Along with personal credit problems, the collapse of home prices and other factors, institutional racism has been cited as a causal influence on the U.S. foreclosure crisis, according to a study by two scholars at the Woodrow Wilson School of Public and International Affairs at Princeton University.
The study, published in the 2010 issue of the American Sociological Review, suggests that racial segregation is an accurate indicator of the number and rate of foreclosures in an area, separate from other market conditions.
The study, co-authored by Jacob Rugh, a doctoral candidate, and Douglas Massey, a professor of Sociology and Public Affairs, analyzes the role of segregation in the American foreclosure crisis in the nation’s 100 largest metropolitan areas.
St. Louis is among the 100 largest metropolitan areas that the study analyzed, and the effects that this study suggests are evident here.
“St. Louis is still a very segregated place, so it has above-average levels of foreclosure,” Massey said.
“In St. Louis, foreclosures are disproportionately distributed in black neighborhoods.”
According to their research, the 1990s saw a major increase in lending to minority groups, largely from predatory financial institutions. In minority neighborhoods there are a number of pawn shops, payday lenders and check cashing services that charge high interest rates and fees. These predatory institutions made it easier for minorities living in these segregated neighborhoods to opt for subprime mortgages with high interest rates.
“The payday loans and check cashing institutions are evidence of under-serving in black neighborhoods so people are used to being taken advantage of,” Massey said. “[Black neighborhoods] had no basic comparison to the way others are served. [Banks] with subprime lending practices are able to take advantage of low-income people in the same way.”
It’s no secret that the effects of the 2008-2009 recession hit minority groups harder than whites. The study illustrates that the disparity does not derive from the fact that minorities were in weaker economic standing and are more likely to default on their loans, but rather from lending practices that started nearly two decades earlier.
To prove this point, the study compared white and minority borrowers with similar credit profiles. They found that African Americans were far more likely to receive a subprime mortgage, and both blacks and Hispanics were more likely to receive loans with poor terms.
The study suggests that predatory lenders, concentrated unequally in largely minority areas, made it easy for large numbers of people in close proximity to be hit by the foreclosure crisis.
The majority of predatory financial institutions are disproportionately concentrated in low-income and minority neighborhoods. Similarly, banks are not normally found in these same neighborhoods.
“Our area has the highest disparity of unbanked and underbanked African Americans,” Mira Tanna of the St. Louis Equal Housing Opportunity Council said.
“We looked at the location of where banks are, and if you look at St. Louis city and St. Louis County there are 7 zip codes that have no banks in them, and it so happens they are all predominately African-American neighborhoods.”
Tanna said several components that have contributed to the problem in St. Louis. First, banks haven’t served African-American communities well.
“I think banks can take some lessons in the types of marketing strategies and locations that these alternate financial institutions use and really compete,” Tanna said.
Second, regulatory agencies have not been effective in enforcing equal housing and civil rights legislation.
“I think our government programs have also failed us. The whole idea of the community reinvestment act is that you can’t ‘redline’ certain areas,” Tanna said. “We have ‘redline’ complaints that we hope are settled.”
Last, that the community is not largely engaged.
The study calls upon the federal government to identify institutional discrimination and sanction those who practice discrimination. According to the article, this would involve amending the Civil Rights Act to include enforcement mechanisms to uncover discriminatory practices.
Without these improvements, Tanna suggests, another financial collapse is possible, with even further damage to the African-American community.
Tanna said, “Those gaps in housing for minorities have reverberations through education, employment and through all aspects of life for people in our community.”