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What is predatory mortgage lending? How did years of predatory lending affect Black families during the 2008 financial crisis?
Predatory mortgage lending is the imposition of unfair loan terms that diminish the borrower’s ability to repay. Predatory lending practices that were designed to exploit low-income Black families such as subprime mortgage loans led many of these families to default and lose their homes during the 2008 crisis.
Read more to learn more about how predatory mortgage lending ensured African Americans were disproportionately affected by the 2008 crisis.
Predatory Mortgage Lending Adversely Affected Blacks in 2008
U.S. regulators’ enablement of racial residential segregation didn’t end with the civil rights battles of the 50s and 60s. In fact, by failing to police the predatory and discriminatory lending practices of mortgage providers in the early 2000s—practices that would eventually lead to the 2008 financial crisis and Great Recession—regulatory agencies tacitly consigned many Black borrowers to default and entrenchment in ghettos.
The story begins with so-called “subprime” mortgages—loans designed for low-income borrowers that featured exploitative features like misleadingly low initial interest rates, high late-payment penalties, and unethical financial incentives for brokers. Although subprime mortgages were designed for borrowers who met certain financial criteria, they ended up being sold to African Americans at much higher rates than white purchasers.
For example, among borrowers who refinanced in 2000, low-income African Americans were twice as likely to have subprime loans as white Americans, and higher-income African Americans were three times as likely to have subprime mortgages as whites. By 2006, whether they qualified for more conventional loans or not, African American mortgagors in general were three times as likely to have subprime mortgages.
The agency responsible for regulating predatory lending was the Federal Reserve. Although a 2005 survey conducted by the Federal Reserve itself confirmed that predatory lenders were targeting African Americans, the agency did nothing to stop the practice. It was only in 2010, after the economy had collapsed and oversight of mortgage lenders had transferred to a different agency, that the Federal Reserve’s neglect came to light.
In the aftermath of the crisis, which resulted in a tsunami of mortgage defaults and foreclosures, some severely affected cities sued banks that had sold subprime mortgages. In one such suit, brought by the city of Memphis against Wells Fargo, affidavits from bank officials showed that subprime mortgages were colloquially referred to as “ghetto loans.”
The effect of the financial crisis on Black families has been significant. Those who lost a house have had to move in with friends or relatives, creating greater crowding in already-overcrowded neighborhoods. Having a default and foreclosure on a credit report makes purchasing a new home even more difficult. And banks are selling foreclosed properties at inflated prices and with punitive terms, echoing the exploitation of not only subprime loans but also the “contract buying” of houses in the 1950s.
In short, the upshot of the crisis has been (1) the greater concentration of African Americans in low-income neighborhoods and (2) a reduction in means to escape those neighborhoods.
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Here's what you'll find in our full The Color of Law summary :
- How racial residential segregation is the result of explicit government policy
- The three reasons why racial segregation is so difficult to reverse
- The steps that could lead to a more integrated and equitable society
