Racial segregation made minority neighborhoods even stronger magnets for pre-crisis subprime loans


In the run-up to the 2008 financial crisis, putting America’s black and Hispanic borrowers into dicey subprime loans was like shooting fish in a barrel—and segregation shrank the barrel.

A paper (pdf) in the journal Social Forces finds that subprime loans were not only prevalent in black and Hispanic neighborhoods of the largest US cities, but more prevalent in heavily segregated cities.

The paper’s authors—Harvard PhD candidates Jackelyn Hwang, Michael Hankinson, and Kreg Steven Brown—found the correlation by combining 2006 government data on subprime lending by census tract with an index they created measuring the clustering of majority-black and Hispanic tracts within a given metro area, to create maps like this one:

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When the clustering measure increased a single standard deviation—meaning that a given area in a city was measurably more black or more Hispanic—the subprime portion of originated home loans increased 22.3 percentage points. High levels of segregation were good for an additional 3.2 percentage points on top of the 14-point gap in the rate of subprime lending between white and minority neighborhoods.

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That’s not to say that race was the only factor at play. Income and other factors might have played a part, the researchers noted, though the effects they observed were relatively small. And the research doesn’t account for purposely discriminatory behavior by lenders, which has been known to happen.

In 2012, Wells Fargo, the largest US home lender, agreed to a $175 million settlement with the US Justice Department over allegations that it had targeted minority borrowers for subprime loans. A related suit filed by the city of Baltimore, Maryland, produced an embarrassing affidavit that outlined Wells Fargo’s lending practices and described (pdf, attachment B, p. 4) loan officers making reference to “ghetto loans” made to “mud people” in minority neighborhoods.

Discriminatory or not, the loans eventually destroyed wealth and led to a disproportionate number of foreclosures (paywall) in minority communities, the researchers affirm:

Although the increased availability of home loans during the peak of subprime lending temporarily allowed blacks and Hispanics to make progress in asset building, the spatial concentrations of such loans and the disproportionate fallout of subprime loans suggest that the housing crisis has further exacerbated racial and ethnic wealth inequality and damaged the economic assimilation of the predominantly immigrant Hispanic population.

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