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w w w . f u r m a n c e n t e r . o r g
n o v e m b e r 2 0 0 9
Policy Brief
furman center
for real estate & urban policy
new york university
school of law • wagner school of public service
The High Cost of Segregation:Exploring the RelationshipBetween Racial Segregationand Subprime Lending
What We Know AboutRacial Disparities inHigh Cost Lending
It has been widely reported that the sub-prime mortgage crisis has disproportion-ately hit communities o color. Academicresearch, media reports, and commentaryrom HUD Secretary Shaun Donovan allhighlight the disproportionate impact thatsubprime lending has had on both black andHispanic borrowers and the neighborhoodsin which they live. Te Furman Center’sanalysis o nationwide mortgage lendingdata, or example, shows that in 2006, thepercentage o black borrowers that receiveda subprime loan was three times higher thanor white borrowers, and the percentage orHispanic borrowers was two and hal timeshigher than or white borrowers.
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In New York City, we ound an even greater dispar-
1In this brie we dene subprime lending as all loans that arehigh cost, and use the terms “subprime loan” and “high costloan” interchangeably. We classiy rst lien home purchaseloans as high cost i they have an interest rate more than threepercentage points higher than the ederal treasury rate o likematurity. Our calculations use mortgage loan data reportedby lenders under the Home Mortgage Disclosure Act (HMDA)and made available by the Federal Financial InstitutionsExamination Council.
ity: the percentage o black borrowers thatentered into a high cost loan was ve timeshigher than or white borrowers; and orHispanics, the percentage was three andhal times higher than or white borrow-ers. In 2007, as the housing market beganto unravel and subprime lending decreased,these racial disparities persisted across thecountry, and actually grew in New YorkCity: in 2007, the percentage o black bor-rowers that obtained subprime loans wasseven times that or white borrowers.Research shows that subprime loans aremore likely to result in oreclosure, evenwhen individual borrower characteristicsand other actors that inuence the prob-ability o oreclosure are taken into account.I black and Hispanic borrowers are morelikely than white borrowers to receive suchloans, then blacks and Hispanics will dis-proportionately suer the consequenceso oreclosures. Black and Hispanic ami-lies will be more likely than white amiliesto lose the savings they put into the downpayment or into maintenance and improve-ments, to be displaced rom their homesand neighborhoods, and to suer damagedcredit ratings and other consequences o
T h H i g h c o s t o f S g g a t i o n : e x p o i n g t h r a t i o n s h i p B t w n r a i a S g g a t i o n a n d S u b p i m l n d i n g
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oreclosure. Neighborhoods with higherpercentages o black and Hispanic residentswill be disproportionately likely to suervacant and abandoned properties, as wellas increases in crime and decreases in prop-erty values, which have been ound to resultrom oreclosure activity.Because the racial disparities in subprimelending are so stark and the consequencesso severe, researchers and policymakershave sought to better understand the cir-cumstances that produce the disparities. At least some portion o the disparity isthe direct result o underlying economicinequality between racial groups in the U.S.;whites, on average, have higher incomes,greater wealth, and better credit than blackor Hispanic households. Another possiblecause or the disparities might be dierentlevels o access to inormation about bor-rowing and dierent levels o sophisticationabout such nancial matters. Finally, racialdiscrimination in mortgage markets mightbe responsible or some o this disparity.Tis discrimination could take multipleorms. Some lenders or brokers may avoidissuing prime loans to minority borrowers,while other lenders or brokers may targetminority borrowers with aggressive mar-keting o subprime loans.In this brie, we describe research exploringwhether the racial segregation o U.S. citiesmight help to acilitate these mechanismsand make disparities more pronounced. oexamine this question, we conducted twotypes o analysis. First, we looked at the rela-tionship between residential segregationand subprime lending: using national data,we tested whether black and Hispanic bor-rowers are more likely to receive subprimeloans i they live in a more racially segre-gated metropolitan area.
