As a result of our current economic downturn, the wealth gap between Whites and African Americans is larger today then any time in the past 25 years. In this post, Bridget Welch explores how historical housing practices and current predatory lending practices combine to reinforce institutional discrimination.
Unless you have been living under a rock, or work on Wall Street, you may have noticed that the economy is not doing so well. Just in case you are unaware of how that statement should win “The Most Understated Statement of the Year” award, please watch this short video that shows the spread of unemployment across the United States. Yet, as hideous as the current unemployment rate is, there is a group of people who live on this razors edge constantly.
You see, African Americans’ unemployment rate is always at the recession rate. In other words, what makes this current economic downturn so notable is that Whites are now at the unemployment rate that African Americans normally are at. And, of course, African Americans are disproportionately hurt by the current downturn – meaning their unemployment rates (particularly men’s) have soared. Don’t believe me? Go play with this fun NYT infographic. The truth is that minorities in our country act as the canary in the coal mine – falling to the poisonous atmosphere before it reaches the rest of us.
Indeed, recent data on wealth inequality bears this out as the gap between Whites and Blacks (and Latinos) is the largest it has been in 25 years: “The median wealth of white households is 20 times that of black households and 18 times that of Hispanic households, according to a Pew Research Center… the typical black household had just $5,677 in wealth (assets minus debts) in 2009; the typical Hispanic household had $6,325 in wealth; and the typical white household had $113,149.”
Reasons for this inequality are complex. As explained by Melissa Harris-Perry, the current economic inequality can best be understood as part of both cumulative (e.g. historical inequality in wealth) and compounding discrimination (e.g. discrimination in the economy and criminal justice practices interact together to increase inequality).
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Yet, despite this complexity, there is one source of institutional discrimination highlighted by both Pew Research Center and Melissa Harris-Perry as a central cause of current economic differences between Blacks and Whites – the housing market.
Cumulative discrimination in the housing market hopefully is not a concept that is new to you. In response to the Great Depression, Roosevelt provided federal loans to homeowners that were in default. Between 1933 and 1936, twenty percent of the people (around 200,000) who got these low interest loans were unable to pay and had their homes foreclosed on by the government. The government reselling these loans refused to sell homes in White neighborhoods to Jews, immigrants or Blacks.
As part of this new program, the Federal Housing Association (FHA) also created color coded maps to indicate the potential risk of providing a loan in a particular neighborhood. These maps were utilized to suggest who should be underwritten (allowed to get a loan) and who shouldn’t be. There were four colors on the map. Newer areas (considered good risks) were blue on the map. These were usually affluent suburbs outside of cities. Then there were green neighborhoods which were slightly worse risks. Yellow neighborhoods were seen as “declining.” And red were neighborhoods that were seen as too risky for mortgage support.
What determined if a neighborhood was red (or redlined)? Looking at one report may help you understand. Under the category “determinental influences” here are some example entries:
- “Grade schools in Chew Avenue section have about 15% negro children. Many of the streets are very spotty – some backing up to poorer property.”
- “Heavy obsolescence of property – concentration of Negroes and Italians.”
- “Threatened with negro encroachment.”
The FHA Underwriting Manual gave race as a stated reason to deny loans. The manual suggested that allowing Blacks to move into White neighborhoods would create negative social conditions. Specifically, it stated that “If neighborhood [was] to retain stability … [then it was] necessary that properties … continue to be occupied by the same social and racial classes.”
If you were shut out at the beginning, it’s nearly impossible to catch up later on.
These laws contributed to the unequal access African Americans were given to homes after WWII. The G.I. Bill promised no down payment loans to returning veterans. Because of their race, African Americans were steered away (or outright denied) mortgages in blue or green neighborhoods. In fact, between 1934 and when this practice was made illegal in 1963, the federal government underwrote loans for 120 billion dollars. Less than 2% of these loans went to minorities.
Okay, but you’re thinking: “That’s ANCIENT history! It no longer matters today!”
