At the Economic Policy Institute, Gregory D.Squires, Derek S. Hyra and Robert N.Renner write:
While there has been widespread recognition that racial minorities are among the hardest hit by the subprime mortgage crisis, racial residential segregation has not been considered a factor behind the crisis in minority communities. Blame is being directed at ill-informed consumers, lax underwriting by loan originators, the failure of regulatory agencies, predatory lending practices, greedy investors, misguided appraisers and credit rating agencies, job loss in economically distressed regions, and a range of other institutional and individual factors. ... Virtually ignored in this debate is racial segregation.
Racial segregation is a significant predictor of the share of subprime loans, even after controlling for the percent of minorities, credit score, median home value, poverty, and education. Black segregation has a stronger effect than Hispanic segregation. These findings reveal that segregation explains, in part, the high rates of subprime lending in America’s most segregated metropolitan areas.
Major findings include:
• A 10% increase in black segregation, on average, is associated with a 1.4% increase in high-cost lending.
• In a highly segregated black area, the percent increase in high-cost loans is 7%; in a highly segregated Hispanic metropolitan area the increase is 4.2%.
• Metropolitan areas with higher education levels have a lower proportion of high-cost loans.
Although there are several reasons why subprime lending proliferated in the last 10 years and various approaches that might ameliorate such lending, the findings here suggest that reducing the level of residential segregation would decrease a metropolitan area’s vulnerability to subprime lending. While we did not explore the specific mechanisms by which segregation leads to higher rates of high-cost lending, it is evident that areas where minority groups are more concentrated are more susceptible to subprime lending.
Solutions, according to the report's authors:
- Decrease segregation and increase affordable housing
- Regulate the lending industry
- Educate borrowers: Financial literacy
Reduce discrimination in the housing industry Housing market discrimination clearly contributes to segregation. To more effectively enforce fair housing laws already in place, the proposed Housing Fairness Act of 2009 (H.R. 476) (which supports non-profit fair housing around the country) should be enacted. This bill would increase funding for the Fair Housing Initiatives Program to $52 million and would fund a $20 million nationwide paired-testing program providing for 5,000 tests, approximately 50 in each of the nation’s 100 largest metropolitan areas. In paired-testing investigations, equally qualified white and non-white auditors posing as homebuyers or renters approach housing providers, such as real estate and rental agents, mortgage lenders, and insurance agents, and inquire about the availability of the same or similar housing units or housing related services like home insurance or mortgage loans. Any differences in treatment they receive likely reflect discrimination since these auditors or testers are assigned identical qualifications and interests. Such investigations have routinely revealed discrimination in approximately one out of every five initial visits to real estate or rental agents.
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palantir has posted the Overnight News Digest.