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Second, we usedmore detailed data rom New York City toexamine the relationship between the racialcomposition o an individual neighborhoodand the probability that the residents o thatneighborhood will obtain subprime loans. Inthis policy brie, we summarize our ndingsrom both analyses, discuss their implica-tions or public policy, and outline the addi-tional research that must be done to moreully understand the relationship betweenneighborhood segregation and troublingracial disparities in subprime lending.
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2For our national analysis, we use HMDA data or loans issuedin 2006, which we believe represents the most recent completeset o single-year mortgage lending data. Although 2007HMDA data is now available, because o the turmoil in the realestate markets and mortgage lending industry beginning in2007, several institutions that originated loans that year did notsurvive long enough to report their lending activity.3Te complete paper, “Te High Cost o Segregation: Explor-ing Racial Disparities in High Cost Lending,” which includesa more detailed description o our methods, can be oundin the April, 2009 edition o the
Fordham Urban Law Journal
or at: http://urmancenter.org/les/High_Cost_o_Segrega-tion_Furman_Center_Working_paper.pd.
T h H i g h c o s t o f S g g a t i o n : e x p o i n g t h r a t i o n s h i p B t w n r a i a S g g a t i o n a n d S u b p i m l n d i n g
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Why might racialsegregation affectsubprime lending?
Tere are several theories that help toexplain why higher levels o segregationmight lead to higher rates o subprimelending to people o color. First, segrega-tion may exacerbate underlying economicinequality between racial and ethnic groups.For example, segregation may isolate racialminorities rom job opportunities andsocial and economic networks and lead toa concentration o poverty, thereby mak-ing it harder or minorities to build wealth,gain access to credit and move out o pov-erty. Because a borrower’s income, wealthand credit rating all aect the likelihood theborrower will obtain a subprime loan, to theextent that segregation intensies underly-ing inequality, it also could magniy dier-ential rates o subprime lending. Another theory suggests that by increasingthe social isolation o racial minorities, seg-regation may limit their access and expo-sure to nancial inormation such as strate-gies or shopping or lower-cost loans, andcause racial disparities in nancial know-how. Lack o inormation and sophistica-tion about mortgages may lead black andHispanic borrowers to rely disproportion-ately on local mortgage brokers rather thanlower cost bank branches or internet-basedbrokers. Tis might be particularly true i there are ewer traditional bank branchesborrowers can visit, which is oten the casein heavily minority neighborhoods.Finally, racial segregation could make peo-ple o color more vulnerable to redliningby prime lenders, and to racial targeting bysubprime lenders. raditionally, minorityneighborhoods have been less likely thansimilar white neighborhoods to be servedby prime lending institutions. Such redlin-ing creates a demand or alternative sourceso credit, which may then result in dis-proportionate reliance on subprime loans.Similarly, i predatory lenders or lendersspecializing in subprime loans are inter-ested in targeting racial minorities or theirproducts, higher levels o segregation makeit easier or such lenders to ocus their mar-keting to communities o color.
Are borrowers wholive in more raciallysegregated metro-politan areas more orless likely to obtainsubprime loans?
A ew previous studies have looked at therelationship between residential segrega-tion o a metropolitan area, on the onehand, and that metropolitan area’s overallsubprime lending rate or the overall dispar-ity in subprime lending rates between bor-rowers o dierent races, on the other. Tesestudies have generally ound more segre-gated metropolitan areas to have higherrates o high cost lending and higher dispar-ities. However, previous studies relied onaggregate metropolitan area-level data. TeFurman Center’s research extends this pre-vious work by using data on individual bor-rowers to explore the relationship betweenblack-white segregation and Hispanic-whitesegregation in a metropolitan area and theprobability that individual borrowers o di-erent racial groups would obtain subprimeloans. By looking at the outcomes o
individ-ual
borrowers, we were able to control notonly or metropolitan area characteristics,but also or some key borrower characteris-tics, improving our condence in our results.Using this method, we could also see howthe relationship between segregation andhigh cost borrowing varied or borrowers o dierent races.Our analysis looked at 200 MetropolitanStatistical Areas (MSAs) across the country.o identiy levels o segregation, we usedthe dissimilarity index—a commonly-used
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