Race, Space, and Cumulative Disadvantage: A Case Study of the Subprime Lending Collapse

Abstract

In this article, we describe how residential segregation and individual racial disparities generate racialized patterns of subprime lending and lead to financial loss among black borrowers in segregated cities. We conceptualize race as a cumulative disadvantage because of its direct and indirect effects on socioeconomic status at the individual and neighborhood levels, with consequences that reverberate across a borrower's life and between generations. Using Baltimore, Maryland as a case study setting, we combine data from reports filed under the Home Mortgage Disclosure Act with additional loan-level data from mortgage-backed securities. We find that race and neighborhood racial segregation are critical factors explaining black disadvantage across successive stages in the process of lending and foreclosure, controlling for differences in borrower credit scores, income, occupancy status, and loan-to-value ratios. We analyze the cumulative cost of predatory lending to black borrowers in terms of reduced disposable income and lost wealth. We find the cost to be substantial. Black borrowers paid an estimated additional 5 to 11 percent in monthly payments and those that completed foreclosure in the sample lost an excess of $2 million in home equity. These costs were magnified in mostly black neighborhoods and in turn heavily concentrated in communities of color. By elucidating the mechanisms that link black segregation to discrimination we demonstrate how processes of cumulative disadvantage continue to undermine black socioeconomic status in the United States today.

Wealth Inequality and Accumulation

“…Although discrimination is notoriously difficult to identify in observational studies, prior research finds evidence consistent with discrimination against African-Americans in lending markets for homes, vehicles, and businesses (Blanchflower et al 2003, Cavalluzzo & Wolken 2005, Charles et al 2008, Charles & Hurst 2002, Oliver & Shapiro 2006), including disproportionate rates of subprime mortgage loans among black households leading up to the Great Recession (Massey et al 2016, Rugh 2015, Rugh et al 2015). Neighborhood segregation further intensified African-Americans’ vulnerability to subprime lending and home foreclosures (Hwang et al 2015, Rugh et al 2015, Rugh & Massey 2010).…”

“…Neighborhood segregation further intensified African-Americans’ vulnerability to subprime lending and home foreclosures (Hwang et al 2015, Rugh et al 2015, Rugh & Massey 2010). We consider it likely that these forms of institutional discrimination, as well as residential segregation, directly contribute to the race gap in wealth.…”

Cumulative Effects of Growing Up in Separate and Unequal Neighborhoods on Racial Disparities in Self-rated Health in Early Adulthood

“…Discriminatory housing policies and practices—including restrictive covenants, redlining, and residential steering as well as differentials in interest rates, subprime loans, and foreclosures—helped produce and continue to perpetuate the distinctive separation of whites and nonwhites in residential space (Peterson and Krivo 2010; Rugh, Albright, and Massey 2015). Of particular consequence is the inequality that often comes with such separation.…”

Evidence and Innovation in Housing Law and Policy

“…Indeed, as foreclosures in certain neighborhood multiply, the impact on property values can contribute to a spiraling foreclosure problem. See Rugh, Albright, and Massey (2015 , the delinquency rate on debt had reached above 10 percent, much higher than seen since the Great Depression. Figure 11.1 shows these patterns.…”