Racial Segregation and the American Foreclosure Crisis

The rise in subprime lending and the ensuing wave of foreclosures was partly a result of mar-ket 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 Reinvest-ment 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 fore-closures across U.S. metropolitan areas. To isolate subprime lending as the causal mecha-nism 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 impor-tant contributing cause of the foreclosure crisis, along with overbuilding, risky lending prac-tices, lax regulation, and the bursting of the housing price bubble. Keywords segregation, foreclosures, race, discrimination Four decades after passage of the Fair Hous-ing Act, residential segregation remains a key feature of America’s urban landscape. Levels of black segregation have moderated since the civil rights era, but declines are concentrated in metropolitan areas with small black populations (Charles 2003). In areas with large African American communities