October 4, 2010

"Racial Segregation and the American Foreclosure Crisis"

After years of demanding more mortgage lending to minorities to smash residential segregation, Douglas Massey of Princeton says that segregation caused too much lending to minorities:
Racial Segregation and the American Foreclosure Crisis
Jacob S. Rugha and Douglas S. Masseya


The rise in subprime lending and the ensuing wave of foreclosures was partly a result of market forces that have been well-identified in the literature, but it was also a highly racialized process. We argue that residential segregation created a unique niche of minority clients who were differentially marketed risky subprime loans that were in great demand for use in mortgage-backed securities that could be sold on secondary markets. We test this argument by regressing foreclosure actions in the top 100 U.S. metropolitan areas on measures of black, Hispanic, and Asian segregation while controlling for a variety of housing market conditions, including average creditworthiness, the extent of coverage under the Community Reinvestment Act, the degree of zoning regulation, and the overall rate of subprime lending. We find that black residential dissimilarity and spatial isolation are powerful predictors of foreclosures across U.S. metropolitan areas. To isolate subprime lending as the causal mechanism through which segregation influences foreclosures, we estimate a two-stage least squares model that confirms the causal effect of black segregation on the number and rate of foreclosures across metropolitan areas. We thus conclude that segregation was an important contributing cause of the foreclosure crisis, along with overbuilding, risky lending practices, lax regulation, and the bursting of the housing price bubble.

Now, there's part of a good argument here: lenders definitely geared up to lend more to minorities, such as by hiring Spanish-speaking mortgage brokers. But, that's what Massey had been arguing for for years. 

And guess what? He'd won his argument. By the last decade, there was nobody left to say publicly that lending more to minorities was a bad idea. The gonzo lenders like Countrywide thought it was a great idea. Investors thought it was a great idea. Government regulators thought it was a great idea. What kind of filthy racist pig would say  it was a bad idea? How many dare say it even now?

Massey's attempt to torture the data to fit his idee fixe that residential segregation is the root of all evil is prima facie silly. Of course, the most segregated areas have the most foreclosures: they have the most blacks and Latinos. Moreover, they typically have the poorest blacks and Latinos, the ones who can't afford to move away.

Yet, the costliest foreclosure disasters weren't the most segregated regions, but in highly diverse, quite integrated, fast growing exurbs like California's Inland Empire. The huge foreclosure dollar value were racked up largely in places where working class people, white, black, Hispanic, and Asian were trying to get away from the 'hood.

Massey ends up giving the game away in a footnote:

To estimate the potential effects of Hispanic segregation, we undertook a separate analysis of the nation’s largest state, California, where Hispanics are numerous and there are far fewer blacks. In the analysis of California foreclosures at the city- and county-levels
that control for a much more extensive array of loan underwriting factors, such as weighted loan-to-value ratios, average credit scores, and interest rates and matched city-level home price trends, we estimated a significant, robust effect of Hispanic segregation. Notwithstanding the incredible boom and bust in places like the Central Valley and Inland Empire, the residential segregation of Latinos matters a great deal to local differences in foreclosure trends. These results support our proposition about the primacy of segregation in structuring the foreclosure crisis and do not bode well for the housing market fortunes of Hispanics, who became the largest minority group during the housing boom.

If you have to have a separate analysis of the nation's largest state, especially the one with a majority of all defaulted dollars, you are kind of missing the point.


Anonymous said...

I just learned a new word today while reading this post, idee fixe. I like the fact you drop unusual words in your posts from time to time without resorting to the antics of George Will. Thanks Steve.

Anonymous said...

Just what the Hell is Massey trying to say?
Just what the Hell is his point?

So, 'segregation' ie the perfectly natural and normal phenomenom of 'minorities' to choose to live in close proximity (perfectly voluntarily), somehow 'caused' the disaster.
The horrible tendency of the professional liars (ie 'economists' and other 'social scientists') to dance a merry dance around incovienient facts and to twist and blather and spin until the reader is worn down never ceases to amaze.
The problem isn't 'segregation' or 'predatory lending' to minorities but the presence of the poor innocent lambs themselves.

l said...

Just what the Hell is Massey trying to say?
Just what the Hell is his point?

Only that minorities would make better decisions and behave more responsibly if they were fully integrated into white society -- when their only examples are other minorities, they're stupid.

Tom of VA said...

What Massey is trying to say, it seems to me, is that poor blacks and Hispanics are preyed upon by lenders who lend them money at higher rates than whites. Why at higher rates? Because they are poor credit risks. But Massey would argue that their higher default rates are because of those higher interest rates, balloon payments, etc. What he wants is for banks to lend to minorities at the SAME rate as whites, and for those whites to bear the cost of the risk.

Anonymous said...

I love how to the proponents of multiculturalism 'minorities' are never responsible for anything they do. It is ALWAYS someone else fault. Must be a pathetic existence.

Half Sigma said...

I think he's saying that lending to NAM (ie: "segregated") neighborhoods turned out to be a bad investment.

Jeff Singer said...

True story:

For all his faults, William Julius Wilson will always have a special place in my heart. When I first met him at the Harris School of Public Policy (I was getting my Master's) he was a star professor there along with Doug Massey. They didn't see eye to eye (to put it mildly) on the causes of urban poverty and disfunction and I asked Wilson a question about Massey's criticism of some of his work. Later students were in awe of me as it was the only time they every say Wilson become animated (in anger at Massey for trying to pigeon-hole all the problems of urban blacks into the segregation box).

cruft said...

why doesn't his head explode?

Anonymous said...

You accused someone, yet again, of being a 'race man,' I had to chuckle a bit there---a 'race man' is precisely what YOU are.

it's called: Projection

elvisd said...

I just learned a new word today while reading this post, idee fixe. I like the fact you drop unusual words in your posts from time to time without resorting to the antics of George Will.

George Will is up there with T.S. Eliot for my all-time most annoying prose style.

Anthony said...

As I pointed out over at Marginal Revolution, the paper doesn't appear to actually try to separate out the effects of segregation from the effects of differential foreclosure rates by race.

There's also very little acknowledgement that differential foreclosure rates by race are significantly affected by differential income levels by race, though he does say that he controls for credit rating.

It might be interesting to see if hispanics and blacks in more segregated neighborhoods had different foreclosure rates, and why. Certainly, there will be different levels of communication into segregated neighborhoods than into integrated neighborhoods. But given the competitive nature of the mortgage brokerage industry, what would that have led to?

Half Sigma said...

"It might be interesting to see if hispanics and blacks in more segregated neighborhoods had different foreclosure rates, and why."

Blacks who live in white neighborhoods are more likely to be middle class and have middle class values, so they would have lower default rates on mortgages.

Veracitor said...

The missing variable problem always makes these studies worthless.

They never regress "borrower's IQ."

I would bet money that it has more predictive power than anything they do take into account.