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Race-based predatory lending fueled housing crisis

By NICK CAREY
October 4, 2010

Foreclosed house for sale in Denver (Reuters)

Predatory lending aimed at racially segregated minority neighborhoods led to mass foreclosures that fueled the U.S. housing crisis, according to a new study published in the American Sociological Review.

Predatory lending typically refers to loans that carry unreasonable fees, interest rates and payment requirements.

Poorer minority areas became a focus of these practices in the 1990s with the growth of mortgage-backed securities, which enabled lenders to pool low- and high-risk loans to sell on the secondary market, Professor Douglas Massey of the Woodrow Wilson School of Public and International Affairs at Princeton University and PhD candidate Jacob Rugh, said in their study.

The financial institutions likely to be found in minority areas tended to be predatory — pawn shops, payday lenders and check cashing services that “charge high fees and usurious rates of interest,” they said in the study.

“By definition, segregation creates minority dominant neighborhoods, which, given the legacy of redlining and institutional discrimination, continue to be underserved by mainstream financial institutions,” the study says.

Redlining is the practice of denying or increasing the cost of services, such as banking and insurance, to residents in specific areas, often based on race.

The U.S. economy is still struggling with the effects of its longest recession since the 1930s, which was triggered in large part by the housing crisis, which was in part triggered by the crash of the subprime loan market.

Subprime lending refers to loans made to consumers with poor credit and others considered higher risk. They tend to have a higher interest rate than traditional loans.

The study, which used data from the 100 largest U.S. metropolitan areas, found that living in a predominantly African-American area, and to a lesser extent Hispanic area, were “powerful predictors of foreclosures” in the nation.

Even African-Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans, according to the study.

“As a result, from 1993 to 2000, the share of subprime mortgages going to households in minority neighborhoods rose from 2 to 18 percent,” Massey and Rugh said.

They said the U.S. Civil Rights Act should be amended to create mechanisms that would uncover discrimination and penalize those who discriminated against minority borrowers.

The study is published in the October issue of the journal.

Copyright © 2010 Reuters

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4 Responses to Race-based predatory lending fueled housing crisis

  1. Almandine

    October 4, 2010 at 9:20 am

    Compliments of good ole Barney Frank.

  2. Guardhouse Lawyer

    October 4, 2010 at 12:22 pm

    Yes, that mean old Barney Frank. He held a gun to the heads of all these lenders and said, “Greed is good. You must make usurious loans and charge outrageous fees, otherwise bad things will happen to you.” None of those mortgage originators, brokers, processors, lenders., etc., would have engaged in these predatory practices if Barney and friends had not made them do so.

    Sheesh.

  3. Mightymo

    October 4, 2010 at 6:19 pm

    I say that this is simply BS. This is an attempt to divert attention from the truth. Predatory lending on this scale didn’t simply just happen, it was promoted by creating an environment that favored it.
    The banking industry, and a predominantly Republican group in government influenced by the banking industry fought for over 20 years to change banking rules created after the depression. The rules restricted the banking industry and prevented them from making money at the expense of the economy.
    Clinton signed into law what the house and senate requested at the very end of his presidency in Nov 1999.
    Bush, in mid 2001 made public his idea and intention of promoting home ownership as a part of the American dream, and as a means of promoting economic growth.
    In mid 2002, Bush through HUD, and Fannie Mae and Freddie Mac, provided funds, tax incentives, and most importantly, changes in lending practices to drastically increase the amount of home purchases by African Americans and Hispanics in the US. This plan was expected to increase the HUD’s funding by 2.1 billion dollars.
    These incentives, for both the banking industry and the mortgage industry were in my opinion, the cataylist for inept financing and the eventual economic collapse.
    Strangely, I rarely ever hear anyone contribute bush’s obvious political push from the top down of the mortgage industry. I clearly remember the drastic increase of idiotic lending practices right after his 2001-2002 push for lending to minorities.
    After owning my home for only a few years, I began to receive all sorts of crazy fliers in the mail for refinancing, along with dozens of visits to my front door by people eager to sign me up for refinancing.
    One plan in particular that I thought was absolutely ridiculous and crazy was the interest only plan. Basically, you pay the interest only for the first 10 years, then begin to pay the principle. The benefit was supposedly more money up front to buy all the goofy things you always dreamt of.

  4. woody188

    October 4, 2010 at 8:16 pm

    They were giving out jumbo liar loans to migrant workers. I’m not sure who was taking advantage of who in those cases. But I did note back in 2006 that more African-Americans were getting option ARM’s versus other groups.

    My one friend is Asian-American, her husband African-American, and I warned them not to do an ARM. They told me it was the only loan they were offered. I told them they should have shopped around with other lenders. Sigh…

    There is a case where interest only loans can be of help. For instance, I have two houses, one I’d like to sell and I don’t care about building more equity in it. So I can refinance to an interest-only loan and make smaller payments until it finally sells. Having two mortgages is a pain in the rear.