Unfortunately, you couldn’t be more wrong. It does matter. Quite a bit, in fact. Especially when it comes to wealth. Most of us gain and maintain our wealth through paying off a mortgage and owning a home. It is home ownership that allows you to get loans for other things – such as your children’s education or helping them underwrite their own home loan. And, as Melissa Harris-Perry says, “If you were shut out at the beginning, it’s nearly impossible to catch up later on.” If 1963 is prior to your own parent’s history, it would be within your grandparents’ time. And what your grandparents could do to help your parents will affect you. Now, I’m not saying that all White people have parents who can help them with their college education or buy them a house, but when we look at the numbers – the pattern (which is what sociology is interested in) – far more Whites have parents who can help them do this than do Blacks or Latinos. Data holds this out. According to the Census, in the 1970s 65.4% of Whites owned homes compared to 41.6% of Blacks. The gap between Whites and Blacks has actually grown with 75.2% of Whites and only 47.2% of Blacks owning homes in 2007.
But there is another way that past housing practices impact wealth today even more directly. Historically, African Americans have been left out of home ownership. Changes in lending practices by banks (for a description of what happened and how, see here) encouraged banks to underwrite subprime (high-cost and high interest rate) loans. To make a very VERY long story short (see here for Inside Job which makes a long story long), banks created a situation where subprime loans made them money hand over fist (first by selling them to investors so they didn’t have the risk of failure and then by purchasing a derivative – a type of insurance – that would pay them when the mortgage failed). This made subprime loans desirable for banks. However, having a higher interest rate is not something that is desirable to consumers. In 1993, only $20 billion of loans were subprime. This was $150 billion in 1998. At the top of the current credit bubble, subprime loans were around $634 billion dollars a year. These loans disproportionately were sold to Blacks (53.3% in 2006, compared to 46.2% to Latinos, and only 17.7% of Whites).
The historical practice of locking African Americans out of these loans was partially responsible for their vulnerability to the loans. But this is not all that is going on: “Strikingly, a 2006 study of 130 cities finds that middle- and upper-income Black and Latino borrowers were actually more likely than low-income white borrowers to get a high-cost loan.” In fact, over 35% of these subprime loans went to people of color who WOULD HAVE QUALIFIED for a regular loan. The predatory lending practice of pushing African American’s into subprime loans has been termed “reverse redlining.” Recently, Bank of America (who bought Countrywide – a bank very active in subprime loaning during the housing bubble) paid $335 million to settle charges that they “engaged in systematic discrimination against blacks and [H]ispanics” (quote from Attorney General Eric Holder). Other banks, such as Wells Fargo, are also fighting these charges.
It shouldn’t be surprising, given all that was just discussed, that African Americans and Latino families have undergone foreclosures at a rate disproportionate to Whites. A recent study on this found that “nearly 8% of both African Americans and Latinos have lost their homes to foreclosures, compared to 4.5% of whites.” They are also more likely to be threatened with imminent foreclosure than Whites. The compounding effects of losing a home are wide ranging. What if your family had to choose between making a mortgage payment and buying medicine? Paying for food? Education? And, once the house is lost – and the wealth that had accrued vanished – what type of cumulative impacts will that have on the next generation? How would this impact their chance of owning a home or of getting a college education? It may no longer be legal to discriminate based on race – but the practices of many mortgage lenders indicate that current institutional practices are the same as it ever was.
- Explain cumulative and compounding discrimination. What are the differences between the two? How is housing discrimination explained through each?
- What are your reactions to the idea that your life chances can be impacted by what happened to your grandparents’ generation? Is this an idea that sits well with most Americans? Why or why not? Does the answer to this question depend on the race of the American?
- Interview someone you know who owns a home about home ownership. Ask them what would happen to them if they lost their home? If they suddenly owed more money on their house than it was worth?
- Listen to “The Giant Pool of Money” a podcast by NPR. How much do you think banks were at fault for lending to people who couldn’t afford it? How much do you think individuals were at fault for taking these loans?