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Structural Racialization and the Subprime Mortgage Crisis john a. powell Williams Chair in Civil Rights & Civil Liberties, Moritz College of Law & Director, Kirwan Institute for the Study of Race and Ethnicity Overview A Story of Overfishing The Foreclosure Crisis Systems Theory

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structural racialization and the subprime mortgage crisis

Structural Racialization and the Subprime Mortgage Crisis

john a. powell

Williams Chair in Civil Rights & Civil Liberties,

Moritz College of Law &

Director, Kirwan Institute for the Study of Race and Ethnicity

  • A Story of Overfishing
  • The Foreclosure Crisis
  • Systems Theory
  • Impact of Subprime Lending on African American and Latino Neighborhoods
  • Impact on all Communities, Cities, and States
a story of overfishing in the north atlantic
A Story of Overfishing in the North Atlantic

Five hundred years ago, the explorer John Cabot returned from the waters around what is now Newfoundland and reported that codfish ran so thick you could catch them by hanging wicker baskets over a ship's side.

By 1988, they were gone.

collapse of atlantic cod stocks off the east coast of newfoundland in 1992
Collapse of Atlantic Cod Stocks Off the East Coast of Newfoundland in 1992

what happened
What Happened?
  • Each fisherman thought that it was in his best interest to catch as many fish as he or she could.
  • With tens of thousands of fisherman thinking similarly, and with technological advancements in fishing, the result was the totally annihilation of the fish stock.
the tragedy of the commons
The Tragedy of the Commons
  • There is sometimes a mismatch between short term self-interest and the common good.
  • This is known as the tragedy of the commons.
greenhouse gases and climate change
Greenhouse Gases and Climate Change

This is the way it is with the atmosphere.

With industrialization, factories, cars, and power plants pump CO2 into the atmosphere faster than it can be absorbed. 

climate change
Climate Change
  • Each nation has an economic interest in pumping as much CO2 as they can. Implementing costly environmentally friendly emissions standards hampers development.
  • The commons (the Earth) is being overwhelmed.
subprime mortgage crisis
Subprime Mortgage Crisis
  • The complex interactions of the financial institutions, mortgage brokers, and securities dealers have produced a tragedy of the commons problem.
  • In 2007 1.3M home loans nationwide went into default (up 75% from prior year) and less than 800K instances in 2005.
  • More than ½ of the foreclosure starts are subprime mortgages (2007)
how did this happen
How Did This Happen?
  • The fundamental problem with the subprime crisis is that the incentives for short-term profit among these entities do not align with the requirements for long-term economic health of homeowners or their communities, cities and states.
  • How did this happen?
how did this happen11
How Did This Happen?
  • To understand it, we need a systems approach. There is no single “cause” of this crisis.
  • The story begins with the securitization of home mortgage loans and the deregulation of consumer lending in the 1980s and 1990s.
how did this happen12
How Did This Happen?
  • Deregulation: In the 1980s, federal deregulation removed state caps and limits on mortgage lending, preempting, in many cases, state laws.
  • Rise in Real Estate Values: The rise in real estate values in the 1980s created much new wealth. This led to “asset-based” lending, loans based on the value of the security rather than the borrower’s ability to repay. This was a crucial change that led to the subprime market.
how did this happen13
How Did This Happen?
  • Rise in the secondary market: In the 1980s, mortgage companies began bundling mortgage loans into large portfolios and selling them on a secondary mortgage market.
  • This let mortgage companies specialize in home equity lending and make a lot more money. They could make loans and quickly resell the loan into the secondary market.
how did this happen14
How Did This Happen?
  • Wall Street: Because mortgages were viewed as safe collateral and increasingly profitable, Investment Bankers became hungry for mortgages for use as collateral in the sale of mortgage backed securities to investors.
  • Wall Street’s hunger for mortgages led to asset-based lending, which fueled the subprime market.
  • This phenomenon took off in 1994 when $10 billion worth of subprime home equity loans were securitized.
    • By the end of 2005, the volume of securitized loans leaped to $507 billion.
systems thinking
Systems Thinking
  • The typical legal advocate thinks of problems from a individual perspective rather than a systems perspective.
  • The legal framing of a claim has the potential to restrict inquiry into the nature and depth of a problem as well as a proper solution.
  • Traditional non-discrimination models encourage lawyers and organizations to see issues as potential legal claims rather than as problems in need of systemic resolution.
traditional discrimination model
Traditional Discrimination Model
  • Victim/perpetrator

