Discrimination: Minority Mortgage Market Experiences Leading Up to and During the Financial Crisis

Dave here. It took this many studies to get to “Discrimination exists”? Ah well. Important to have the data underpinning the reality. But it’s pretty obvious: minority borrowers have a larger majority of their wealth tied up in their homes, so of course they’re more vulnerable to downturns that have wide-ranging effects on their economic well-being. If anything that’s a legacy of centuries of discrimination.

This is another reason, incidentally, why industry rebuttals to the foreclosure crisis and its associated frauds always fell back on the “deadbeat” trope. Quite simply, it’s playing to a crude stereotype, one created by racially discriminatory lending.

By Stephen L. Ross, Professor in the Department of Economics, University of Connecticut. Originally posted at VoxEU

The foreclosure crisis and the growth of subprime lending that preceded the crisis have disproportionately affected low-income and minority neighborhoods, having dire consequences for minority homeownership (Geradi and Willen 2009). Some have suggested that subprime lending played a substantial and general role in the foreclosure crisis (Mian and Sufi 2009); others argue that high cost lending in minority neighborhoods contributed to the high foreclosure rates among black and Hispanic borrowers (Reid and Laderman 2008). Bhutta and Canner (2013) find a lower incidence of high cost loans within banks’ Community Reinvestment Act (CRA) assessment areas, consistent with mortgage brokers playing a role in high cost lending. Further, discrimination in the underwriting of prime mortgages may cause minority borrowers to select into the subprime market (Munnell et al. 1996, Ross and Yinger 2000). In fact, the U.S. Department of Justice has recently filed several cases against major lenders for steering minority borrowers into subprime loans.

At the same time, the purpose of subprime lending was to provide credit to borrowers who faced credit constraints in the primary mortgage market; such borrowers should be expected to face a higher price of credit and have worse credit market outcomes. African-Americans and Hispanics have lower levels of wealth, and as a result are likely to face significant downpayment constraints that discourage homeownership (Deng et al. 2003, Gyourko et al.1999, Duca and Rosenthal 1994). Minority mortgage applicants tend to have lower credit quality and incomes – as well as higher loan-to-value ratios – than white borrowers (Ross and Yinger 2000, Bhutta and Canner 2013). In fact, many studies of loan pricing at the individual lender level find at most modest and often zero racial and ethnic differences in prices when controlling for observable characteristics (Black et al. 2003, Courshane 2007, Courshane and Nickerson 1997).

However, few studies assess market wide racial and ethnic differences in either the price of credit or credit market outcomes, such as mortgage delinquency or foreclosure. Several studies use proprietary samples to examine the outcomes of minority borrowers. On the price of credit, Reid and Laderman (2009) find substantial racial and ethnic differences in the likelihood of receiving a high cost or rate spread loan, and find that the wholesale origination channel plays a major role in explaining the incidence of high cost loans for all demographic groups. Haughwout et al. (2009) find no racial differences in the price of credit for 2/28 mortgages in 2005, while Ghent et al. (2013) find racial and ethnic differences for longer-term adjustable rate mortgages that are concentrated in the purchase market and among non-depository lenders. Further, Reid and Laderman (2009) find substantial racial differences in the likelihood of default among loans to African-Americans and Hispanics. One key limitation of these papers is that the samples tend to be dominated by privately securitized loans, and so are composed primarily of non-conforming loans originated in what is thought of as the subprime mortgage market.

A recent paper by Bayer et al. (2014) examines racial and ethnic differences in the incidence of high costs loans in a sample that provides broad coverage of the mortgage market during the crisis and the period leading into it. They draw samples of home purchase and refinance loans in seven major metropolitan areas between 2004 and 2008 from the Home Mortgage Disclosure Act data. They merge this data with detailed assessor, transaction, and lien data to obtain information on the house price, the combined loan-to-value ratio, the type of mortgage (e.g. adjustable or fixed rate), and the address – then providing these addresses to a major credit repository in order to obtain anonymous loan files with detailed credit history information. Using the resulting sample, they estimate models on the likelihood of obtaining a high cost or rate spread loan using detail controls for mortgage risk factors and find that blacks and Hispanics are more likely to have high cost loans for both home purchase and refinance loans across all metropolitan markets. Furthermore, a majority of the observed differences are associated with the lender, rather than resulting from differences across races at the same lender. For blacks in the home purchase market, the racial differences are spread across the entire market, rather than being concentrated among loans with credit risk factors that are typically associated with subprime lending. For Hispanic homebuyers, differences are concentrated among borrowers with high loan-to-value ratios and subprime credit scores. Finally, they find that racial differences in high cost loans are associated with locations where most black borrowers have relatively low levels of education, suggesting a role for financial sophistication in explaining the pervasiveness of high cost loans among black borrowers.

