The New York Times
By: Michael Powell
May 30, 2010
MEMPHIS -- For two decades, Tyrone Banks was one of many African-Americans who saw his economic prospects brightening in this Mississippi River city.
A single father, he worked for FedEx and also as a custodian, built a handsome brick home, had a retirement account and put his eldest daughter through college.
Then the Great Recession rolled in like a fog bank. He refinanced his mortgage at a rate that adjusted sharply upward, and afterward he lost one of his jobs. Now Mr. Banks faces bankruptcy and foreclosure.
"I'm going to tell you the deal, plain-spoken: I'm a black man from the projects and I clean toilets and mop up for a living," said Mr. Banks, a trim man who looks at least a decade younger than his 50 years. "I'm proud of what I've accomplished. But my whole life is backfiring."
Not so long ago, Memphis, a city where a majority of the residents are black, was a symbol of a South where racial history no longer tightly constrained the choices of a rising black working and middle class. Now this city epitomizes something more grim: How rising unemployment and growing foreclosures in the recession have combined to destroy black wealth and income and erase two decades of slow progress.
The median income of black homeowners in Memphis rose steadily until five or six years ago. Now it has receded to a level below that of 1990 -- and roughly half that of white Memphis homeowners, according to an analysis conducted by Queens College Sociology Department for The New York Times.
Black middle-class neighborhoods are hollowed out, with prices plummeting and homes standing vacant in places like Orange Mound, Whitehaven and Cordova. As job losses mount -- black unemployment here, mirroring national trends, has risen to 16.9 percent from 9 percent two years ago; it stands at 5.3 percent for whites -- many blacks speak of draining savings and retirement accounts in an effort to hold onto their homes. The overall local foreclosure rate is roughly twice the national average.
The repercussions will be long-lasting, in Memphis and nationwide. The most acute economic divide in America remains the steadily widening gap between the wealth of black and white families, according to a recent study by the Institute on Assets and Social Policy at Brandeis University. For every dollar of wealth owned by a white family, a black or Latino family owns just 16 cents, according to a recent Federal Reserve study.
The Economic Policy Institute's forthcoming "The State of Working America" analyzed the recession-driven drop in wealth. As of December 2009, median white wealth dipped 34 percent, to $94,600; median black wealth dropped 77 percent, to $2,100. So the chasm widens, and Memphis is left to deal with the consequences.
"This cancer is metastasizing into an economic crisis for the city," said Mayor A. C. Wharton Jr. in his riverfront office. "It's done more to set us back than anything since the beginning of the civil rights movement."
The mayor and former bank loan officers point a finger of blame at large national banks -- in particular, Wells Fargo. During the last decade, they say, these banks singled out blacks in Memphis to sell them risky high-cost mortgages and consumer loans.
The City of Memphis and Shelby County sued Wells Fargo late last year, asserting that the bank's foreclosure rate in predominantly black neighborhoods was nearly seven times that of the foreclosure rate in predominantly white neighborhoods. Other banks, including Citibank and Countrywide, foreclosed in more equal measure.
In a recent regulatory filing, Wells Fargo hinted that its legal troubles could multiply. "Certain government entities are conducting investigations into the mortgage lending practices of various Wells Fargo affiliated entities, including whether borrowers were steered to more costly mortgage products," the bank stated.
Wells Fargo officials are not backing down in the face of the legal attacks. They say the bank made more prime loans and has foreclosed on fewer homes than most banks, and that the worst offenders -- those banks that handed out bushels of no-money-down, negative-amortization loans -- have gone out of business.
"The mistake Memphis officials made is that they picked the lender who was doing the most lending as opposed to the lender who was doing the worst lending," said Brad Blackwell, executive vice president for Wells Fargo Home Mortgage.
Not every recessionary ill can be heaped upon banks. Some black homeowners contracted the buy-a-big-home fever that infected many Americans and took out ill-advised loans. And unemployment has pitched even homeowners who hold conventional mortgages into foreclosure.
Federal and state officials say that high-cost mortgages leave hard-pressed homeowners especially vulnerable and that statistical patterns are inescapable.
"The more segregated a community of color is, the more likely it is that homeowners will face foreclosure because the lenders who peddled the most toxic loans targeted those communities," Thomas E. Perez, the assistant attorney general in charge of the Justice Department's civil rights division, told a Congressional committee.