(individualistic view)

  • Intent (purpose or motive)

(prejudiced “bad apple)

  • Decision-maker self awareness

(transparency of mind)

systems thinking18
Systems Thinking
  • Systems Theory is a transdisciplinary model that focuses on a web of relationships and processes and not on linear, singular causation or the intent of one or even a few individuals
  • In a complex systems model, actions and inactions have multiple effects, and the delayed or distant consequences are often different from more proximate effects.
systems thinking19
Systems Thinking
  • From a systems perspective, causation is cumulative and mutual.
    • Negative outcomes are caused by many actors’ and institutions’ actions and inaction over time and across domains
    • Negative outcomes are the result of causes that accumulate over time and across domains.


  • A Labor economist’s analysis of discrimination in the labor market, controlling for background characteristics and educational preparation of labor market participants, ignores the previous discrimination in education, housing, and health markets.
  • Wealth: intergenerational and impact across domains.
systems view
Systems view
  • The application of a systems theory model changes our analysis of responsibility and response to harms.
  • Consider global warming:
    • Caused by cumulative and mutual actions of many actors
    • Need for collective action
    • No need to show intent before responding.
solving the tragedy of the commons
Solving The Tragedy of the Commons
  • Solving the Tragedy of the Commons requires collective action.
  • Individuals will continue to act against their long-term interest and the common good.
  • An individualistic perspective or a narrow focus on “intent” or “culpability” will not solve these problems.
structural racism
Structural Racism
  • Courts have used a systems perspective.
    • Gaston County v. United States – North Carolina sought to reinstate a literacy test as a qualification for voting.   The Court found a violation of the Voting Rights Act because segregated "deprived its black residents of equal educational opportunities, which in turn deprived them of an equal chance to pass a literacy test." 
    • An apparently impartial literacy test was found to be a violation of the Voting Rights Act when one examined the institutional relationship between segregated education and voting restrictions.   
application of sr model thompson v hud
Application of SR Model:Thompson v. HUD
  • In 1995 six families living in Baltimore public housing filed suit on behalf of 14,000 other low-income families.
  • In 2005, a federal court ruled that HUD had violated Title VIII of the Fair Housing Act by failing to affirmatively further fair housing.
    • HUD had effectively restricted low-income minority families to segregated neighborhoods in the central city
    • During the 1990s, 89 percent of public housing units developed with HUD’s support in the Baltimore Region were in Baltimore City.
    • The majority – more than 67 percent – of the City’s Section 8 voucher holders live in census tracts that are 70 to 100 percent Black.
thompson v hud remedial phase expert report
Thompson v. HUDRemedial Phase Expert Report
  • The remedy must be goal-driven and adaptive to the dynamic nature of the housing market
  • The remedy must connect subsidized housing recipients to areas of opportunity.
  • The remedy must require HUD to utilize a variety of tools available, including vouchers and new housing production.
opportunity index for the baltimore region
Opportunity Index for the Baltimore Region
  • We have worked to create an opportunity index for the Baltimore region
  • The index is made up of more than a dozen variables related to opportunity
black neighborhoods are disproportionately impacted by subprime foreclosures
Black Neighborhoods are disproportionately impacted by subprime foreclosures
  • About 46% of Hispanics and 55% of blacks who obtained mortgages in 2005 got higher-cost loans compared with about 17% of whites and Asians, according to Federal Reserve data.
    • Other studies indicate they would have qualified for lower-rate loans.
  • The most recent estimate is that African American and Latino homeowners will lose ¼ TRILLION dollars in home equity in the next two years as a result of the crisis. The largest loss of home equity ever experienced in US history among African American and Latino homeowners.

