Addressing Structural Racism and the Economic Crisis

The NAACP has filed lawsuits against two of the nation’s largest mortgage lenders — HSBC and Wells Fargo — alleging “systematic, institutionalized racism” in their subprime lending (image from here).  But this lawsuit is really just the tip of a very large, and deeply racist, iceberg.

Part of this has to do with the way that housing – and what former President George W. Bush once called ‘the ownership society’ – was the only path to wealth creation in the U.S.   In other words, most of the wealth that people have and accumulate in the U.S. is through home ownership.  This has been a central tenet of the American Dream for decades.  Unfortunately, this dream was only available to a few and that availability was often based on race.   Listen to this short video (1:52) in which Professor Kimberlé Crenshaw explains the roots of this inequality with journalist Laura Flanders.

Joe Sims of Political Affairs, writes in his extensive piece entitled, “The End of Neo-Liberalism and Bush’s Last Scam: How Racism Sparked the Financial Collapse,” that:

Still, as the main civil rights organizations charged in the summer of 2008, the racist origins of the subprime mess are difficult to ignore. A cursory glance at some of the statistical highlights provides ample evidence. An excellent study authored by United For a Fair Economy entitled “Foreclosed” suggests several indicators, chief among them the disproportionate numbers of people of color holding subprime loans: over 50 percent of all mortgages held by African Americans fall into this category. The figure is 40 percent for Latinos.

While some political leaders blamed the “mismanagement” of Fannie Mae and Freddie Mac and demagogues like Ann Coulter and Pat Buchanan blamed Black and Latino families for the economic collapse of the subprime mortgage market, the fact is, as Sims points out that bad credit was not the primary factor for distributing the loans, a myth conveniently circulated and repeated to this day. Sims refers to Rep. Charles Schumer who refutes the bad credit explanation, quoting the Wall Street Journal:

Based on the Journal’s analysis of borrowers’ credit scores, 55 percent of subprime borrowers had credit scores worthy of a prime, conventional mortgage in 2005. By the end of last year, that percentage rose to over 61 percent according to their study. While some will have damaged their credit in the interim, it’s clear that many subprime borrowers have the financial foundation for sustainable homeownership, but may have been tricked into unaffordable loans by unscrupulous brokers.

Basically, the subprime mortgage scheme was a way for Wall Street bankers to drive up profits (some were pushing for 25% profit margins, according to Sims) and doing it on the backs of mortgages to predominantly African American and Latino homeowners.  Sims speculates:

Perhaps this explains at least in part why no Wall Street insiders had qualms about their activities or why in recent weeks the issue seems to have almost disappeared from discourse on the economic recession.

So what made the loans predatory?  According to Sims and a study by a group called United for a Fair Economy:

One factor is their marketing and sales to inappropriate customers. Another is pre-payment penalties. Seventy percent of subprime loans had such penalties. A third element was Adjustable Rate Mortgages (ARMS), which often carried unexplained ballooning interest rates that increase payments by as much as one-third. A majority of subprimes were ARMS. Yet another condition was the exclusion of tax and insurance costs when estimating the monthly payment for a potential home-buyer. And finally the encouragement of ordinary borrowers to take interest-only loans, where in the initial year or two only the interest is paid on, after which the principal rates kick in raising the cost dramatically.

The stimulus package and economic recovery needs to acknowledge that what are often referred to as “marginal”  home owners or borrowers were largely Black and Latino working-class families struggling to make ends meet, targeted by Wall Street financiers.  Recovery is likely to further entrench racial inequality if leaders fail to acknowledge the role of racism in the current economic crisis.


  1. Joe

    Nice piece, Jessie. Many of these subprime loans were second loans that were sold to working class and lower middle class homeowners, esp. homeowners of color, as ways to get out some of their equity to spend for health care (often crisis) expenses and educational expenses. They were not primary loans. The many homeowners of color losing their homes as a result of these high interest subprime loans have thus lost an estimated $160-200 billion in wealth, and that is the main source of wealth these families have. yet one more example of the redistribution of wealth to whites, the white men running the banks.

  2. Schiffon

    When the NAACP filed this lawsuit last week I was very disturbed by the general sentiment of the majority of comments left on The Consumerist. People accused the NAACP of trying to do a shake-down on the banks, they questioned the data suggesting that the association was spurious, some asserted that race is an independent predictor of mortgage default risk, others faulted African-Americans for being poor negotiators of favorable mortgage terms or for failing to comparison shop, one former bank representative mentioned that because sub-prime institutions predominantly serve the African-American community, the brokers had incentives to sell these mortgages or lose commissions by referring qualified borrowers to another representative who could offer a standard loan product.

    Bottom line, 90%+ of posters refused to attribute this to racism.

  3. Victor Ray

    Schiffon, I am actually surprised that 10% of posters do use racism as an explanation, given the woefully inadequate conceptualization as individual prejudice that many people use as the definition of racism. Given that, and as Joe pointed out in his last post, white refusal to see racism almost anywhere unless they are directly confronted with the “n-word” (and even then most will say it was a joke, they were quoting someone else, etc) 10% is a pretty good number. Sorry for the pessimism.

