African Americans have suffered disproportionately from foreclosures due to racially discriminatory lending practices, a new study shows (h/t to Felix Salmon).
The study (pdf), authored by Douglas Massey and Jacob Rugh of Princeton, looks at racially segregated neighborhoods, where the percentage of minorities (particularly blacks, Hispanics and Asians) is higher than in the country as a whole. Using a black "dissimilarity index" to measure how a region's African-American makeup differs from the national percentage, the authors found that one standard deviation increase in this index -- when a community is slightly blacker than the nation as a whole -- increases the number of foreclosures by 15,028 and the foreclosure rate by 1.68 percentage points. As Salmon points out, that's quite high, given that the nation's foreclosure rate is 4.14 percent.
Before the housing bubble burst, blacks were more likely than their white counterparts to be given "subprime" loans, with high (or increasing) interest rates and hidden fees. It's a practice often referred to as "predatory lending." As Reuters notes, blacks with similar credit scores to whites were given worse deals on their loans, suggesting that race played a role in the way some lenders structured these deals.
Among lenders that went bankrupt in 2007, blacks were three times more likely than whites to receive subprime loans, according to a previous study that the authors cite in their report. Among lenders that did not go bankrupt, blacks were equally as likely as whites to receive "predatory" treatment.
The structures of these subprime mortgages made default especially likely, contributing in large part to the housing market meltdown that led to the financial crisis. But lenders didn't have to worry about the risk of default: With the rise of mortgage securitization in the 1980s, lenders could originate loans and sell them off to banks, which repackaged them and sold them to investors. The popularity of mortgage-backed derivatives, especially collateralized debt obligations, in the years leading up to the crisis created a huge demand for subprime, high-yield bonds -- which in turn encouraged some lenders to engage in ever riskier practices.
Racial segregation concentrated and intensified the fallout from racially motivated lending practices, the study says. It also facilitated the lending in the first place, since lenders could target communities that they knew to be disproportionately black or Hispanic.
"Hispanic and black home owners, not to mention entire Hispanic and black neighborhoods, bore the brunt of the foreclosure crisis," the study says. The authors say the nation's civil rights legislation must be amended to include more effective mechanisms for enforcement.
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