UBC Reports | Vol. 49 | No. 10 | Oct.
Not Necessarily for Sale
Racial and ethnic discrimination alive and well in American
By Erica Smishek
The more things change in the American inner city, the more
they stay the same.
For decades, banks engaged in a practice called red-lining,
refusing to make loans for home purchases, renovations or
business investment to low-income minorities. Today, everyone
and their proverbial dog are lining up to lend people money.
But according to UBC geography assistant professor Elvin Wyly,
its just creating new inequalities in the ways homes
are financed and what the cost and risk of the credit will
He cites the example of Beatrice, an African-American woman
in her 70s who has lived for almost 50 years in the same house
in Newark, New Jersey. After repeated targeted telephone solicitation,
she entered into a contract for exterior home repairs. The
agent got her a $46,500 loan at an annual interest rate of
11.65 percent, adjustable after six months. At the time, the
average initial rate for one-year adjustable loan was 5.73
percent. The loan was a balloon type, requiring
monthly installments for 15 years and then a final payment
Months later, after unconscionably poor workmanship,
Beatrice was shocked to learn the precise loan terms and requirements
when she re-read the numerous and confusing loan documents.
She stopped making payments and the lending firm filed for
foreclosure. Beatrice filed a counter-claim, claiming violations
of the Law Against Discrimination and the Civil Rights Act,
among others. The case eventually went to appeal and is believed
to be the first appellate court decision recognizing that
predatory lending practices can violate U.S. federal and state
civil rights laws.
There is a perception that weve gotten past racial
discrimination and its just simply not true, says
Wyly, a specialist in urban housing and labour markets. There
are new ways that home ownership is being transformed that
create new axes of inequality.
Inequalities are especially pronounced in gentrifying neighbourhoods.
Between 1993 and 2000, Wyly found that capital investment
for home purchases grew twice as fast in gentrified neighbourhoods
as in the suburbs. Over the same period, African-American
loan rejection odds in these neighbourhoods stood at 2.1 times
those for non-Hispanic whites - even after accounting for
differences in income and estimated credit risk.
He is currently studying changes in the U.S. banking industry
and the implications for home ownership among low-income households
and racial/ethnic minorities in inner-city U.S. neighbourhoods.
Supported by a three-year grant from the Social Sciences and
Humanities Research Council, and assisted by Mona Atia, a
doctoral student in geography, Wyly is analyzing how the institutional
structure of mortgage lending has changed race and income
inequalities among borrowers.
Preliminary results point to widening inequalities in the
ways homes are financed and used as vehicles of debt, creating
new inequalities in the long-term material benefits of home
Home ownership is presented as a solution to all the
worlds problems, says Wyly. This research
demonstrates that there are a lot of caveats to that.
Wyly has found that many minority and moderate-income households
gained access to home ownership for the first time in the
1990s, but new waves of investment are making many parts of
the city unaffordable and worsening the shortage of inexpensive
rental housing. In addition, old inequalities of exclusion
and discrimination remain.
The result is a complex urban system of old and new forms
of inequality, with wide variations in racial exclusion.
No matter how you slice and dice it, you still find
persistent racial disparities, he says. They vary
across different cities. In one city, racism has an African-American
face, in another Latino.
He has also uncovered discrimination along gender lines.
Lenders, brokers, realtors and home renovation agents
often specialize in narrowly-defined markets. The transformation
of the financial system has allowed some of these actors to
extract profits in new ways. Elderly African-American widows
have become an important target market for abusive home lending,
particularly if theyve built up some home equity over
the years, but also have medical expenses or home repair needs,
Some of the new practices used in inner-city housing
markets violate all our traditional assumptions about mortgages
and lending. Foreclosure and default are supposed to be bad
for everyone involved. But there are people who are learning
to make a profit from it.
The good and bad thing about the 1990s is that companies
found ways of making a profit out of almost anything,
The 1990s saw widespread innovations in underwriting, risk
modeling and ways of measuring and pricing the various components
of risk and profit in making a loan -- and selling these as
securities on Wall Street. The decade also saw the rapid erosion
of the traditional institutional structure of home mortgage
lending -- neighbourhood-based banks and thrifts were overshadowed
by large financial services conglomerates catering to the
wealthiest customers, specialized divisions of large banks
making high-cost loans to borrowers with blemished sub-prime
credit, and a new breed that have come to be called predatory
lenders who specialize in the home equity and refinance
loan markets and use deceptive tactics and hidden, excessive
fees to strip out homeowners equity.
We need to talk about those connections in a very open
way to understand whats good about those connections
and what needs to be changed, he says.