Many pundits describe the current economic environment as being the worst since the Great Depression and the longest recession since that era.
One of the most significant factors that created the current crisis is a consequence of the subprime loan industry. Rising mortgage delinquencies and foreclosures, coupled with higher interest rates on adjustable mortgages and declining home values, have undermined the market for mortgage securities.
Now researchers Douglas Massey of the Woodrow Wilson School of Public and International Affairs at Princeton University, and Ph.D. candidate Jacob Rugh, have just released a study that shows that poorer minority areas in concert with subprime lending practices may have impacted the housing crisis the most. Specifically, predatory lending by mortgage companies that intentionally targeted racially segregated minority neighborhoods.
The study, which will be published in the American Sociological Review, suggests that this practice, which involved giving loans with unreasonable fees and interest, led to mass foreclosures that fueled the U.S. housing crisis. These practices became very popular in the 1990s.
Coupled with redlining, which is the practice of denying or increasing the cost of services, such as banking and insurance, to residents based on race and where they reside, loans were made to high-risk individuals with poor credit. Add to this the growth of mortgage-backed securities and the prevalence of pawnshops, payday lenders and check cashing services in minority areas, and it is not unreasonable to make the correlation asserted by the authors.
The study used data from the 100 largest U.S. metropolitan areas. Findings indicated that living in a predominantly African American area was a significant predictor of foreclosure. It was also found that African Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans. In fact, the authors documented that from 1993 to 2000, the share of subprime mortgages going to African American households in majority African American neighborhoods increased from 2 to 18 percent. –torrance stephens, ph.d.
