Segregation and the subprime lending crisis

The recent rise in subprime lending and record-level foreclosure rates has generally been explained in terms of ill-informed borrowers, irresponsible lenders, greedy investors, lax regulators, fraudulent appraisers, and other institutional actors in the financial and insurance services industries. Few have asked whether broader contextual factors influence the growth of high-cost loans. Some research has examined selected individual- and neighborhood-level predictors of subprime lending. In particular, prior research has shown that minorities or residents of predominately minority neighborhoods are more likely to receive a subprime loan. However, little research has examined the possible effects of racial segregation and the concentration of people of color. Using multivariate OLS regression models, with data from the 2006 HMDA report, the 2006 American Community Survey, and the 2000 Census, and credit score information, we find evidence that even after controlling for percent minority, low credit scores, poverty, and median home value, racial segregation is clearly linked with the proportion of subprime loans originated at the metropolitan level. We also find that black segregation has a stronger effect than Hispanic segregation. This research suggests that the context of racial segregation is an important determinant of subprime lending. We also find that general education levels seem to be an important protective factor against high proportions of subprime loans. Consequently, policy initiatives should address these broader dimensions of segregation and uneven development, in addition to consumer behavior, banking practices, and regulation of financial services industries.