African-Americans were more likely to be offered subprime loans over whites who had similar financial backgrounds, according to a new study that looks at institutional racism in the nation’s housing crisis. While other economic studies have concluded that leveraged refinancing, overbuilding, collapsing home prices and a poorly regulated mortgage market were primarily responsible for the rise in foreclosures, the authors of a new Princeton University study argue that the foreclosure crisis also had racial dimensions. The study, by two Woodrow Wilson School of Public & International Affairs scholars, found that racial discrimination from the point of origination to the point of foreclosure, played a key role in the large numbers of minority borrowers who have defaulted on their home loans. The authors of the study, published this month in the American Sociological Review, looked at credit profiles, down payment ratios, personal characteristics and residential locations of white borrowers and compared them with minority borrowers with similar qualities in 100 major metropolitan markets. The study found that from 1993 to 2000, the share of subprime mortgages going to minorities increased from 2% to 18%. The authors argue that residential segregation created a niche of minority clients who were marketed risky subprime loans. “Four decades after passage of the Fair Housing Act, residential segregation remains a key feature of America’s urban landscape. Levels of black segregation have moderated since the civil rights era, but declines are concentrated in metropolitan areas with small black populations,” the study notes. Findings show that such black segregation, and to a lesser extent Hispanic segregation, are powerful predictors of the number and rate of foreclosures in the United States — even after removing the effects of a variety of other market conditions such as average creditworthiness, the degree of zoning regulation, the overall rate of subprime lending, or coverage under the Community Reinvestment Act, an act passed in the 1970s to reduce redlining. Minority-dominant neighborhoods continue to be underserved by mainstream financial institutions, while predatory lenders are commonplace in such neighborhoods, the study notes. “This study is critical to our understanding of the foreclosure crisis since it shows the important and independent role that racial segregation played in the housing bust,” said Jacob Rugh, one of the authors and a Ph.D. candidate at Woodrow Wilson. “While policy makers understand that the housing crisis affected minorities much more than others, they are quick to attribute this outcome to the personal failures of those losing their homes — poor credit and weaker economic position,” noted Douglas Massey, the study’s other author and a professor at Woodrow Wilson. “In fact, something more profound was taking place; institutional racism played a big part in this crisis.” The authors call on the federal government to take stronger steps to rid U.S. real estate and lending markets of discrimination via amendment of the Civil Rights Act with enforcement mechanisms to uncover discrimination and sanction those who discriminate. The pair recommends sending “testers” — black and white purchasers into the marketplace to test whether they are treated differently. Write to Kerry Curry.
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