The foreclosure mess just will not go away. Neither will incomplete if not misleading explanations for the crisis, or partial if not ineffective policy proposals. More than 10 million families will lose their homes to foreclosure before the housing market "clears" according to Credit Suisse. Meanwhile, as with the subprime and predatory lending bubbles that led directly to the present crisis, fingers are pointed in several directions as all parties to the debate try to shift blame to their favorite individual and institutional targets. Lost in this discussion is how continuing racial segregation has fueled these developments.
The guilty parties in the foreclosure crisis are many: greedy homeowners, unscrupulous investors, lax underwriters, asleep-at-the-wheel regulators, sloppy mortgage servicers, and more. No doubt all share in the blame. But all these actors played their roles in a context of ongoing racial segregation that greatly facilitated the fraud, deceit, and exploitation that occurred at each stage of the lending process. Research by a variety of organizations ranging from the Federal Reserve to the Center for Community Change reveals that subprime loans were concentrated in, and specifically targeted to, low-income, minority neighborhoods. As a result, foreclosures have fallen heaviest on the most disadvantaged segments of society.
To illustrate, when subprime lending peaked in 2006, just 18% of white borrowers received subprime loans compared to 54% of African Americans. An unfortunate irony, as the Wall Street Journal reported in 2007, is that over 60% of subprime borrowers had credit scores that qualified them for prime loans, underscoring the discriminatory nature of the marketing. Moreover, as reported by the Mortgage Bankers Association, subprime loans are approximately three times more likely to enter into default than conventional loans. As a result, between 2007 and 2009 approximately 8% of homes owned by black or Hispanic families went into foreclosure compared to 4.5% for whites. According a study by the Center for Responsible Lending, these disparities persisted even after taking household incomes into account.
Discriminatory lending patterns do not happen by chance. As the National Community Reinvestment Coalition has reported, in recent years racial minorities and minority communities were deliberately targeted by predatory lenders for subprime lending. The more segregated a metropolitan area is, of course, the easier it is to find exploitable clients. Segregation creates natural pockets of financially unsophisticated, historically underserved, poor minority homeowners who are ripe for exploitation.
It is no surprise to learn, therefore, that a recent study published in the American Sociological Review found that the level of black-white segregation was the single strongest predictor of the number and rate of foreclosures across U.S. metropolitan areas -- more powerful than the overall level of subprime lending, the degree of overbuilding, the extent of home price inflation, the relative creditworthiness of borrowers, the degree of coverage under the Community Reinvestment Act, or the extent of local government regulation.
More than forty years after the passage of the Fair Housing Act, two thirds of all black urbanites continue to live under conditions of high segregation and nearly half live in metropolitan areas where the degree of racial isolation is so intense it conforms to the criteria for hypersegregation. If we had somehow been able to eliminate segregation between blacks and whites in the years since 1968, the average metropolitan area would have experienced a foreclosure rate 80% lower than that actually observed during 2006-2008. Segregation is the reason for the unusual severity of the foreclosure crisis in the United States.
Given the powerful role played by racial segregation causing the current crisis, policy proposals to enact a national moratorium on foreclosures, modify the terms of outstanding loans, make bankruptcy restructuring easier, or undertake other financial reforms largely miss the point. Although such steps might provide short-term relief for some homeowners, speculative housing bubbles will likely recur along racially unequal lines as long as hypersegregation persists as a basic feature of metropolitan America. It is long past time to address the nation's segregated living patterns directly, and several policy initiatives to do so are now on the table.
The Housing Fairness Act (HR 476) would substantially increase the funding of fair housing organizations for nationwide paired testing (where matched pairs of white and non-white auditors approach housing providers to determine if they are treated equally). Such testing would yield much stronger enforcement of fair housing laws.
The Community Reinvestment Modernization Act (HR 1749) would extend the Community Reinvestment Act (a federal ban on redlining) to virtually all mortgage lenders and explicitly require them to be responsive to the credit needs of minority communities. Currently the CRA only applies to depository institutions (which today originate less than half of all mortgage loans). Moreover, the law currently focuses on service to low-income communities without a specific racial or ethnic mandate. Extending the CRA to all mortgage lending would help curb the predatory lending that drove much of the current crisis.
