The Dramatic Racial Bias of Subprime Lending During the Housing Boom
Through a strange kind of logic – the sort that makes sense if you're a large bank at the height of the housing boom – high-income black households were actually the perfect customers for subprime loans. Black communities had long been ignored by banks, creating a void in the market for anyone pedaling these relatively new financial products. And subprime loans, while risky, were tremendously profitable (for the banks) when the homeowners didn't foreclose, thanks to their higher fees and interest rates.
Give a black family that could probably qualify for a prime loan a subprime one instead, and the lender likely wins.
In the wake of the housing crash (and even before), banks have been widely accused of doing just this, and the practice has even become the subject of some damning discrimination lawsuits. But here is some data on exactly how skewed things really were: In 2006, at the height of the boom, black and Hispanic families making more than $200,000 a year were more likely on average to be given a subprime loan than a white family making less than $30,000 a year.
"To me, I see that information and I kind of scratch my head," says Jacob Faber, a PhD Candidate in New York University's Department of Sociology who uncovered that gaping disparity studying nationwide mortgage data from that period. One explanation suggests that minority borrowers, particularly those living in communities where bank branches had long refused to go, were simply not financially sophisticated enough to know these loans were wrong for them. "I’m thinking, so for this financial literacy argument to really work, we also have to say that incredibly wealthy blacks and Latinos are less financially savvy than arguably pretty poor white households."
That is probably not the full story here. In research that Faber recently presented at the annual meeting of the American Sociological Association, he analyzed Home Mortgage Disclosure Act data on 3,819,923 loan applications from 2006. About 1.5 million of them were denied. A little over 2 million were approved at a prime rate, and about 200,000 (or 5.4 percent) at a subprime rate.
Relative to comparable white applicants, and controlling for geographic factors, blacks were 2.8 times more likely to be denied for a loan, and Latinos were two times more likely. When they were approved, blacks and Latinos were 2.4 times more likely to receive a subprime loan than white applicants. The higher up the income ladder you compare white applicants and minorities, the wider this subprime disparity grows.
So what was going on here? Intentional malice? Perhaps lenders were convinced that minority borrowers even with high incomes would still pose greater risk over the life of mortgage?
"Certainly we can’t rule out personal bias on behalf of lenders," Faber says. But that's not all of it, either. "There’s a larger part of the story that the financial institutions responsible saw these profitable communities and targeted them specifically because they weren’t risky."
Over the sweep of history, this sounds ironic: Banks that once ignored minority communities were targeting them now to make money, a practice that's been bitterly referred to as "reverse-redlining." But Faber puts it another way: "I think it's tragic," he says. And this data offers another illustration that middle-class blacks have often not been able to leverage their income status for the same benefits as middle-class whites.
Faber was intentionally studying a slice of this mortgage data from the housing peak, when many of these practices were likely at their most pervasive.
"Some people might think that 2006 is a long time ago," he says. "But the consequences of these huge disparities in subprime lending – and then subsequent foreclosures – are going to have really powerful lasting impacts."
Individual families that have lost much of their wealth will struggle to pay for college or manage emergencies. Whole neighborhoods suffering from epidemics of foreclosures will suffer from declining property values and related problems. And even cities that have lost their tax base will struggle to fund schools and police and services. "We might not be able to measure that impact for another five, 10, 20 years," Faber says of this last group of implications. "We might now know what the fallout is."
Top image of foreclosure protesters in Los Angeles in May: David McNew/Reuters