reverse redlining
Reverse Redlining
  • Reverse Redlining – “practice of targeting residents in certain geographic areas for credit on unfair terms due to the racial or ethnic composition of the area.” Unlike redlining, which is denying prime credit to those communities, reverse redlining is targeting an area for deceptive, predatory, or otherwise unfair lending practices. Reverse redlining has repeatedly been held to violate the Fair Housing Act.
  • Reverse redlining requires the condition of residential segregation, often a product of twentieth century federal government, mortgage lender, and real estate industry practices.
  • In Baltimore, the neighborhoods with 90% African American populations are at the center of the foreclosure crisis. This was a result of predatory practices.
    • Two-Thirds of Wells Fargo’s foreclosures in 2005 to 2006 were in census tracts that were over 60% African-American, but only 15.6% were in tracts that were 20% or less African-American.
    • A Wells-Fargo loans in predominantly African-American neighborhood were four times as likely to result in foreclosures as a Wells Fargo loan in a predominantly white neighborhood.
    • Wells-Fargo made high-cost loans to 65% of its African-American mortgage customers in Baltimore, but only to 15% of its white customers in Baltimore. Importantly, an African-American borrower was 2.5 times more likely to be a high cost than a refinance loan to a white borrower.
the web of housing challenges
The Web of Housing Challenges

Structural Racialization Analysis Applied

Housing Challenges

equity as a diagnostic tool
Equity as a Diagnostic Tool
  • The “Miner’s Canary” metaphor
    • Disparities facing communities of color are indicators of larger societal challenges
broader impact
Broader Impact

“ We believe that evidence of disparate pricing for borrowers of color is likely a symptom of a larger set of issues in a market that has gained notoriety as a magnet for predatory lenders.”

- Unfair Lending: Study of Racial Impact on Price of Subprime Mortgages By the Center For Responsible Lending

immediate impacts
Immediate Impacts
  • As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.
  • Example:
    • Don Doyle, computer engineer at Lockheed Martin with six-figure income and had a stellar credit score in 2004, had to refinance his home in Northern California to take cash out to pay for his daughter’s college tuition.
    • Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.”
  • Source:
cost to cities
Cost to Cities
  • A Structural Perspective helps us see that these systems have impact for the entire society. Racialized arrangements impact everyone, but they impact marginalized groups first.
  • A homeowner loses their house. The investors lose their collateral asset. Communities lose property tax values, which cities and states suffering. Schools lose revenue. Services have to be cut back. It is a cycle that is vicious as it is pernicious.
cost to cities38
Cost to Cities
  • Here’s how cities are affected:
  • Foreclosures leads to abandoned and vacant homes. This causes neighborhoods, especially ones already struggling, to decline rapidly by reducing the value of property of nearby homes. (A Fannie Mae study using Chicago found that every foreclosure is responsible for an average decline of 1% in the value of each single-family home within a quarter mile).
  • This in turn results in lost tax revenue from property taxes, which makes it more difficult for the city to borrow funds because the value of the property tax base is used to qualify for loans.
cost to cities39
Cost to Cities
  • In addition, cities lose real estate transfer tax revenues because of the depressed market for home sales.
  • These cities must spend additional funds for services related to foreclosures:
    • Cost of securing vacant homes
    • Holding administrative hearings
    • Conducting other administrative and legal procedures
    • Costs of providing additional police and fire protection as vacant properties because centers of dangerous and illicit activities
    • The total estimate costs for the city of Baltimore are about $34,199 per foreclosure.

Systems Perspective (Multiple Impacts)

Capital Market ‘Credit crunch’

Banks, police and courts saddled with foreclosures

Families lose their homes, wealth and safety

SUBPRIME LENDING: We didn’t care about the canary...