In a companion paper using the same sample, Bayer et al. (2012) examine racial and ethnic differences in loan performance. They examine the likelihood of mortgage delinquency and foreclosure from 2005 to 2009 for mortgages underwritten between 2004 and 2008. They find substantial racial and ethnic differences in the likelihood of delinquency and foreclosure, even after controlling for credit risk factors and for contemporaneous estimates of negative equity and county-wide risk of unemployment. Racial differences in unemployment risk can explain part of the difference for black homebuyers, and the remainder appears to be concentrated among borrowers who have very high debt-to-income ratios. For Hispanics, ethnic differences in county employment rates cannot explain the observed differences, but the delinquency and foreclosure differences are concentrated almost entirely in counties with the highest overall unemployment rates for Hispanics. Further, the unexplained racial and ethnic differences are concentrated among individuals who purchased their homes near the peak of the housing and mortgage market expansion, and these effects are largest among borrowers with high debt-to-income ratios and who have been exposed to low employment rates. Bayer et al. argue that this evidence is consistent with a process where borrowers sort into homeownership in part based on their expected risk of adverse future events. As credit becomes more easily available, the new entrants to the housing market will tend to be those who face the highest risks of negative outcomes during an economic downturn, and these effects are felt most dramatically among minority borrowers who tend to be more vulnerable to economic downturns (Hoynes et al. 2012).

Minority homebuyers – especially blacks – tend to face a higher cost of mortgage credit and had substantially worse credit market outcomes during the recent downturn than white homebuyers with equivalent mortgage risk factors. In terms of the price of credit, a majority of the unexplained differences are associated with the lender from which the homebuyer obtained credit. These effects are felt most among minority borrowers with the lowest levels of education, and are likely due in part to the concentrated activity of subprime lenders in minority neighborhoods and a lack of knowledge of financial markets among minority borrowers with low levels of education. On the other hand, most of the racial differences in loan performance that are unexplained by traditional credit risk factors cannot be captured by controlling for the lender or other aspects of subprime lending. African-Americans and Hispanics appear to be more vulnerable to an economic downturn and to the associated risks of unemployment and housing price declines than observationally similar white homeowners. This higher vulnerability is most pronounced for borrowers who purchased their homes right before the onset of the financial crisis, even after controlling for the increased risk of negative equity associated with buying at the peak of the market. While the expansion of the subprime sector may have contributed to a higher cost of credit for black homebuyers, their concentration in high cost loans (and in the subprime market more generally) can explain only a small portion of the racial differences in foreclosure. Rather, a broad spectrum of black and Hispanic borrowers appear to be especially vulnerable to the economic downturn and associated shocks to their ability to meet their mortgage commitments.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. Ditto

    Many aspects of the economic plight of People if color is tied to race

    From the job search:

    To health care:

    To wages:

    None of these trends, including those with housing, are new.

    Its why I’m so against neoliberal polices. They disproportionately harm people of color:


    1. jrs

      Wow is that first link depressing, as bad for introverts as it it for blacks. Of course I do think there is additional discrimination based on race.

  2. john

    The larger issue is the long standing systemic racism against minorities and specifically against blacks in the US gets no serious attention and therefore gets no action for change. Unfortunately, the plight of blacks will continue to be marginalized.

    1. Ditto

      The systemic racism exists based on the denial you mention to the point that some Whites will claim its a matter of merit like you find us argued in the tech sector. In other words , the vice of system exclusion is passed off as a virtue. They will argue that “the black homeowners did not merit prime ” all the while ignoring that even those that did were steered to subprime. I have come to view “merit”‘with a great deal of suspicion. I view the term as code ( like when not hiring claiming one is not a “right fit for the job”) for race. EEOC enforcement is so gutted and the rejection subtle enough that race can be ignored as the real culprit. Despite the claims otherwise, I’ve seen too many cases of this. My grand parents once described systemic racism as a con game of hiding the ball under the cup. You think you know the rules but as soon as you try to fairly follow you realize the rules are rigged. Eg I have a friend who obtained a job in a prominent law firm as an associate. He explained how on the surface the rules looked the same but underneath was a pattern of career sabotage.

  3. diptherio

    …the purpose of subprime lending was to provide credit to borrowers who faced credit constraints in the primary mortgage market…

    This makes it sound like the purpose of subprime was to help borrowers…WTF? Subprime loans originated because the they were a necessary part of the control-fraud carried out by Wall Street execs to increase their own wealth. Duh! Who actually believes, in this day and age, that the d-bags on Wall Street (present company excluded) actually do anything for the sake of anyone but themselves? This guy, apparently….jeesh.

    1. Jared

      I believe this is technically true, though one might substitute “original” or “nominal” for “primary.” Much like the subprime auto lending boom we’re in at the moment, these policies didn’t arise out of a vacuum, but had some relationship to a federal initiative to expand ownership of a certain asset. At least that’s what I was told when I heard Austan Goolsbee, who was then economic adviser to the Obama campaign, give a lecture at my college in 2007/8. In any case, it does seem that a large part of reason why these sorts of practices have metastasized to the degree they have is that there is, from a certain and influential perspective, some sort of social good that is accomplished by allowing a wider range of potential buyers to take out loans for certain things.

