Although reckless lending, lax government regulation and overbuilding are recognized as major causes of the foreclosure epidemic racking the U.S. housing market, another -- and largely overlooked -- factor also played a key role: race.
By concentrating foreclosures in metropolitan areas with large racial differentials in subprime lending, segregation structured the causes of the crisis, as well as the geographic and social distribution of its costs, on the basis of race. Segregation therefore racialized and intensified the consequences of the American housing bubble.Foreclosures are hitting African-American and, to a lesser extent, Hispanic communities across the U.S. harder than white neighborhoods, the researchers found. As an aside, this isn't to downplay the damage to anyone, regardless of creed or color, who faces losing their home. But it is to recognize that in the years preceding the housing crash, predatory lenders targeted certain groups more than others.
Indeed, until the 1990s many minorities couldn't even get a mortgage. That changed during the housing boom. And interestingly, it was for reasons directly related to shifts in the financial industry that contributed to the ensuing bust.
Before that time, banks were reluctant to lend to borrowers with weaker credit because of concerns that such loans would go bad. But the rise of securitization, in which loans are sliced up and sold to investors, encouraged lenders to get into the subprime business because they were no longer on the hook if the mortgages underlying the securities ultimately defaulted. To use the industry jargon, the "originate-to-hold" lending model largely gave way to an "originate to distribute" approach.
That had two effects: Lenders saw a reduced risk of pooling high-risk mortgages into CDOs and other financial instruments; and banks needed to find more borrowers to satisfy the growing demand for mortgage-backed securities.
As a result of these developments, from 1993 to 2000 the share of subprime mortgages going to minority households leaped from 2 to 18 percent. So when the housing bubble popped, the damage was most intense in these areas. The foreclosure rate for subprime mortgages in 2009 was nearly 16 percent, compared to 4.6 percent overall. Say the researchers:
Due to segregation, large numbers of these foreclosures were clustered in densely populated neighborhoods, thereby leaving not only the individual borrowers victims of the housing bust, but entire minority neighborhoods hit harder by the crisis than those in other parts of the country.It's easy to assume that the higher level of foreclosures in larger cities and collar suburbs reflect the lower incomes of residents in such communities. That's false, say Massey and Rugh, who did a statistical analysis of the 100 largest U.S. metropolitan areas. African-American borrowers with similar credit profiles, down payment ratios and other demographic characteristics were more likely to receive subprime loans than white borrowers, they found. Minorities were also far more likely than whites to get mortgages with unfavorable terms, such as a prepayment penalty.
Such findings are consistent with lawsuits against lenders alleging that they preyed on minorities. A former senior executive with Wells Fargo (WFC) last year described the banking giant's efforts to push subprime loans on African-Americans. Consistent with Massey's and Rugh's findings, she also said company loan officers had financial incentives to steer minority borrowers into subprime loans regardless of their credit or income.
It's critical to end such practices. Now. And not, clearly, only to make the financial markets more equal, but also to reduce the likelihood of dangerous lending. To that end, the researchers offer a worthy solution -- amending the 1964 Civil Rights Act to include enforcement mechanisms that reveal and punish discriminatory lending. It's worth noting that the landmark law once included such protections; such provisions were stripped to avoid a congressional filibuster (sound familiar?). They write:
Ultimately, the racialization of America's foreclosure crisis occurred because of a systematic failure to enforce basic civil rights laws in the United States.... In addition to tighter regulation of lending, rating, and securitization practices, greater civil rights enforcement has an important role to play in cleaning up U.S. markets.Image from Flickr user Miheco