    What is interesting to me about this is it seems to be almost a new manifestation of racism through inclusion. Historically, with VA loans for housing, redlining, social security, car loans, or new deal funds or almost any means-tested government transfer, structural racism was manifest through exclusion. This process, of symbolic inclusion (i.e. sure you can have this loan) but actual exploitation is not something I have heard of on such a scale before. Of course, what has not changed is that blacks and people of color get blamed either way.

  4. siss

    This has little to do with race and more to do with personal accountability/greed. I’m sure that in some instances, race was used inappropriately to determine an interest rate. If there is a way to find the ones who used this tactic, we must find them and give them serious consequences. However, it is ultimately up the buyer if he/she chooses to accept such a bogus rate/arm. I know that my degrees in Finance make me a bit biased but some of the predicaments sub-prime borrowers got themselves in are down right foolish. I read the article and comments that Schiffon referenced. Someone posted this response and I couldn’t have said it better myself:
    “I know a lot of these lenders pushed customers into loans they couldn’t afford but where is the personal responsibility of the people who borrowed all the money? Do they get a free pass? How can any reasonable person believe that an income of $50k a year is enough to afford a house that costs $350k no matter how creative the financing is? I don’t believe any marketing practice absolves borrowers from the obligation to look at the numbers and conclude, “No, I just can’t afford a house that costs so much.”
    It’s disgusting that lenders engaged in these practices, but it’s the homebuyer that ultimately signed on the dotted line. There is an abundance of information (free, readily available, and user-friendly) out there for prospective homebuyers.
    If someone was going to buy a car, for example, would they research the cars, find the lowest price and shop around for a decent rate? YES. The same method should be used with a home or any large purchase you make (especially if you’re relying on financing to buy it!). No matter what your SES, income level, credit score, intelligence, etc, everyone knows not to sign a document unless you are clear on everything beforehand. And if you do not know this (ie kids, mentally incapacitated, uninformed), IMO, you don’t need the responsibility of being a homeowner.

  5. Victor Ray

    Hey Siss, thanks for validating schiffon’s comment. Some people (usually whites) really are blind when it comes to race. My question to you is if this is primarily about “greed/personal accountability” why do people of color represent only 27% of nationwide home loans yet 50% of all home loans held by blacks and 40% of those held by latinos are subprime? Logic implies that if it was greed alone explaining these disparities, the distribution would not be skewed, and whites would be feeling the economic pain in equal proportions. Further, as the article points out, many (a majority) of those blacks and latino’s given subprime loans qualified for fair rates. Perhaps, as much research has shown, minorities were only shown certain products when they applied, so even if they were making “rational market choices” they were not exposed to the same amount of mortgage products to chose from. To use your example, research on car prices has shown that there is a clear racial/gender hierarchy in who gets what car price. And, you guessed it, white men are given the best deals, followed by black men, white women, and then black women. So, even if they shopped around, as you suggested, the patterned, institutionalized practices of racism would tend to produce an outcome like the one observed in the housing crisis. This, coupled with tons of audit studies that show severe discrimination in housing markets, plus a huge body of historical work outlining systematic discrimination in housing (i.e. redlining, steering, and outright white violence, including murder) imply that what we have here is a continuity, of traditional racist policies, not a break from the past (or apparently, the present).

  6. siss

    The only portion my response qualified was her note on the distribution of comments, and you’re welcome. You misinterpreted my theory as to “personal accountability/greed”. Greed was directed at the predatory lenders who gave shotty interest rates and misleading information. The borrower’s lack of personal accountability and the LENDERS’ greed contributed to this mess we currently face. From their desire to con people, they sought to fatten their bottom lines by whatever means it took. My apologies if I was not clear but I think we’re talking about two different things.
    If the plaintiffs can prove that they were given higher rates solely based on race then action must be taken not only against the banks but the actual lenders who sold them the mortgage. There are numerous factors that go into the calculation of interest rates so I cannot answer your question of why a little less than half of loans given to latinos/blacks are subprime. Plus all “subprime” loans are not equal. There are other factors besides credit scores that are taken into account. Where you plan to live, documentation provided, community growth, down payment, etc. are all things that can go into calculating your rate.

  7. Victor Ray

    Actually Siss, you qualified the “90% + of posters refuse to attribute this to racism” part. I agree with you that predatory lenders were perhaps motivated by greed, and the plain facts dictate that you should agree with me that the greed was manifest thorough a racialized pattern of lending, that many scholars characterize as “instutional,” “structural,” or “systemic” racism. So, I think we are talking about the same thing, only one of us isn’t afraid to call a pattern racist, and the other has an extreme form of historical and current racial amnesia.
    As for taking action against the lenders, I agree.

  8. Jeff B.

    Very interesting piece and blog overall.

