VOL. 125 | NO. 182 | Monday, September 20, 2010
A story from The Memphis News
On newsstands throughout the city
'A New Day'
JONATHAN DEVIN | Special to The Memphis News
“In terms of selling, African-Americans were hit harder than most, the biggest reason being because there were so many subprime products out there. Even if they were qualified for an FHA (Federal Housing Administration) product, with a subprime loan they could go in with a rate below FHA and not have to have mortgage insurance, which would give them a lower payment.”
– Michelle Hayes, President, Hayes Homes and Realty
Marvell Mitchell has had it with numbers.
“I’ve read the numbers and I hear people talking about the recession but frankly, there’s an opportunity here,” said Mitchell, who owns Mitchell Technology Group LLC with his wife, Ledelle.
The Mitchells, like many African-Americans in Memphis, were part of a dramatic rise in overall African-American wealth during the 1990s when they started their business. But they now face serious decreases in wealth during the current recession that has widened the gap between white wealth and black wealth.
“The most difficult pieces for me have been the changes in banking, the availability of capital is more challenging, and the receivables portion has become more challenging,” said Marvell Mitchell.
“Even though we’re doing work, people are taking longer to pay, and banks have made a major change in the way we fund our business.”
Mitchell’s business line of credit was reduced making it more difficult to purchase the computer equipment he sells. In the end he decided to change the nature of the business altogether.
“It appeared that our product volume was going to go down,” he said. “We went from a product-based company to a service-based company, because when businesses can’t buy your equipment, they’ve got to keep what they’ve got.”
Mitchell’s business volume is down 30 percent, but he has managed to maintain an overall net profit. He was able to put three children through college, and he knows he’s one of the lucky ones.
The numbers, after all, are plentiful and disturbing.
In May The New York Times reported that the median income of black Memphians had been steadily rising before the recession but now is below that of 1990. Black unemployment rose to 16.9 percent, up from 9 percent in 2008. White unemployment is only 5.3 percent, according to a Queens College Sociology Department study. A 2010 Federal Reserve study found that, nationally, black and Latino families own 16 cents for every dollar owned by a white family.
According to the Economic Policy Institute’s “The State of Working America” from December 2009, median white wealth dropped 34 percent during the recession to $94,600 while median black wealth fell 77 percent to $21,000. Those who study small-business profit, real estate and investments say that the same factors led to overall recession across all demographics, but some behaviors, attitudes and conditions have added extra burdens to African-Americans.
“One thing that research has borne out over time is the fact that there are some behavioral and attitudinal differences between whites and blacks when it comes to savings and investing,” said John Paul Webber, vice president of the Associated Agency, which manages 401(k) and other qualified retirement plans.
Starting from scratch
For one, Webber said that African-Americans are generally introduced to saving and investing tools later in life, and many prefer more conservative options like real estate and life insurance policies to playing the stock market.
That’s according to Ariel Investment’s 2010 Black Investor Survey. The company has surveyed African-Americans on investment issues for the last 12 years.
In the study, 27 percent of African-Americans reduced their monthly 401(k) contributions compared to 16 percent of whites. Twenty-two percent of non-retired African-Americans borrowed or withdrew money from their retirement, compared to 14 percent of whites.
Monthly savings for black households fell below $200 per month for the first time in ten years to $189, compared to $367 among white households.
“I think that the whole specter of fear and anxiety around saving and investing for retirement transcends race and demographics,” said Webber.
But when potential investors are less experienced with investing, they may be more fearful of the products available.
“Financial planning is not just a battle of knowledge over ignorance, it’s a battle of faith over fear,” said Webber.
Michelle Hayes, president of Hayes Homes and Realty, said that real estate as an investment tool has provided a sense of security for African-Americans until the housing market collapsed. And, well, for a while it was an easy business to get into.
“In terms of selling, African-Americans were hit harder than most, the biggest reason being because there were so many subprime products out there,” said Hayes, whose clientele is almost 100 percent African-American.
“Even if they were qualified for an FHA (Federal Housing Administration) product, with a subprime loan they could go in with a rate below FHA and not have to have mortgage insurance, which would give them a lower payment.”
African-Americans were drawn into the subprime market by not having to pay earnest money, down payments or appraisal fees in some cases.