The reversal of economic fortune in Memphis is particularly grievous for a black professional class that has taken root here, a group that includes Mr. Wharton, a lawyer who became mayor in 2009. Demographers forecast that Memphis will soon become the nation's first majority black metropolitan region.
That prospect, noted William Mitchell, a black real estate agent, once augured for a fine future.
"Our home values were up, income up," he said. He pauses, his frustration palpable. "What we see today, it's a new world. And not a good one."
"You don't want to walk up there! That's the wild, wild west," a neighbor shouts. "Nothing on that block but foreclosed homes and squatters."
To roam Soulsville, a neighborhood south of downtown Memphis, is to find a place where bungalows and brick homes stand vacant amid azaleas and dogwoods, where roofs are swaybacked and thieves punch holes through walls to strip the copper piping. The weekly newspaper is swollen with foreclosure notices.
Here and there, homes are burned by arsonists.
Yet just a few years back, Howard Smith felt like a rich man. A 56-year-old African-American engineer with a gray-flecked beard, butter-brown corduroys and red sneakers, he sits with two neighbors on a porch on Richmond Avenue and talks of his miniature real estate empire: He owned a home on this block, another in nearby Whitehaven and another farther out. His job paid well; a pleasant retirement beckoned.
Then he was laid off. He has sent out 60 applications, obtained a dozen interviews and received no calls back. A bank foreclosed on his biggest house. He will be lucky to get $30,000 for his house here, which was assessed at $80,000 two years ago.
"It all disappeared overnight," he says.
"Mmm-mm, yes sir, overnight," says his neighbor, Gwen Ward. In her 50s, she, too, was laid off, from her supervisory job of 15 years, and she moved in with her elderly mother. "It seemed we were headed up and then" -- she snaps her fingers -- "it all went away."
Mr. Smith nods. "The banks and Wall Street have taken the middle class and shredded us," he says.
For the greater part of the last century, racial discrimination crippled black efforts to buy homes and accumulate wealth. During the post-World War II boom years, banks and real estate agents steered blacks to segregated neighborhoods, where home appreciation lagged far behind that of white neighborhoods.
Blacks only recently began to close the home ownership gap with whites, and thus accumulate wealth -- progress that now is being erased. In practical terms, this means black families have less money to pay for college tuition, invest in businesses or sustain them through hard times.
"We're wiping out whatever wealth blacks have accumulated -- it assures racial economic inequality for the next generation," said Thomas M. Shapiro, director of the Institute on Assets and Social Policy at Brandeis University.
The African-American renaissance in Memphis was halting. Residential housing patterns remain deeply segregated. While big employers -- FedEx and AutoZone -- have headquarters here, wage growth is not robust. African-American employment is often serial rather than continuous, and many people lack retirement and health plans.
But the recession presents a crisis of a different magnitude.
Mayor Wharton walks across his office to a picture window and stares at a shimmering Mississippi River. He describes a recent drive through ailing neighborhoods. It is akin, he says, to being a doctor "looking for pulse rates in his patients and finding them near death."
He adds: "I remember riding my bike as a kid through thriving neighborhoods. Now it's like someone bombed my city."
Banking on Nothing
Camille Thomas, a 40-year-old African-American, loved working for Wells Fargo. "I felt like I could help people," she recalled over coffee.
As the subprime market heated up, she said, the bank pressure to move more loans -- for autos, for furniture, for houses -- edged into mania. "It was all about selling your units and getting your bonus," she said.
Ms. Thomas and three other Wells Fargo employees have given affidavits for the city's lawsuit against the bank, and their statements about bank practices reinforce one another.
"Your manager would say, 'Let me see your cold-call list. I want you to concentrate on these ZIP codes,' and you knew those were African-American neighborhoods," she recalled. "We were told, 'Oh, they aren't so savvy.' "
She described tricks of the trade, several of dubious legality. She said supervisors had told employees to white out incomes on loan applications and substitute higher numbers. Agents went "fishing" for customers, mailing live checks to leads. When a homeowner deposited the check, it became a high-interest loan, with a rate of 20 to 29 percent. Then bank agents tried to talk the customer into refinancing, using the house as collateral.
