Racial Segregation and the American Foreclosure Crisis

Abstract

Although the rise in subprime lending and the ensuing wave of foreclosures was partly a result of market forces that have been well-identified in the literature, in the United States it was also a highly racialized process. We argue that residential segregation created a unique niche of poor minority clients who were differentially marketed risky subprime loans that were in great demand for use in mortgage-backed securities that could be sold on secondary markets. We test this argument by regressing foreclosure actions in the top 100 U.S. metropolitan areas on measures of black, Hispanic, and Asian segregation while controlling for a variety of housing market conditions, including average creditworthiness, the extent of coverage under the Community Reinvestment Act, the degree of zoning regulation, and the overall rate of subprime lending. We find that black residential dissimilarity and spatial isolation are powerful predictors of foreclosures across U.S. metropolitan areas. In order to isolate subprime lending as the causal mechanism whereby segregation influences foreclosures, we estimate a two-stage least squares model that confirms the causal effect of black segregation on the number and rate of foreclosures across metropolitan areas. In the United States segregation was an important contributing cause of the foreclosure crisis, along with overbuilding, risky lending practices, lax regulation, and the bursting of the housing price bubble.

Power, Intergroup Conflicts and Social Stratification in the United States: What has the Global Crisis Taught us?

“…Regardless of the level of uncertainty in the economic environment, the black group is segregated across the occupational spectrum. This is consistent with Rugh and Massey (2010) mentioned in the previous section, but also with Lacy (2012) who looked at the foreclosure rates of the black group by level of income. The findings show that the foreclosure rate of borrowers from the black group is the highest amongst low-income, but remains at the same level, around 10 percent, also for high-income borrowers.…”

“…The last thirty years have indeed been characterised by the evolution of financial exclusion of poor and minority households into their financial exploitation. Rugh and Massey (2010) estimate the effect of residential racial segregation on foreclosures in the US, controlling for factors such as housing price inflation, overbuilding, excessive subprime lending, and failure to assess creditworthiness. The results…”

Spatial Analysis of Clustering of Foreclosures in the Poorest-Quality Housing Urban Areas: Evidence from Catalan Cities

“…Within this context, it is possible to observe links between the spatial concentration of foreclosures and falling property values at the neighborhood level [22][23][24][25][26]. Relationships have also been observed with increases in crime rates [27][28][29][30][31] and racial segregation [32,33]. Several studies have also focused on the negative effects that increases in the number of foreclosures have had on public health [34][35][36][37] and on how different groups of local residents perceive the quality of life in their respective neighborhoods [38].…”

Foreclosures and crime: A city-level analysis in Southern California of a dynamic process

“…If such neighborhoods are indeed more vulnerable to foreclosures, this would imply that the main effects of racial/ethnic heterogeneity and racial segregation, as well as their interaction, will have positive effects, as noted in Table 1. Whereas one study showed that metropolitan areas with more racial segregation experienced higher foreclosure rates (Rugh and Massey 2010), we test whether the combination of foreclosures and segregation also translates into higher crime rates.…”