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.
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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:
“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.