July-August 2009 Issue • Volume 37 • Issue 6

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What’s Segregation Got to Do With the Nation’s Subprime Mortgage Lending Fiasco?

Sociologists examine factors in the U.S. financial industry implosion and address policy implications

by Lee Herring, ASA Public Affairs and Public Information Office

For the first quarter of this year, the National Home Price Index tallied a 19.1 percent drop, the largest quarterly drop in the index’s 21-year history. American homeowners, depending on their particular housing market, have suffered to varying degrees a precipitous 32-percent drop in home values since the 2006 peak.

Despite dailiy high-profile attention to financial institutions, the nation’s Federal Reserve Board actually devotes serious airtime to financial services issues affecting low- and moderate-income individuals, families, and communities. In fact, the Consumer and Community Affairs Division of the Federal Reserve System organizes a well-attended biennial research conference on a range of interrelated economic and social issues. In April, the Federal Reserve held its sixth Community Affairs Research Conference, which featured a presentation by sociologists and students from George Washington University (GWU) and the U.S. Department of Housing and Urban Development.

Titled "Innovative Financial Services for the Underserved: Opportunities and Outcomes," this 2009 Washington, DC, conference was held to encourage objective research exploring the role, processes, and outcomes of innovation in financial services for low- and moderate-income consumers and underserved populations. Featuring leading researchers, it was intended to "inform innovative market and product development."

Emphasizing the need for a balance between innovation and regulation, Federal Reserve Board Chairman Ben S. Bernanke was the closing keynote speaker at the event. More than 20 panelists from national research, policy, and other organizations participated. Attendees included business and government executives, representatives from the lending industry, and compliance and community development officers of financial institutions; leadership of community and economic development organizations; policymakers, and researchers in economics, finance and banking, and urban and rural development.

Sociology in the Mix

In a sea of economists GWU sociologists Gregory Squires and Derek Hyra and their colleague Robert Renner, U.S. Department of Housing and Urban Development, presented their research paper, titled "Segregation and the Subprime Lending Crisis," which was supported by the Ford Foundation and the National Fair Housing Alliance.

Squires, Hyra, and Renner argued that, except for a general acknowledgement that the recent rise in subprime lending and record-level foreclosure rates are explained in terms of a confluence of several documented factors (i.e., ill-informed borrowers, irresponsible lenders, greedy investors, lax regulators and infrastructure, fraudulent appraisers, and other institutional actors), few have asked whether broader contextual factors influence the growth of high-cost loans. While some research has examined selected individual- and neighborhood-level predictors of subprime lending, no larger-picture analyses have surfaced.

In particular, the researchers maintain that while prior research has shown that minorities or residents of predominately minority neighborhoods are more likely to receive a subprime loan, little research has examined the possible effects of racial segregation and the geographic concentration of people of color. Using data from the 2006 Home Mortgage Disclosure Act report, the 2006 American Community Survey, the 2000 U.S. Census, and credit score information, these sociologists found evidence that—after controlling for percent minority, low credit scores, poverty, and median home value—racial segregation is clearly linked with the proportion of subprime loans originating at the metropolitan level.

They also discovered that black segregation has a stronger effect than Hispanic segregation, suggesting that the contextual variable of racial segregation is an important determinant of subprime lending. They also found 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 economic development, in addition to consumer behavior, banking practices, and regulation of financial services industries.

Graduate Students’ Reactions

Students in Squires’ sociology course, "Race and Urban Redevelopment," were graciously offered complimentary registrations by the Federal Reserve to attend the 2009 conference. Here is what they had to say: "From an academic point of view, I found the conference enriching….The sharing of ideas and methods among smart, motivated people helps promote future research and understanding," said Rajeev Darolia, a GWU doctoral student in public policy and administration. "However, from a policy perspective, I lament the difficulty to move from research to action….There were few immediate actions available due to the cautious, measured restraint commensurate with quality research."

Lee Goldstein, an MA student in public administration at GWU, said, "The extreme knowledge gap that was highlighted between lenders and consumers was one of the most significant themes I noted." In addition, in referring to Bernake’s speech, Goldstein said, "[I] feel as though he didn’t hold back. In his calls for increased transparency and reduced complication, he decried the notion that we cannot have both innovation and regulation. There must be regulation when innovation is abused and complicated lending practices are used to confuse consumers."

Next Conference

The Federal Reserve Bank of Kansas City organized this year’s Community Affairs Research Conference and is interested in broadening participation beyond economic research for the next conference. Footnotes readers should contact Steven Shepelwich (steven.shepelwich@kc.frb.org) for more information, and/or visit www.kc.frb.org, where the presented papers and videos of the presentations are posted. logo


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