Jacob William Faber

Racial Dynamics of Subprime Mortgage Lending at the Peak

Subprime mortgage lending in the early 2000s was a leading cause of the Great Recession. From 2003 to 2006, subprime loans jumped from 7.6% of the mortgage market to 20.1%, with black and Latino borrowers receiving a disproportionate share. This article leveraged the Home Mortgage Disclosure Act data and multinomial regression to model home-purchase mortgage lending in 2006, the peak of the housing boom. The findings expose a complicated story of race and income. Consistent with previous research, blacks and Latinos were more likely and Asians less likely to receive subprime loans than whites were. Income was positively associated with receipt of subprime loans for minorities, whereas the opposite was true for whites. When expensive (jumbo) loans were excluded from the sample, regressions found an even stronger, positive association between income and subprime likelihood for minorities, supporting the theory that wealthier minorities were targeted for subprime loans when they could have qualified for prime loans. This finding also provides another example of an aspect of American life in which minorities are unable to leverage higher class position in the same way as whites are. Contrary to previous research, model estimates did not find that borrowers paid a penalty (in increased likelihood of subprime outcome) for buying homes in minority communities.

Effect of neighborhood stigma on economic transactions

Significance Although previously theorized, virtually no rigorous empirical evidence has demonstrated an impact of neighborhood stigma on individual outcomes. To test for the effects of neighborhood stigma on economic transactions, an experimental audit of an online classified market was conducted in 2013–2014. In this market, advertisements were placed for used iPhones in which the neighborhood of the seller was randomly manipulated. Advertisements identifying the seller as a resident of a disadvantaged neighborhood received significantly fewer responses than advertisements identifying the seller as a resident of an advantaged neighborhood. The results provide strong evidence for an effect of neighborhood stigma on economic transactions, suggesting that individuals carry the stigma of their neighborhood with them as they take part in economic exchanges. The hypothesis of neighborhood stigma predicts that individuals who reside in areas known for high crime, poverty, disorder, and/or racial isolation embody the negative characteristics attributed to their communities and experience suspicion and mistrust in their interactions with strangers. This article provides an experimental test of whether neighborhood stigma affects individuals in one domain of social life: economic transactions. To evaluate the neighborhood stigma hypothesis, this study adopts an audit design in a locally organized, online classified market, using advertisements for used iPhones and randomly manipulating the neighborhood of the seller. The primary outcome under study is the number of responses generated by sellers from disadvantaged relative to advantaged neighborhoods. Advertisements from disadvantaged neighborhoods received significantly fewer responses than advertisements from advantaged neighborhoods. Results provide robust evidence that individuals from disadvantaged neighborhoods bear a stigma that influences their prospects in economic exchanges. The stigma is greater for advertisements originating from disadvantaged neighborhoods where the majority of residents are black. This evidence reveals that residence in a disadvantaged neighborhood not only affects individuals through mechanisms involving economic resources, institutional quality, and social networks but also affects residents through the perceptions of others.

Race and the Housing Cycle: Differences in Home Equity Trends Among Long-Term Homeowners

Abstract During the past decade, housing markets across the United States experienced dramatic upheaval. Housing prices rose rapidly throughout much of the country from 2000 until the start of 2007 and then fell sharply during the next 2 years. Many households lost substantial amounts of equity during this downturn; in aggregate, U.S. homeowners lost

Segregation and the Geography of Creditworthiness: Racial Inequality in a Recovered Mortgage Market

7 trillion in equity from 2006 to 2009. Aggregate home equity holdings had fallen back to 2000 levels by early 2009. Whereas this intense volatility has been well documented, there remain unanswered questions about the variation in experiences across racial groups, particularly among those who purchased their homes before the boom and kept them through the collapse of the market. Did this housing market upheaval widen the already large racial and ethnic gaps in housing wealth? Using the American Housing Survey, we analyze differences in the changes in home equity experienced by homeowners of different races and ethnicities between 2003 and 2009. We focus on homeowners who remained in their homes over this period, and find that blacks and Hispanics gained less home equity than whites and were more likely to end the period underwater. Black–white gaps were driven in part by racial disparities in income and education and differences in types of homes purchased. Latino–white disparities were most dramatic during the market’s bust.

Cashing in on Distress: The Expansion of Fringe Financial Institutions During the Great Recession:

Abstract The subprime boom and subsequent foreclosure crisis highlighted risk associated with pursuit of the American Dream of homeownership. People of color and those living in segregated areas were particularly harmed by the dramatic rise and fall of the housing market. Almost a decade after the economy’s collapse, questions remain about racial and spatial disparities in access to mortgage credit. I leverage Home Mortgage Disclosure Act data to explore mortgage application outcomes in 2014. Well into the economy’s recovery, minority borrowers remained at a disadvantage in the mortgage approval process. Whereas 71% of White applicants were approved for home loans, approval rates were lower for Asians (68%), Latinos (63%), and Blacks (54%). Black and Latino borrowers were also significantly more likely to receive higher cost loans than Whites, a practice that has accelerated since the foreclosure crisis. Results suggest that segregation exacerbated racial disparities as lenders funneled expensive credit into isolated minority communities. Furthermore, the differences between White and minority outcomes were largest in census tracts where subprime lending was common in 2006 and foreclosures accumulated during the Great Recession. Together, these findings indicate how spatially organized markets have racialized consequences in a highly segregated society.

