investment banks, money center banks and other large Wall Street financial institutions had made big bets upon, relying upon grossly overstated estimates of the default risk in mortgage backed securities made by a small number of credit reporting agencies laboring under conflicts of interest. By the fourth quarter of 2007, it all fell apart.

An analysis of census data released Tuesday in a report by FRESC, a Denver based non-profit (via the Denver Post), shows that this financial crisis had a hard to foresee victim. Blacks in the Denver-Aurora metropolitan area saw their median household income fall "23 percent to $31,870 in 2008 from $41,429 in 2007, and held steady in 2009."

The 23% drop in median income far exceeds that for the state of Colorado as a whole, where median income has fallen 2.8% from 2007 to 2009, and for many Denver-Aurora metropolitan area counties for the population as a whole. In Denver median incomes were actually up 1.6% in that time period. In Adams county, they fell 0.6%. In Douglas County, median incomes were up 3.8%. In Jefferson County, they fell 0.9%. In harder hit Arapahoe County, which includes much of Aurora, however, median incomes fell 8.4%.

Some of this could attributable to rising unemployment, "the unemployment rate among blacks in Colorado was 14.7 percent last year compared with 6.9 percent of whites, according to the U.S. Bureau of Labor Statistics." Overall unemployment in the Denver-Aurora metro area roughly doubled from 2008 to 2009.

While I have no numbers to back it up, another possible culprit may be the demise of the subprime lending industry. Through 2007, subprime lending was making up an increasing share of the total mortgage industry market. This created a lot of good jobs selling mortgages and processing them. Subprime lending took place disproportionately in minority communities, where many people who could have been eligible for conventional prime rate mortgages took out subprime mortgages instead because those were the lenders with whom the borrowers were familiar. I've never seen a report that says so, but I suspect that I a lot of the people with good jobs in that subprime lending industry in Denver, a lot of real estate agents making home sales facilitated by those subprime loans, a lot of the neighborhood insurance agents providing home owner's insurance when these loans closed, and a lot of people doing renovations financed with subprime loans, were black.

Conventional mortgage lending from banks and non-subprime oriented mortgage finance companies, in contrast, tend to have overwhelmingly white employees and to have referral networks that connect people to white insurance agents and contractors.

The financial crisis virtually eliminated the entire subprime and Alt-A lending industry in a matter of months. The financial markets stopped issuing new mortgage backed securities almost completely, and the vast majority of subprime and Alt-A loans were financed with mortgage backed securities. Subprime mortgage finance companies were typically national companies that had obligations to repay investors if the mortgages they sold had unexpectedly high default rates, and when default rates rose and those obligations were called, almost all of those mortgage finance companies went out of business, with their few worthwhile assets sometimes gobbled up by commercial banks.

The loss of most of the good paying jobs in the real estate, finance and insurance jobs in black neighborhoods in a matter of months would be just the kind of event that could lead to the catastrophic decline in median income for African-Americans in the Denver-Aurora metropolitan area that happened between 2007 and 2008.

Another reason to suspect subprime lending as a culprit in that decline in median income is that this decline took place mostly between 2007 and 2008, while the rise in unemployment created by the recession that the financial crisis spawned took place mostly between 2008 and 2009. The people whose incomes fell to produce the decline in median income from 2007 to 2008 are probably some of the best educated, middle class members of the Denver-Aurora black community, while the people in the Denver-Aurora black community who became unemployed between 2008 and 2009 are probably disproportionately the least educated, working class members of the Denver-Aurora black community.

If rising unemployment were driving declining median income, one would have expected to see a big drop in median income from 2008 to 2009, and instead it held steady then. This suggests that unemployment disproportionately affected those who were in jobs that made less than the median income before the recession hit.

I haven't seen the numbers, but I also suspect that the drop in median incomes was even more severe for black women in the Denver-Aurora black community, who make up a disproportionate share of the employees in the finance, insurance and real estate industry in the subprime mortgage related industry that I suspect produced much of the decline, while the increase in unemployment from 2008 to 2009 in the Denver-Aurora black community was disproportionately among black men.

The bad news, if my suspicions are correct, is that the massive median income loss in the black community in the Denver-Aurora metropolitan area is structural rather than cyclic. The good paying jobs destroyed, and the incomes of self-employed people reduced by the demise of the subprime and Alt-A lending industries aren't coming back any time soon. The market has collectively decided to permanently reduce the scale of that industry, and changes in the policies of businesses key to the scale of that industry (like private mortgage insurers, secondary market mortgage buyers, and credit reporting agencies rating mortgage backed security obligations) and government regulators with jurisdiction over that industry, have changed in ways that insure that subprime lending and Alt-A lending cannot resume on a business as usual basis.

The good news, if my suspicions are correct, is that a generation of people in the Denver-Aurora black community were lifted into the middle class in the 2000s, and have built the business skills and earned the experience necessary to excel in the industries. The skills, the experience, and the expectations of the middle class life style that came with them, aren't going away. The cohort of finance, insurance and real estate professionals in the black community who rode the subprime boom in the 2000s, once they recover from the immediate setbacks that they have suffered, are going to use their skills and experience, and be driven by their heightened economic expectations to find places for themselves in the more conventional part of the finance, insurance and real estate industry. The numbers suggest that many of them have already found jobs after the setbacks they suffered when the industry collapsed. They are going to rebuild their careers. They will provide the human capital infrastructure that is needed to build neighborhood level economic health to black neighborhoods where they have built business networks and personal ties. Many will connect consumers in black neighborhoods to conventional lending opportunities.

You saw something similar in Grand Junction, Colorado after the oil shale bust. The oil shale boom caused Grand Junction to develop infrastructure and a base of professional people. When the bust hit, the buildings saw their values collapse, the infrastructure was dramatically underutilized, and the professionals were underemployed and some left the area entirely. But, many of the professionals stayed and over the next couple of decades, Grand Junction used its excess infrastructure and overabundance of professionals to grow its economy on a more diversified basis as city boosters beat the bushes to bring companies doing things like building 3-D copying machines and German software companies setting up branch businesses to the city. The result has been a healthier economy that suffered less this time around when the oil industry jobs slipped away after a mini-boom fueled by high oil prices.

There is no reason that black neighborhoods in Denver and Aurora, which make up about half of the black population of Colorado, can't used capacity developed in the subprime boom to fuel a similar round of more sustainable economic growth.

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