    I couldn’t find a general comment page, so I thought it would be good to post here:

    It has been a very interesting journey in my life being part “black” and part “Asian” (the portmanteau “blasian”). I think as a country to this day, Americans still view racism on “white” and “black” terms and fail to really see the gray areas in between (Asians, Latinos…). While I do share similar experiences with “full black” Americans, there’s also some discernible differences, even from “mulattoes”. But then again, I did grow up in a very diverse city and lived in a very “liberal” city. I also come from a military family background and lived in other countries.

    I think many people fail to realize that racism comes in very different forms in many different contexts. It overlaps with class, religion, and gender, among other things. I’ve traveled and lived in places in Asia where in some places blacks and whites were considered superior to ethnic Indonesians…

    Anyways, great blog. I want to see more about racism with other ethnic groups, racism of the same kind, and racism in the global sphere.

  9. siss

    If you would have read my first post more thoroughly, I stated [“has LITTLE to do with race…that in some instances, race was used inappropriately to determine an interest rate.”]. I’m not refusing to attribute it to race, because, from the statistics, it seems to have an effect on the distribution of sub-prime loans. I agree that “greed was manifest thorough a racialized pattern of lending” but not to the degree that the article eludes. Just because a trend is present doesn’t mean we should jump the gun and call race. Like I said before, when determining interest rates (esp. for complex mortgages like ARMS) the computer algorithms companies use have dozens of inputs (most of which the companies themselves know NOTHING about). Also, I’m not afraid to call it like I see it – and in this case, I suspect the skewed dispersion is not for the reasons you would assume and to the degree you are assuming. Hopefully with these lawsuits, we will get to the bottom of WHY there was a trend (race related or not) to begin with. Which, might I add, is going to be extremely difficult to do, considering the nature of how the lending process/credit approval works PLUS the revolting lack of transparency within these companies.

  10. Kristen L

    Quoting siss: “I’m not refusing to attribute it to race, because, from the statistics, it seems to have an effect on the distribution of sub-prime loans. . . . Just because a trend is present doesn’t mean we should jump the gun and call race.”

    I can’t get my logical brain around this explanation. It’s plain to see that there is a racialized trend, yet we shouldn’t “jump the gun and call race”? Why shouldn’t we look at race? We would be really terrible social scientists if we didn’t.

    We really need to deal honestly with this issue. Because of our long history of white supremacy, it’s impossible to uncouple racial inequality from social class stratification. I dare say the reason people try so hard to do it is because they can’t stand to acknowledge that we’re still a racist nation, due to our history and our contemporary practices of discrimination and exclusion.

    As for those mysterious algorithms, they don’t program themselves using the science of pure objectivity. People create algorithms, and remember it wasn’t that long ago that home values were determined solely by racial composition of a neighborhood. Not to mention the fact that social audit studies nationwide consistently show realtor and lender discrimination towards people of color with or without an algorithm – higher interest rates on every type of loan, steering away from homes in white neighborhoods, etc. People have created this whole mess of racial inequality, not computers or strange weather patterns or coincidence.

    The subprime mortgage lawsuits will be decided in someone’s favor, which won’t really prove anything. The court system has gotten it wrong so many times when it comes to race that I have no confidence left. But kudos to the NAACP for keeping the faith.

  11. siss

    Kristen – key word: seems. It seems to have an effect….therefore, lets not jump the gun. I’m not suggesting we not look at race, but also do further research (I have no experience in the social science field, so I leave it the ones that do).
    How long ago were I/R soley determined by community racial composition? 5,10,15 yrs ago? Steering away? How can one quanitify that….that is subjective. As for computer inputs, this is a new(er) method. I thought we were talking about the current eco-crisis?

  12. Robin P

    Point of View: All the News That’s Fit to Ignore – AIG, Andrew Cuomo, The Subprime Housing Meltdown, and Media ManipulationShare

    Friday, March 27, 2009 at 7:39am

    If you read nothing else today, you must read this.

    March 27, 2009 – quoted New York Attorney General Andrew Cuomo regarding his on-going investigation into AIG:

    Our investigation into corporate bonuses has led us to an investigation of the credit-default swap contracts at AIG,” Cuomo said yesterday in a statement. “CDS contracts were at the heart of AIG’s meltdown. The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayer dollars to capitalize banks all over the world.

    August 5, 2008 – Wayne Barrett of The Village Voice reported on New York Attorney General Andrew Cuomo’s tenure as former Secretary of HUD. In his six page article, Mr. Barrett stated of Mr. Cuomo,

    What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York’s attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie.

    Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded “kickbacks” to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.

    Who says great American theatre is dead? We are getting to watch this train wreck for free. But at what cost? As the economy overtook headline news and the talking heads covered even the most minute aspects of this meltdown, there was no mention of this particular story in mainstream media. The link to the Village Voice article follows.

    Robin Pugh-Perry, MHS

    Conversation creates possibility and within that space, miracles happen!

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