How segregation caused the housing crisis

How segregation caused the housing crisis

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It used to be extremely difficult to get a home loan if you weren't white. Especially if you lived in a black neighborhood. Banks created maps to show which neighborhoods they would not give home loans to, a process coined here in Chicago in the 1960s called "redlining." Black families could rent a house, but many could never own it based on where they lived. And if they did, their house was deemed not-so valuable because of who their neighbors were.

But seemingly overnight, that changed. Anyone could get a home loan
anywhere, no matter how much you made. This seemed like a good idea,
right? Wrong. It turned out to be horrible for minority communities. A new study out of Princeton shows
that segregation caused the foreclosure crisis that we're in. I'm not
just talking about contributed to the crisis - but was a root cause.

How? Let's start at the beginning.

First, there was redlining. The suburban boom era was made possible by government-backed mortgages. But those mortgages mostly went to people who were white because the federal government saw mortgages for black people as too risky to insure. Mortgage insurers would draw red lines around black communities, indicating areas where they wouldn't grant homeowners FHA mortgage insurance. And if you were white and a black person moved in next door, some white people felt it was time to move. Real estate brokers went door to door, telling white residents that the color of their new neighbors' skin was causing the value of their home to decline. So many white people left that we call it "white flight," and it's the reason that many of our cities are intensely segregated.

Then, everything changed. The way we sold home loans, that is. It used to be that a mortgage was just a loan between you and your bank. That's why the bankers were so picky about who they sold to. They wanted to make sure that you could make good on your loan. A mortgage looked like this:

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Diagrams from James Hamilton and Menzie Chin from EconBrowser.

But today there's a lot more money in the world and a lot more people looking for a safe investment with a good return. What's better than a 30-year mortgage? (For more on this, listen to This American Life's podcast "The Giant Pool of Money.") So Wall Street found a way to buy loans from banks and bundle them together into mortgage-backed securities - investments where the return is interest from a lot of people's mortgages. They're much more complicated, like this:
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What is that a picture of? NPR's Adam Davidson explains it best:

"You have Clarence.  He gets a mortgage from a broker. The broker sells the mortgage to a small bank. The small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street. Then Mike takes a few thousand mortgages that he bought this way, he puts them in one big pile. Now he's got thousands of mortgage checks coming to him every month. It's a huge monthly stream of money, which is expected to come in for the next 30 years - the life of a mortgage. And he then sells shares of that monthly income to investors - those shares are called mortgage backed securities. And the $70 trillion pool of money loved them."

The demand for mortgages skyrocketed. Pretty soon, the number of customers ran out. All the people who typically qualified for home loans already had them. To get more customers, lenders had to loosen their standards and find new people to sell to - eventually creating high-cost, subprime mortgages. That's where the segregation comes in.

Researchers at Princeton say that without segregation, the expansion of these subprime loans, and the subsequent economic crash, couldn't have happened. Mortgage brokers needed swaths of communities where people met the following criteria: 1) they didn't already have a home loan, 2) they were used to predatory lending practices, and 3) there weren't other financial institutions around to clue buyers into the fact that these subprime loans weren't a good deal.

Segregated communities like those on the South and West sides of Chicago fit these requirements to a T. Segregation put all these vulnerable people in one geographic location. Mortgage lenders didn't have to hope the right person would stop by their office. They could set up shop in a place where there were thousands of available customers.

A lot of people have said that foreclosures and subprime loans hit minority communities the hardest. But these Princeton researchers showed through their economic analysis of lending, credit scores, and racial isolation that segregation is not just a factor in the housing crisis - it's actually one of the causes. If we weren't so segregated, we may not be in the mess we're in now.

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  • I find it so amazing how these articles keep wandering onto the news scene with so many facts conveniently left out.Just 1 small fact that the feds make ALL the rules that you speak off with the evil wall street people just waiting to pull another trick out of their sleeve to rob everyone.Complete the story please.This started and was allowed to progress with the help of our pale in washington.Follow the money,look at congress and the senate.The rules and programs come from there.Where was the oversight? Who was in charge? Who gave the ok for these programs to go into place.Me giving you the answers will not help,you must find them yourselves.Don't be afraid of the truth or are you afraid of the names you'll find tied to them? Also,look at race percentages.I understand the point but lets be honest with ourselves too.Speculating ,home equities,flipping and liar loans were probably the major cause. There were many at fault here,the most of which came from and were allowed by washington.We can also go back to the 60tys and see this happening also and who started those programs?????? washington idealogues......social justice....again!!!!!!!

  • Waterbill, again. I can't take it anymore. I'm not sure if you actually read before commenting or just read the headline and decide to complain.

    This story is not about the rules in Washington. It's a blog post about a study that came out of Princeton. I understand that those were a factor, but that's not the point of what we're talking about here.

    How are we being afraid of the truth? You're not providing any answers either. "Also,look at race percentages.I understand the point but lets be honest with ourselves too.Speculating ,home equities,flipping and liar loans were probably the major cause. There were many at fault here,the most of which came from and were allowed by washington" What does that even mean?

    Yes - speculation and manipulative loans were the cause. I actually say that in the post. The point of this post is that if it weren't for segregation, there wouldn't have been such a large amount of geographically concentrated vulnerable people without mortgages to sell them to.

    I really don't understand why you come here every day. Every single day, you come here and read this blog, telling us we're all dumb. Why do you come back? What are you getting out of this?

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