Several state and city regulators have placed Wells Fargo Bank in their cross hairs, and their lawsuits include similar accusations. In Illinois, the state attorney general has accused the bank of marketing high-cost loans to blacks and Latinos while selling lower-cost loans to white borrowers. John P. Relman, the Washington, D.C., lawyer handling the Memphis case, has sued Wells Fargo on behalf of the City of Baltimore, asserting that the bank systematically exploited black borrowers.
A federal judge in Baltimore dismissed that lawsuit, saying it had made overly broad claims about the damage done by Wells Fargo. City lawyers have refiled papers.
"I don't think it's going too far to say that banks are at the core of the disaster here," said Phyllis G. Betts, director of the Center for Community Building and Neighborhood Action at the University of Memphis, which has closely examined bank lending records.
Former employees say Wells Fargo loan officers marketed the most expensive loans to black applicants, even when they should have qualified for prime loans. This practice is known as reverse redlining.
Webb A. Brewer, a Memphis lawyer, recalls poring through piles of loan papers and coming across name after name of blacks with subprime mortgages. "This is money out of their pockets lining the purses of the banks," he said.
For a $150,000 mortgage, a difference of three percentage points -- the typical spread between a conventional and subprime loan -- tacks on $90,000 in interest payments over its 30-year life.
Wells Fargo officials say they rejected the worst subprime products, and they portray their former employees as disgruntled rogues who subverted bank policies.
"They acknowledged that they knowingly worked to defeat our fair lending policies and controls," said Mr. Blackwell, the bank executive.
Bank officials attribute the surge in black foreclosures in Memphis to the recession. They say that the average credit score in black Census tracts is 108 points lower than in white tracts.
"People who have less are more vulnerable during downturns," said Andrew L. Sandler of Buckley Sandler, a law firm representing Wells Fargo.
Mr. Relman, the lawyer representing Memphis, is unconvinced. "If a bad economy and poor credit explains it, you'd expect to see other banks with the same ratio of foreclosures in the black community," he said. "But you don't. Wells is the outlier."
Whatever the responsibility, individual or corporate, the detritus is plain to see. Within a two-block radius of that porch in Soulsville, Wells Fargo holds mortgages on nearly a dozen foreclosures. That trail of pain extends right out to the suburbs.
Begging to Stay
To turn into Tyrone Banks's subdivision in Hickory Ridge is to find his dream in seeming bloom. Stone lions guard his door, the bushes are trimmed and a freshly waxed sport utility vehicle sits in his driveway.
For years, Mr. Banks was assiduous about paying down his debt: he stayed two months ahead on his mortgage, and he helped pay off his mother's mortgage.
Two years ago, his doorbell rang, and two men from Wells Fargo offered to consolidate his consumer loans into a low-cost mortgage.
"I thought, 'This is great! ' " Mr. Banks says. "When you have four kids, college expenses, you look for any savings."
What those men did not tell Mr. Banks, he says (and Ms. Thomas, who studied his case, confirms), is that his new mortgage had an adjustable rate. When it reset last year, his payment jumped to $1,700 from $1,200.
Months later, he ruptured his Achilles tendon playing basketball, hindering his work as a janitor. And he lost his job at FedEx. Now foreclosure looms.
He is by nature an optimistic man; his smile is rueful.
"Man, I should I have stayed 'old school' with my finances," he said. "I sat down my youngest son on the couch and I told him, 'These are rough times.' "
Many neighbors are in similar straits. Foreclosure notices flutter like flags on the doors of two nearby homes, and the lawns there are overgrown and mud fills the gutters.
Wells Fargo says it has modified three mortgages for every foreclosure nationwide -- although bank officials declined to provide the data for Memphis. A study by the Neighborhood Economic Development Advocacy Project and six nonprofit groups found that the nation's four largest banks, Wells Fargo, Bank of America, Citigroup and JPMorgan Chase, had cut their prime mortgage refinancing 33 percent in predominantly minority communities, even as prime refinancing in white neighborhoods rose 32 percent from 2006 to 2008.
For Mr. Banks, it is as if he found the door wide open on his way into debt but closed as he tries to get out.
"Some days it feels like everyone I know in Memphis is in trouble," Mr. Banks says. "We're all just begging to stay in our homes, basically."