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.