1 The High Cost of Segregation Exploring Racial Disparities in High Cost Lending Vicki Been, Ingrid Ellen, Josiah Madar, Johanna Lacoe Urban Affairs Association Conference Colloquy Session: How Urban Neighborhoods are Faring in the Foreclosure Crisis Saturday, March 8, 2009

The Furman Center for Real Estate and Urban Policy 2 Motivation & Research Questions Motivation  High cost loans 1 are more likely to default and end in foreclosure.  Foreclosure has direct, adverse effects on families.  Concentrated foreclosures can drive down neighborhood property values. Questions:  Does racial segregation impact the probability of receiving a high cost loan? Are black and Hispanic borrowers more likely to get high cost loans, relative to whites, in more segregated metropolitan areas? 1 High cost loans: 1st lien loans with an interest rate of more than 3 percentage points higher than the federal treasury rate of like maturity; junior lien loans with an interest rate of 5 percentage points higher.

The Furman Center for Real Estate and Urban Policy 3 Potential Mechanisms for Racial Disparities in High Cost Lending Underlying economic inequality (i.e. income, wealth, ties to financial system) Differences in access and usage of mortgage channels & borrower behavior (i.e. the role of brokers, financial literacy or shopping behavior) Racial discrimination in housing, mortgage markets (i.e. steering, targeting) Claim: Segregation exacerbates the effects of these mechanisms.

The Furman Center for Real Estate and Urban Policy 4 Racial Disparities in High Cost Lending Characteristics of Home Mortgage Disclosure Act (HMDA) Borrowers National (2006) White Borrowers Black Borrowers Hispanic Borrowers % 1 st Lien Home Purchase loans that are High Cost 17.7%53.3%46.2% % Refinance loans that are High Cost 25.5%51.7%38.6% Number of Loans 5,726,468780,6541,133,720 New York City ( ) White Borrowers Black Borrowers Hispanic Borrowers % 1 st Lien Home Purchase loans that are High Cost 7.8%40.8%30.1% % Refinance loans that are High Cost 17.5%37.3%29.5% Number of Loans 127,97470,30844,051

The Furman Center for Real Estate and Urban Policy 5 Methodology Are disparities between whites and blacks, and whites and Hispanics, larger in more segregated areas? Estimate logistic regression models controlling for borrower and MSA-level characteristics.  Data: Home Mortgage Disclosure Act (HMDA) (2006) & US Census (2000)  Geography: Metropolitan Statistical Area (MSA)  Dependent Variable: Probability of individual borrower receiving a high cost loan (binary)  Independent Variable: Dissimilarity index* (measures the extent to which two groups sort differently across neighborhoods within a metropolitan area) *We also tested the models with the isolation index, which reflects the share of blacks that live in a neighborhood of the “typical” black person in an MSA, and found similar results.

The Furman Center for Real Estate and Urban Policy 6 Results: Predicted Probabilities of Receiving High Cost Loans* by Quartiles of Segregation Low Low/Mod Mod/High High *1 st Lien Home Purchase Loans.

The Furman Center for Real Estate and Urban Policy 7 Digging Deeper into Mechanisms Does the spatial distribution of populations within an MSA contribute to the probability of getting a high cost loan? Focus on New York City: Is there evidence of loan targeting? Consider the probability of blacks, Hispanics, and whites getting a high cost loan in neighborhoods with differing concentrations of minorities.

The Furman Center for Real Estate and Urban Policy 8 NYC*: Predicted Probabilities of Receiving High Cost Loans by Quartiles of Percent Non-White *Pooled HMDA data ( ) for New York City, analysis at the Census Tract level. First lien home purchase loans. Low Low/Mod Mod/High High

The Furman Center for Real Estate and Urban Policy 9 Conclusions Strong evidence that segregation is correlated with lending patterns. Racial disparities in the percentage of borrowers who receive high cost loans are significantly larger in more segregated metropolitan areas.  Blacks and Hispanics in highly segregated MSAs are more likely to receive high cost loans than blacks and Hispanics in MSAs with low segregation.  Across all MSAs, blacks and Hispanics are more likely than whites to receive high cost loans. In NYC, as the percentage of minorities in the neighborhood increases, whites, blacks and Hispanics all have a higher probability of receiving high-cost loans, but disparities persist.

The Furman Center for Real Estate and Urban Policy 10 Limitations & Future Research This study is not able to make causal claims about the relationship between racial segregation and high cost lending. Segregation does not tell the whole story: Even in MSAs with low levels of segregation, black and Hispanic borrowers are far more likely to receive high cost loans than white borrowers. More research needed on potential mechanisms through which segregation affects the likelihood of receiving a high cost loan.