As public debate mounts on the advisability of a national foreclosure moratorium, two Ivy League scholars recently concluded that racial segregation and the nation's foreclosure crisis are inextricably intertwined. Studying data from the nation's 100 largest metropolitan areas, Professor Douglas S. Massey and Ph.D. candidate Jacob S. Rugh, both with Princeton University's Woodrow Wilson School of Public and International Affairs, concluded that racial segregation and discriminatory lending were as much at fault in creating the foreclosure crisis as was subprime lending. Moreover, racial discrimination was apparent at every lending juncture, from loan origination all the way to foreclosure.
"While policymakers understand that the housing crisis affected minorities much more than others, they are quick to attribute this outcome to the personal failures of those losing their homes – poor credit and weaker economic position", noted Massey. "In fact, something more profound was taking place; institutional racism played a big part in this crisis."
The authors examined the characteristics of White and minority borrowers and found that even with similar performance on key risk factors such as down payment ratios and credit profiles, African-Americans were more likely to receive subprime loans. From 1993 to 2000, the share of subprime mortgages going to families in minority neighborhoods rose from two to 18 percent. Similarly, both Blacks and Latinos were significantly more likely than Whites to receive loans with unfavorable terms such as prepayment penalties.
Additionally, the study points out that although subprime loans have always had a higher failure rate, the gap between subprime and prime performance widened dramatically during the period of reckless lending. According to the study, in 2005 the subprime foreclosure rate was 3.3 percent compared to only 1 percent for all mortgage loans. In the next four years, however, the foreclosure rate for subprime mortgages was 15.6 percent compared to 4.6 percent overall.
Despite enactment of the federal fair housing 40 years ago, the report also found that the degree of segregated African-American neighborhoods is still remarkably similar to what the law was intended to correct. Beyond its effects on African-Americans, the authors found that Hispanic segregation is also rising.
According to Massey and Rugh, the historical record of not lending to minorities left many minorities consumers vulnerable to a questionable, if not unethical lending environment. As predatory lending rose, it became concentrated in segregated minority neighborhoods where homebuyers were often unaware of alternative and less expensive financing. That concentration of high-cost mortgages is reflected in the number of minority neighborhoods now devastated by foreclosures.
Secondly, the selling of interests in mortgages to investors in the form of mortgage-backed securities resulted in reduced and inconsistent accountability for lenders who were relieved of losses associated with foreclosures.
"Ultimately, the racialization of America's foreclosure crisis occurred because of a systemic failure to enforce basic civil rights laws in the United States," the authors wrote. "In addition to tighter regulation of lending, rating, and securitization practices, greater civil rights enforcement has an important role to playing in cleaning up U.S. markets."
These scholarly findings echo the recent calls of civil rights leaders, who in a unified coalition voice called for an immediate moratorium on all foreclosures.
According to Hilary Shelton, Director of the NAACP's Washington Bureau, "The foreclosure crisis has decimated African-American and Latino communities. The civil rights community warned the nation three years ago that if nothing was done to intervene, that the crisis would impose the greatest loss of wealth ever experienced by the African-American and Latino communities. Sadly, this is being borne out."
The recent Princeton findings support earlier by research from the Center for Responsible Lending (CRL) that determined how widespread foreclosures have drained an estimated $350 billion from communities of color. According to Foreclosures by Race and Ethnicity: the Demographics of a Crisis, CRL's June research report that for every 100 African-Americans who were homeowners in 2006, the crisis has resulted in 11 homes lost or at imminent risk of foreclosure. For Latino families, the figures are even worse – 17 for every 100 Latino homeowners.
Federal and state authorities are coming to terms with fraudulent robo-signing of foreclosure documents. While the ramifications of these failures are unclear, our nation needs a fair and dependable process to avoid unnecessary foreclosures. With more than two million homes already in the foreclosure process and almost four million more mortgages in trouble, our national economic recovery is at risk.
Charlene Crowell is the communications manager for state policy and outreach with the Center for Responsible Lending.