      1. Jared

        Oops, excuse me — I meant to say that one might specify that that was the original or nominal purpose of subprime lending in the above quote.

  4. BITFU

    And now, a Just Get 3! public service announcement from Jay-Z:

    “Look, I grew up a poor black kid in Brooklyn, I was willing to do anything to get out. I sold drugs, ran the streets and lived ‘The Hood Life’. But I got lucky; I found music before the bullets found me.

    I learned a lot of hard lessons along the way. And here’s lesson number one: Nobody’s gonna look out for you. It’s just the facts. You got to figure out on your own.

    Take, buying a house and getting a mortgage. Yeah, I know it’s not glamorous, but this the real deal, man. This is your life, don’t screw it up! You’ve busted your ass, held down a job and you done good. Now you’re ready to get a little something for you and yours’.

    So what do you do? Do you go to the “We Have Government Pamphlets on Getting a Mortgage” Office next to the DMV” ? Do you seek out a loan of color because you just know blacks never never rip off their own? [Jay Z laughs at that notion…]

    No and No.

    Here’s what you do. And-it-really-is-this-simple.

    You get your credit report (you are entitled to this by law). Then, you go to 3 different mortgage companies and say ‘I realize that if I go with you, you will need to run another credit report, but based on this report, please give me a good faith estimate for the purchase of my new home.’

    Three different companies. No exceptions!

    Then, compare the numbers. Play them off each other. Ask ’em, ‘Why are you quoting a 9% rate, when this other company can get me a 6% rate? Do this across the board on rates and fees. And watch how the deals being offered improve.

    All of these guys want one thing, and one thing only: To get paid as much as possible, as quickly as possible. Don’t hate ’em for that. That’s just the game, man. People aren’t trying to rip you off because you’re black. They are trying to rip you off because they think you’re stupid.

    But you’re not stupid. Get 3 Good Faith Estimates. Play them off each other and, like magic, you will get a much better deal and you will not get ripped off. I’m tellin you: Just Get 3!”

    And now, back in the real world: We all know that ain’t happening. The fact that blacks pay more in mortgage fees and get ripped off is a cultural failure within the black community.

    Ask anyone who actually works as a loan officer or real estate agent. What would work better at improving the plight of blacks and mortgages: The Just Get 3! Program or whatever bullshit can be extrapolated from the nonsense written by Stephen Ross?

    It really is that simple: A public service initiative by Jay Z, Lebron, Richard Sherman, Obama, ect. would do wonders. But it won’t happen: Instead, we’ll just follow the lead of useless academics, like Stephen Ross, and useless race-baiters like Al Sharptons—who are nothing more than racial entrepreneurs spewing noise.

    1. Thisson

      This is the money quote: “People aren’t trying to rip you off because you’re black. They are trying to rip you off because they think you’re stupid.”

      This is 100% true. I represented a large number of minority customers who obtained loans at crappy rates compared to whites. What I saw was that most of the loan officers made very little on the majority of their loans; they made the lion’s share of their profits off of that one *sucker* that was willing to grossly overpay. So they would try to keep a constant flow of customers coming through so that they would locate the next sucker as quickly as possible.

      1. Yves Smith

        Whoa, don’t you get that black is presumed to equal stupid? And if everyone who gives you those famed three quotes gives your as black person super inflated ones, trying to play them off against each other won’t get you that far. They know everyone giving prices knows the customer is black and will therefore give “black” prices.

        Same phenomenon is very well documented with women buying cars. BTW.

  5. beene

    Is their and real reason for lower income people paying more; no. The following paragraph is from a hud study.

    The principal finding of this study is that, in comparison to relevant market benchmarks, foreclosure rates among homebuyers assisted through the HOME/ADDI programs are not excessive. In comparison to FHA-insured homebuyers overall, who comprise a similar population of lower-income first-time homebuyers, foreclosure rates in the HOME/ADDI program are consistently lower for all those assisted between 2001 and 2005.
    Read more…….http://www.huduser.org/portal/publications/addi1.pdf

  6. jfleni

    RE: Discrimination … etc

    The nub of the problem with “Barry Bubba” as he stumbles around the links with his Republican and plutocrat buddies, is nothing new at all: His status as the first black president is just the same old “protective coloration” that started with Quimbo & Sambo in Uncle Tom’s cabin, continued with “Daddy Devine” much later on, and continues today with many so-called black leaders who don’t just advise reasonable moderation and common sense, but very often grab their thirty pieces-of-silver first and foremost as they sell their own folks “down the river”!

    The result is both obvious and destructive, and is getting worse.

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