Hayes is reluctant to say that predatory lending against African-Americans was a factor even though Memphis and Shelby County have litigation pending against Wells Fargo for doing just that.
“I think we had a lot more uneducated homebuyers who were relying solely on the opinion of those who were selling them the homes,” said Hayes.
“I think we as African-Americans were not as educated about what was available and sometimes not educated on saving and preparing to purchase a home.”
Before the housing collapse, Hayes said black investors snapped up homes to flip. Now the market is flooded with investment homes that cannot be sold because the interest rates adjusted higher while property values dropped.
“I did quite a bit of work with investors and I could sell maybe 15 investment properties over a 16-day period,” said Hayes.
“And the properties now are more affordable than they were back then, but because (investors) know that the number of people out there who can buy the houses are fewer now, they are moving towards the stock market.”
That’s in line with the Ariel survey, which found that this year African-Americans chose stock and mutual funds as their preferred investment tools for the first time since the survey was offered.
African-American small businesses may also have lost more profit than white-owned businesses due to being new to the market.
“African-American businesses are for the most part first-generation business,” said Luke Yancy III, president and CEO of the Mid-South Minority Business Council Inc.
“When you have multi-generational businesses, each generation builds on the successes of the prior generation. Wealth begets wealth.
Michelle Hayes, right, president of Hayes Homes and Realty, shows a home in southeast Memphis to client Jahwondene Brown. Hayes said that when the housing market collapsed, African-Americans were hit harder than most because of subprime loan products.
Photos: Lance Murphey
“If you are an African-American-owned business and you are a first-generation business owner, you are starting out with no wealth and you are in business for the first time trying to compete with businesses that have been around forever. You’re not going to have as much net worth or capital as multi-generational businesses that you tend to compete against.”
Yancy doesn’t believe that banks intentionally discriminate against African-American businesses, but that businesses with more liquid assets tend to get better responses from lenders.
But Roby S. Williams, president of the Black Business Association of Memphis has noticed a disturbing trend among minority businesses that cannot get lines of credit from local or national lending institutions sufficient to meet their needs.
“They’ll find someone who will do some factoring for them,” said Williams. “They’ll find someone to finance their receivables on a contract.”
Essentially, third-party factoring companies buy invoices from small businesses at a discount in exchange for immediate cash, which the business can use to maintain operations.
The buyer then pays the factoring company for the full amount of the invoice.
While legal, factoring can reduce a business’ overall profitably significantly.
“Our members are pretty shrewd,” said Williams. “They’re doing such things like if they can get a second mortgage or a home equity line of credit and use those funds as a business line of credit if you will. If they have to, they do some factoring. I advise against that, but as a last resort, they will do that.”
A study released in May by the Institute on Assets and Social Policy (IASP) at Brandeis University studied the wealth black/white wealth gap in the United States between 1984 and 2007 and concluded that the disparity was largely a factor of social policy that favored the already wealthy:
One factor is that over the period studied there was an increasing dependence on credit markets to make ends meet.
Among those with no financial assets, credit is often an emergency resource to help pay for job loss or medical emergencies.
A second factor is that deregulation of the lending market brought a proliferation of high-cost credit, including securitized subprime and predatory loans, payday lending and check-cashing stores.
Consumers of color were targeted in this market and resorted more frequently to credit card debt and other forms of high-cost debt in the absence of assets or extended family resources to draw upon.
According to the study, the racial wealth gap in the United States increased by $75,000 during the 23-year period. Financial assets in real dollars among white families grew from a median value of $22,000 to $100,000 during that period while African-Americans had only a median wealth of $5,000 in 2007.
But one statistic seems to hold defiant against the rest.
“One thing the (Ariel) study revealed that I think is key is the fact that despite being hurt by the recession, blacks are considerably more optimistic than whites,” said Webber.
Mitchell is happy to bear that out.
“When I read the numbers about the wealth that’s been created in the African-American community, that doesn’t necessarily fit me,” said Mitchell. “It doesn’t reflect what we’ve done.”
The silver lining, he said, is learning how to make his business a leaner operation that will stand the test of time.
“We still have a line of credit with the bank, but not in the excess we had in the past,” said Mitchell. “Even though we paid on time, they’ve changed and we can’t force them. The question is who can adapt the quickest? It’s a new day.”