UBC Reports | Vol. 49 | No. 10 | Oct. 2, 2003

Not Necessarily for Sale

Racial and ethnic discrimination alive and well in American mortgage lending

By Erica Smishek

The more things change in the American inner city, the more they stay the same.

For decades, banks engaged in a practice called “red-lining,” refusing to make loans for home purchases, renovations or business investment to low-income minorities. Today, everyone and their proverbial dog are lining up to lend people money. But according to UBC geography assistant professor Elvin Wyly, it’s just creating new inequalities in the ways homes are financed and what the cost and risk of the credit will be.

He cites the example of Beatrice, an African-American woman in her 70s who has lived for almost 50 years in the same house in Newark, New Jersey. After repeated targeted telephone solicitation, she entered into a contract for exterior home repairs. The agent got her a $46,500 loan at an annual interest rate of 11.65 percent, adjustable after six months. At the time, the average initial rate for one-year adjustable loan was 5.73 percent. The loan was a “balloon” type, requiring monthly installments for 15 years and then a final payment of $41,603.

Months later, after “unconscionably poor” workmanship, Beatrice was shocked to learn the precise loan terms and requirements when she re-read the numerous and confusing loan documents. She stopped making payments and the lending firm filed for foreclosure. Beatrice filed a counter-claim, claiming violations of the Law Against Discrimination and the Civil Rights Act, among others. The case eventually went to appeal and is believed to be the first appellate court decision recognizing that predatory lending practices can violate U.S. federal and state civil rights laws.

“There is a perception that we’ve gotten past racial discrimination and it’s just simply not true,” says Wyly, a specialist in urban housing and labour markets. “There are new ways that home ownership is being transformed that create new axes of inequality.”

Inequalities are especially pronounced in gentrifying neighbourhoods. Between 1993 and 2000, Wyly found that capital investment for home purchases grew twice as fast in gentrified neighbourhoods as in the suburbs. Over the same period, African-American loan rejection odds in these neighbourhoods stood at 2.1 times those for non-Hispanic whites - even after accounting for differences in income and estimated credit risk.

He is currently studying changes in the U.S. banking industry and the implications for home ownership among low-income households and racial/ethnic minorities in inner-city U.S. neighbourhoods. Supported by a three-year grant from the Social Sciences and Humanities Research Council, and assisted by Mona Atia, a doctoral student in geography, Wyly is analyzing how the institutional structure of mortgage lending has changed race and income inequalities among borrowers.

Preliminary results point to widening inequalities in the ways homes are financed and used as vehicles of debt, creating new inequalities in the long-term material benefits of home ownership.

“Home ownership is presented as a solution to all the world’s problems,” says Wyly. “This research demonstrates that there are a lot of caveats to that.”

Wyly has found that many minority and moderate-income households gained access to home ownership for the first time in the 1990s, but new waves of investment are making many parts of the city unaffordable and worsening the shortage of inexpensive rental housing. In addition, old inequalities of exclusion and discrimination remain.

The result is a complex urban system of old and new forms of inequality, with wide variations in racial exclusion.

“No matter how you slice and dice it, you still find persistent racial disparities,” he says. “They vary across different cities. In one city, racism has an African-American face, in another Latino.”

He has also uncovered discrimination along gender lines.

“Lenders, brokers, realtors and home renovation agents often specialize in narrowly-defined markets. The transformation of the financial system has allowed some of these actors to extract profits in new ways. Elderly African-American widows have become an important target market for abusive home lending, particularly if they’ve built up some home equity over the years, but also have medical expenses or home repair needs,” Wyly explains.

“Some of the new practices used in inner-city housing markets violate all our traditional assumptions about mortgages and lending. Foreclosure and default are supposed to be bad for everyone involved. But there are people who are learning to make a profit from it.”

“The good and bad thing about the 1990s is that companies found ways of making a profit out of almost anything,” Wyly says.

The 1990s saw widespread innovations in underwriting, risk modeling and ways of measuring and pricing the various components of risk and profit in making a loan -- and selling these as securities on Wall Street. The decade also saw the rapid erosion of the traditional institutional structure of home mortgage lending -- neighbourhood-based banks and thrifts were overshadowed by large financial services conglomerates catering to the wealthiest customers, specialized divisions of large banks making high-cost loans to borrowers with blemished “sub-prime” credit, and a new breed that have come to be called “predatory lenders” who specialize in the home equity and refinance loan markets and use deceptive tactics and hidden, excessive fees to strip out homeowners’ equity.

“We need to talk about those connections in a very open way to understand what’s good about those connections and what needs to be changed,” he says.