BETRAYAL OF THE AMERICAN DREAM: WHY BLACKS AND LATINOS WERE HIT HARDEST BY THE U.S. HOUSING CRISIS

Abstract

I contend that the United States housing boom and subsequent crisis were fundamentally structured by the social forces of racial segregation, discrimination, and demographic change in ways that uniquely disadvantaged black and Latino borrowers and communities. Controlling for an array of rival explanations, black-white residential segregation emerges as the strongest predictor of 2006-2008 foreclosure filing rates across the largest 100 metropolitan areas. Using a two-stage least squares estimation, I show that black-white and Hispanic-white disparities in subprime lending link segregation to foreclosure rates in a causal relationship. I explore further the mechanisms that generate for inequality in high cost subprime lending in one of the nation's most segregated cities. I find that blacks and Latinos and borrowers in mostly black and Latino neighborhoods experienced discrimination in broker-originated, high cost, and subprime refinance lending in ways that cannot be explained by credit profile, loan characteristics, borrower income, or other factors. Residence in mostly black and Latino neighborhoods is also strongly significantly related to higher odds of foreclosure, but not default, which is more strongly driven by losses in income and declines in home prices. I return to a national analysis and argue that Latinos were dealt a double-blow by the crisis. First, they experienced discriminatory subprime lending alongside black neighbors in segregated cities. Second, Latinos were twice as likely as blacks to receive new exotic alt-A loans due to their late entry in the housing boom, continued immigration, and greater rates of suburbanization. Among a sample of 200,000 borrowers, I find that Latinos experience the highest foreclosure rate and were twice as likely as blacks to have received alt-A nonprime loans. Using a competing risk framework, I confirm that residence in hard hit states and broker-originated loans with deceptive features account for much of the Latino disparity in foreclosure. I uncover new sources of Latino disadvantage, such as their concentration in states without judicial foreclosure and reduced access to housing counselors and loan modifications. I conclude that, like blacks, Latinos were also victimized by risky subprime and especially alt-A lending, and that unequal lending ultimately betrayed the American Dream of home ownership.