By Jesus Hernandez

Abundant research exists showing how the current wave of foreclosures from unsustainable subprime mortgage products has brought a devastating loss of wealth to non-white neighborhoods across the US. Accordingly, the case against racially concentrated subprime lending should demonstrate not only how the inequitable effects of the mortgage meltdown are concentrated in non-white communities but also how these inequities remain rooted in long-standing patterns of housing discrimination that shaped segregated space – the essential condition for a racialized concentration of subprime lending to take place. Racially defined residential space should be seen as “ground-zero” for the foreclosure crisis and remains an important piece of evidence in building the case against predatory lending. The task before us is to clearly articulate how the uneven effects of subprime lending, a seemingly place-less and colorblind market phenomenon, continues the intergenerational practice of housing discrimination in the very neighborhoods initially shaped by race-based housing policies.

Here I offer two suggestions for building the fair housing case against predatory lenders and for stabilizing communities under stress. First, fair housing litigation and advocacy can benefit from contexualizing predatory lending within the historical record of racialized housing thereby linking the economic catastrophes brought on by the subprime mortgage meltdown to past episodes of racially disparate market action. Second, fair housing advocates can use this evidence to justify improvements to federal mortgage reporting requirements that can lead to more effective monitoring of financial institutions. The improved lender monitoring will aid in demonstrating how the spatially and racially concentrated loss of homeownership seen today represents a continuum of housing discrimination in segregated residential space. In turn, practical and expedited solutions for crisis relief can be targeted to those places and populations most affected by the on-going financial crisis.

Building the fair housing case against predatory lenders remains complicated by explanations that frame the cause of the mortgage meltdown as complex financial processes removed from social decisions or as irresponsible consumer action. Missing from this reasoning, of course, is acknowledging the racialized predatory lending that took place in predominantly non-white neighborhoods by subprime lenders supported by Wall Street investment. Here the significance of race-based market manipulation cannot be overstated. Holding financial institutions accountable for the social and financial damage brought by the default of rapidly unsustainable mortgages requires identifying the specific market practices that made racially segregated space vulnerable to predatory capital extraction. Connecting these historical practices to subprime lending is surprisingly very simple but because this link developed over decades of time through the formative years of the modern real estate and mortgage industry, it is easily overlooked. More often, the link is simply explained away as an epiphenomenon of competitive supply and demand markets. The link can be summarized as follows.

During the 1900s, community builders and the National Association of Real Estate Boards (NAREB) actively promulgated the use of racially restrictive covenants limiting the purchase of newly constructed homes to whites. The covenants were used as a way to create value and demand for new suburban residential developments. The NAREB also guided the development of appraisal techniques and practices that conditioned property values upon the racial characteristics of neighborhood residents. When NAREB members were appointed to draft FHA underwriting guidelines for New Deal home financing programs, racial restrictions became a formal condition of mortgage credit and fueled the formation of the homogeneous residential suburbs during the post-war housing boom.

New Deal FHA guidelines also prohibited, or “redlined,” access to credit in neighborhoods with non-white residents. The subsequent decline in redlined property values made inner-city neighborhoods vulnerable to urban redevelopment programs that assembled de-valued property for transfer to commercial developers. The forced exodus of non-white residents from redevelopment zones to areas without racially restricted covenants created new racial boundaries for residency and led to a second wave of mortgage redlining during the period 1950-1980. By this time, racialized residential boundaries were firmly embedded in the social and physical landscapes of our cities. Federal urban policy, and private implementation of said policy by the real estate industry, effectively redirected the flow of capital towards predominantly white suburban residential development. Concomitantly, these race-based market interventions shaped segregated space and created credit-starved neighborhoods now vulnerable to subprime and predatory lending.

When intensive bank deregulation shifted the risk traditionally associated with lending in segregated space to Wall Street via securitization, the rush was on. During the period 2003-2006, data from the Home Mortgage Disclosure Act (HMDA) revealed an intense concentration of unsustainable subprime loans in previously redlined areas, a market phenomenon now referred to as “reverse redlining.” To no one’s surprise, mortgage default and foreclosure rates also mirror subprime loan concentrations in redlined space. Accordingly, race remains a salient factor in understanding the current housing crisis as it played a central role in triggering the wave of foreclosures that eventually froze Wall Street credit markets.

Making the connection between financially vulnerable segregated space and today’s predatory lending practices exposes the inadequacies of federal financial monitoring policies designed to keep discriminatory mortgage lending practices in check. Lender monitoring currently takes place via the Community Reinvestment Act (CRA), which discourages redlining by assessing a financial institution’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods; and HMDA, which mandates lenders to report data regarding loan originations, loan pricing, loan purchases, and applicant demographics. Because these monitoring practices failed to detect in advance the disparate lending practices seen today in segregated space, connecting the history of housing discrimination to the current wave of foreclosures occurring in non-white communities becomes the starting point for justifying changes to federal monitoring policy.

Housing advocates should now push for three broad changes to federal monitoring that can improve access to fair credit and fair housing. First, expand HMDA reporting requirements to keep pace with industry innovation. The list of lenders required to report should now include all financial institutions and their affiliates that generate loans for securitization and eventual sale on Wall Street. Also, expand HMDA reporting to include data on borrower interest rates, credit scores, loan reset periods, balloon payments, adjustable rate mortgage margins and indices, and loan product underwriting (e.g. stated income or low-documentation loans). These data will help identify racial and spatial concentrations of dangerous credit products that strip away home equity and cause financial instability. Simply monitoring high-cost loans as the primary indicator of predatory lending fails to capture data on important loan characteristics that help identify abusive lending practices.

Finally, housing advocates should push for transparency and enforcement of loan modification reporting requirements imposed by federal bailout programs. Loan modifications are critical to stabilizing neighborhoods experiencing stress from concentrated subprime lending and mortgage foreclosures. Proper reporting of loan modification activities remains essential to monitoring the actions of lenders and asset managers who are unwilling to move quickly to modify unsustainable loans. When used with HMDA data on subprime lending and mortgage default data, the tracking of loan modification applications and outcomes can help demonstrate disparate patterns of treatment by lenders. Thus housing advocates can gain leverage against lenders by showing how the number of approved loan modifications in segregated space fails to keep pace with their mortgage foreclosure rates thereby inhibiting federal efforts to stabilize communities in stress. Such leverage can be used to push these same lenders to remedy past practices by improving access to safe financing products designed for home buyers in crisis neighborhoods. The resulting increase in homeownership opportunities will slow the pace of investors “bottom-feeding” on repossessed homes. This will expedite the rebuilding of communities with stable families and support networks rather than encouraging investor-owned neighborhoods of unstable renters.

Keeping an innovative global credit market accountable for abusive lending practices is a process that relies upon public scrutiny for its effectiveness. Improving the data available for fair housing practitioners can be a valuable strategy in revealing disparate credit practices, advancing fair credit and fair housing enforcement, and act as a pre-emptive strike against dangerous profit-taking from financially vulnerable communities in the future. These steps will go a long way in reversing the effects of the new global financial infrastructure now operating as a Plessy-type credit market that continues to separate and divide our communities.

Jesus Hernandez is a real estate broker practicing in the Sacramento area with over 20 years of experience in residential sales and financing. His research connects the current subprime loan crisis to historical processes of mortgage redlining and residential segregation and demonstrates how racialized mortgage credit practices reproduce long-standing spatial and social patterns of inequality. He is currently completing his Ph.D in sociology at the University of California at Davis.