The high cost of segregation: exploring racial disparities in high-cost lending.

 
Introduction 
 
I.   Racial Disparities in Subprime Lending 
 
II.  Causes of Racial Disparities in Subprime Lending and the Role of 
     Segregation 
     A. Underlying Economic Inequality 
     B. Geographic Differences and Borrower Behavior 
     C. Racial Discrimination, Steering, and Targeting 
     D. The Role of Segregation 
 
III. Prior Investigations of the Relationship Between Segregation 
     and Subprime Lending 
 
IV. Empirical Analysis 
    A. Methodology 
       1. Metropolitan Area Segregation and Lending 
       2. Neighborhood Racial Composition and Lending: The 
          Case of New York City 
     B. Results of Regressions 
        1. Metropolitan Area Segregation and Lending 
        2. Neighborhood Racial Composition and Lending: The 
           Case of New York City 
 
Conclusion 
 
Appendix 

INTRODUCTION

The current foreclosure crisis has devastated many predominantly black or Hispanic communities, in part because blacks and Hispanics were disproportionately likely to finance their home purchases or refinance existing mortgages with subprime mortgages, which enter foreclosure at far higher rates than prime mortgages. Across the nation, blacks were almost three times more likely to receive a subprime first lien home purchase mortgage than whites, and Hispanics were 2.6 times more likely than whites to receive such loans. There are a variety of explanations for these stark racial disparities in subprime lending, ranging from underlying income and wealth inequalities between whites, blacks, and Hispanics to intentional discrimination in lending practices.

Efforts to determine which of these explanations are most apt and to craft appropriate policy responses to the racial disparities in the share of subprime mortgages should take into account the relationship between existing levels of residential segregation and the racial disparities in the types of mortgages homeowners received. Residential segregation may make discrimination more likely by providing easy geographic markers for the targeted racial groups, for example. Residential segregation may also exacerbate the exclusion of blacks and Hispanics from more competitive financial markets and from other consumers who are more sophisticated about mortgage products. Understanding the relationship between segregation and racial disparities in subprime lending may thus help elucidate the causes of those disparities. Similarly, understanding the relationship may help policy-makers develop better solutions to the racial disparities in the mortgage market. If levels of segregation are highly correlated with racial disparities in lending, policy-makers may need to devote more resources to ensuring that minority communities are not targeted by subprime lenders or deserted by prime lenders. If levels of black-white segregation are more highly correlated with racial disparities in lending patterns than levels of Hispanic-white segregation, policy-makers may need to fine-tune programs to take into account differences between highly segregated black and Hispanic communities.

This Article explores the relationship between residential segregation in about 200 metropolitan areas across the country and the propensity of borrowers within those areas to receive subprime loans. It also examines how borrowers of all races who live in highly segregated minority neighborhoods fare in the mortgage market, compared to those who live in more heterogeneous communities.

Part I reports the stark racial disparities in the percentage of subprime mortgages received by members of different racial groups. Part II explores the various mechanisms that might explain those racial disparities, and assesses whether and how a higher level of segregation in a metropolitan area might magnify them. Part III reviews what we know--and do not know-from earlier studies about the relationships between subprime lending and neighborhood segregation. Part IV describes our study methodology and reports our findings.

I. RACIAL DISPARITIES IN SUBPRIME LENDING