Finally, the U.S. Department of Housing and Urban Development has announced plans to issue a regulation to "affirmatively further fair housing" clarifying the statutory obligation that all recipients of federal housing and community development funds have to use those dollars in a manner that identifies and eliminates discriminatory barriers to equal housing opportunity. The agency should do so sooner rather than later.
Changing the behavior of financial institutions, regulators, and consumers is an important policy objective. Unless the segregated context in which they operate is also altered, however, speculative financial bubbles will persist and their uneven effects will continue to fall on vulnerable communities of color who have long paid the high costs of hypersegregation in the United States, America's own brand of Apartheid.
Douglas S. Massey is the Henry G. Bryant Professor of Sociology and Public Affairs at Princeton University. Gregory D. Squires is Professor of Sociology and Public Policy and Public Administration at George Washington University.
When did discrmination only take place on one day. it is a long term pattern of behavior. to show how much these complaints are being suppressed is that my research on huds own website shows only 34 such cases ever went to court on behalf of the borrower homeowner sold a discriminatory loan.
if there was ever a cover up going on of overwhelmeing proportions it is this mortgage redlining reverse redlining coverup.
I did find out the Federal Reserve Bank of New York owns my mortgages and on the FRB website they claim they are the lead agency for preventing reverse redlining as well as the OCC.
Both of these agencies seem to be allegedly responsible for all this discriminatory lending practice by the big banks.
when is the STANDARD OF ETHICAL BEHAVIOR by regulatory agencies for bank and the banks themselves going to rise out of the sewer where their ethics are now.
"Five years from now, you can always sell your home, pocket the profit, and put it into savings and go back to an apartment if you like."
That scenario is not a racist scenario, it puts people into homes who could not afford them and gives them a chance to make a profit before selling the home.
The problem however, was that this was a bubble that had to burst, but probably not that many people knew since even loan appraisers were hit by the down turn and have had to suffer the indignity of a tumbling credit score that could cost them their license.
Ironically, George Bush Jr. probably would have been called a racist if he had persisted in toughening up the home buying rules because even less low income earners could have afforded homes.
I do think that ALL mortgage interest rates should be reracked to 4.00 % flat rate, NO QUESTIONS ASKED. This would eliminate the predatory loans that are still out there causing people grief.
Secondly, as you noted, predatory lenders were responsible for much of the subprime lending. They went to where the market/demand was. Now penalizing other businesses/banks/institutions and making them adhere to a new set of race-based lending guidelines doesn’t change the dynamics of the market you are forcing them to enter. All it does its add another level of race-based profiling, something I am sure you will agree is wrong.
BTW, don’t we have a new Consumer Protection Czar that is already onto all this stuff without having to create a bunch of new racial profiling measures that further systematizes use race as a decision-making criterion.
Kai
"To illustrate, when subprime lending peaked in 2006, just 18% of white borrowers received subprime loans compared to 54% of African Americans" what you failed to mention was whether or not the houshold incomes were the same for the 18% and 54% repectivley...in 2006 the Median houshold income within the white community was around $50,000 and in the black community it was $30,000. Which from a simple qualification standard you would expect to see a higher percentage in the black comminuty, as well as a higher default rate.
At $30,000 qualifying for a mortgage would nearly always have required a sub prime mortgage, regardless of the person's race. As for segregation, especially within the housing market, the least expensive houses tend to be in the neighborhoods with the lowest incomes. Its not a matter of race, its a matter of income.
These studies would mean much more if the entire statistical profile were presented.
This article doesn't compare apples to oranges. It compares individual bits of fruit salad. All the statistics that were published in support of this article are completely meaningless by themselves. You'd need to compare similar loans to people with similar incomes and similar down payments. Who applied for what, was approved for what, and the foreclosure rate that followed. Then you might show some discrepancy, but it still won't show cause.
Are people being foreclosed on because they lost their job, they found out they were upside down on the loan and walked away, the they can't afford the payments that they knew were going increase, or what? There are many reasons for foreclosure. None of them prove that the borrower was scammed, much less scammed because of skin color.
http://www.georgetownlawjournal.com/issues/pdf/98-4/Spann.PDF
That is clearly not the case here. The banks intent (i.e., to scam or not to scam) is irrelevant if, in the end, there is a disparate impact on a protected community.
And no amount of Federal regulation on lending is going to change this anytime soon because anyone I know of who can afford to buy a home isn't looking anywhere within 200 miles of a major metropolitan area.
A true entrepreneur never puts race over results.