Race And Subprime Lending

Baseline Scenario puts together a sobering post on the issue of race and subprime lending in America and arrives at the conclusion that racism still exists.

Like most forms of hardship in our society, the foreclosure crisis is disproportionately affecting minorities. The New York Times conducted a study of foreclosures in the New York area and found, among other things:

Defaults occur three times as often in mostly minority census tracts as in mostly white ones. Eighty-five percent of the worst-hit neighborhoods — where the default rate is at least double the regional average — have a majority of black and Latino homeowners.

Well, that might simply be a function of poverty: statistically speaking, minorities are more likely to be poor, and therefore more likely to become delinquent on their mortgages. But I don’t think it’s that simple.

It never is. Turns out that a lot of minority homeowners who could have qualified and gotten regular mortgages were given subprime loans anyway.

You can also give him a higher-rate mortgage than he could otherwise qualify for. According to the Times article:

Roughly 33 percent of the subprime mortgages given out in New York City in 2007, [Secretary of HUD Shaun] Donovan said, went to borrowers with credit scores that should have qualified them for conventional prevailing-rate loans.

In general, high-rate mortgages account for a larger proportion of mortgages in minority communities, even after taking median income into account. According to sociologist Gregory Squires,

We see these loans heavily concentrated in poor neighborhoods and targeted to minority neighborhoods. There is some evidence that these neighborhoods were actually targeted — that lenders have gone after people whom they think are less sophisticated borrowers, including single women and the elderly. . . .

Credit rating and income would and does explain some of the patterns. But when you control for those, segregation is also a factor. . . . In those metro areas where segregation is highest, the share of loans that are subprime goes up.

If you are disproportionately steering minority borrowers into higher-rate mortgages, then of course they will suffer a higher rate of defaults and foreclosures than you would predict solely from their other characteristics (income, credit rating, etc.).

Remember, the argument from the "broke-ass minorities caused the subprime crisis" theory states that banks were forced to give minorities loans under Clinton's (It's always Bill Clinton's fault) Community Reinvestment Act, and the only loans these minorities could get were subprime loans at higher rates (which they couldn't pay). Banks were therefore forced to give risky loans to risky customers, and that's how these defaults wrecked the financial industry and eventually the entire economy.

But this of course shows that this theory is completely false. The banks were greedy and gave minorities in poorer neighborhoods subprime loans to rip them off. They should habve qualified for better prime loans. They were instead given worse loans and higher rates based on race and location, NOT income.

But here's the real mindblower from the Times article.

In retrospect, this seems like an area where better consumer education could have played a role. Back to the Times:

Upper-income black borrowers in the region are more likely to hold subprime mortgages than even blacks with lower incomes, who often benefit from homeownership classes and lending assistance offered by government and nonprofits.

Maybe the economic debacle we are all living through will lead to better personal finance education, both in school and for adults. That’s one silver lining to hope for, since an end to racism is almost certainly far off.

In other words, they didn't know they were getting ripped off. They didn't shop around...they just figured "Well, that's the rate you get when your me."

Buyer beware, of course. But the banks certainly got greedy across the board. They ripped off millions of Americans, bilking them for billilions. Now the bill is due, and we're all paying for corporate greed.

Remember this story next time somebody tells you it was the "broke-ass blacks and Mexicans" who ruined the economy.