Affected neighborhoods are being reduced to ‘ghost towns’

Reduced spending and retail flight

linked fates transformative change
Linked Fates…Transformative Change
  • Our fates are linked, yet our fates have been socially constructed as disconnected, especially through the categories of class, race, gender, nationality, region…
how did this happen who s who
How Did This Happen?Who’s Who?
  • Understanding the Players:
    • The Originators
    • The Mortgage Holder
    • The Mortgage Brokers
    • The Servicers
    • The Securitizers
      • Trust/Trustee
      • Custodian
      • Rating Agencies
      • Investors
how did this happen mortgage brokers
How Did This Happen?Mortgage Brokers
  • Mortgage Brokers historically serve as intermediaries that arrange financing for a homeowner, often to find their clients the best available loan.
  • In the subprime market, Mortgage brokers were acting more like direct salesmen, marketing sub-prime loans to desirous would-be homeowners who might not be able to afford a home under a prime mortgage arrangement.
mortgage brokers
Mortgage Brokers
  • The mortgage broker fee was built into the mortgage, and was typically $2500, but could be as much as $8000 in more egregious circumstances. But the fee is buried in paperwork and hidden in the mortgage. The mortgage broker only makes money when the mortgage is originated or refinanced.
    • Thus, subprime ARMs made even more money for brokers whose clients were forced to refinance before the “teaser” period ran out.
  • Worse, Mortgage brokers were getting kickbacks, known as “yield spread premiums” to find subprime borrowers for banks.
how did this happen47
How Did This Happen?
  • The Mortgage Originator: This is mortgage lender whose name appears on the loan note.
  • Mortgage Holder: This is the person who owns the mortgage.
  • Since many mortgages were assigned by the originator to the purchaser on the secondary market, very often the mortgage holder is not the person who made the loan.
how did this happen48
How Did This Happen?
  • So, Mortgage originators typically sold the mortgage to a downstream buyer who could then use the mortgage as collateral to a fancy securities instrument that would be sold to investors who hold mutual funds and similar investments.
  • In short, the banks and mortgage brokers set people up in loans they knew they would not be able to afford, made lots of money, and passed the risk off to investors and to the homeowner.
how did this happen servicers
How Did This Happen?Servicers
  • Servicers: These are the companies that manage the mortgage payments, are responsible for keeping track of account balances, and engaging in loss mitigation and prosecuting foreclosures.
  • In many cases, they are the only party with whom the homeowner has any contact.
servicers the real problem now
Servicers: The Real Problem Now
  • They are not interested in the well being of the homeowner or the investors. They make money from ancillary fees:
    • Late fees
    • Income from forced place insurance commissions
    • Other “junk” fees
  • Often, they put payments into “suspension” and start to tack on fees, ambiguously labeled as “corporate fees” and the like, which is actually slush fund money.
  • Services have incentives to add fees because that is money they keep. Additional fees make it more difficult for homeowners to keep up with their payments.
  • They cause and speed up foreclosure
  • Common abuses include:
    • Overcharging of late fees
    • Junk fees
    • Escrow account problems
    • Suspense accounts
    • Misapplication of payments
  • Misapplication of payments is where they fail to credit funds and instead put payments towards junk fees. This has a snowball effect that directly leads to foreclosures
  • Servicers are really the key problem for homeowners. They are very difficult to deal with and will try to gauge homeowners.
servicers the real problem now53
Servicers: The Real Problem Now
  • Servicers junk fees harm everyone: homeowners, investors and communities.
  • Yet, typical mortgage advice often suggests that homeowners make “forbearance” or “repayment arrangement” with servicers.
  • This is very bad advice that will continue to harm homeowners, investors and communities.
bringing it all together
Bringing it All Together
  • Lenders, Mortgage Brokers, and Investment Banks were enticed by short-term profits resulting from exorbitant original fees, points, and pricing schemes. They offered irresponsible subprime loans to borrowers who could not afford them. They convinced them to accept the terms through deceptive means and promises to refinance at a later date.
  • Servicers right now are not helping. Onerous forbearance arrangements loaded with “junk” fees will keep homeowners underwater and accelerate foreclosures.