The Geography of Stigma: Experimental Methods to Identify the Penalty of Place

The Great Recession was a consequence of widening inequality and the growth of a tiered financial services system, in which the rich and the poor have access to vastly different tools for wealth accumulation. The spatial organization of these dynamics created neighborhoods vulnerable to predation on behalf of subprime lenders and other fringe service providers. This project seeks to understand the reproduction of institutional marginalization in consumer finance. Results show that racially isolated neighborhoods in New York City, where subprime lending and foreclosures were common, were uniquely vulnerable during the Great Recession and were communities where check cashing outlets (CCOs) sprouted, highlighting a mechanism for the reproduction of inequality over time. CCOs cost more per transaction than a checking account—potentially totaling tens of thousands of dollars over a career. The link between widening financial services inequality and the recession’s consequences provides a strong impetus for safety net and community investment policies.

Financially Overextended: College Attendance as a Contributor to Foreclosures During the Great Recession

The United States remains a spatially segregated nation by many measures including race, income, wealth, political views, education , and immigration status. Scholars have, for many years, grappled with questions stemming from spatial inequality and have come to recognize the neighborhood in which an individual lives as a socially organizing unit of space, predictive of many individual-level outcomes. The mechanisms that underlie the relationship between neighborhoods and outcomes for residents, however, remain relatively underexplored. In this chapter, we show how the use of audits and field experiments can help uncover one such mechanism—place-based stigma in social interactions. Specifically, we describe the methodology of a previous study (Besbris M, Faber JW, Rich P, Sharkey P, Effect of neighborhood stigma on economic transactions. Proc Nat Acad Sci 112:4994–4998, 2015) that revealed how signaling residence in a poor community of color negatively affected sellers’ ability to attract buyers in a classified marketplace. We focus on the study’s operationalization of neighborhoods and show how future research can use non-individual-level treatment characteristics such as units of space. Doing so helps us better understand the causal relationship between space and individual-level outcomes, as well as better parse the effects of individual-level variables versus non-individual-level variables, which are often conflated in non-experimental research. We close by suggesting the implementation of field experiments in testing for effects at other geographic scales, such as metropolitan area, state, region, country, or continent.

Book Review: Foreclosed America

Although subprime mortgage lending and unemployment were largely responsible for the wave of foreclosures during the Great Recession, additional sources of financial risk may have exacerbated the crisis. We hypothesize that many parents sending children to college were financially overextended and vulnerable to foreclosure as the economy contracted. With commuting zone panel data from 2006 to 2011, we show that increasing rates of college attendance across the income distribution in one year predict a foreclosure rate increase in subsequent years, net of fixed characteristics and changes in employment, refinance debt, house prices, and 19-year-old population size. We find similar evidence of college-related foreclosure risk using longitudinal household data from the Panel Study of Income Dynamics. Our findings uncover a previously overlooked dimension of the foreclosure crisis, and highlight mortgage insecurity as an inadvertent consequence of parental investment in higher education.

Where, When, Why, and For Whom Do Residential Contexts Matter? Moving Away from the Dichotomous Understanding of Neighborhood Effects

The evidence presented in the first two chapters strongly suggests that regional governance structures are advantageous for cities. However, Rusk acknowledges that government consolidation or annexation may not be viable options in all metropolitan regions. Physically constrained cities and metros where voters oppose government consolidations can overcome jurisdictional fragmentation through three regional mechanisms. Racial and economic segregation and fiscal disinvestment can be addressed at the regional level through inclusionary zoning mandates, coordinated land use and transportation planning to control growth, and tax-base sharing programs. These three regional policies can deliver the benefits of consolidation while minimizing political and resident opposition. Regional strategies do still require significant coordination and cooperation across jurisdictional boundaries. Rusk argues that several strategies could ease the consolidation and annexation processes or, at the very least, encourage reinvestment in existing areas. Because of the entrenchment of local politics and frequent lack of voter support, the state and federal levels have the greatest potential for helping cities stretch. States can revise annexation legislation to empower cities, legally limit the creation of new municipalities, create regional partnerships, and facilitate the consolidation of city and metro governments. Assuming that the federal government will be unable or unwilling to allocate additional money to cities, Rusk recommends reallocating resources to offset the negative consequences that have resulted from decades of federal policies. Transportation and housing funding can reduce sprawl and segregation by targeting areas for reinvestment (rather than new development) and encouraging spatially distributed mixed-income housing opportunities. While the state and federal levels are likely to be the most effective pathway to change, local organizations and communities should also build common interest coalitions to ensure that their voices are heard and that their needs are met. Cities without Suburbs provides clear data analysis and synthesis for metropolitan areas across the United States, illustrating the challenges that cities face. The case studies included throughout the book give a rich context, best practices, and examples for overcoming urban problems. Rusk does an admirable job at highlighting solutions for each level of government that are realistically achievable. While the book is primarily focused on jurisdictional fragmentation as the driver of city decline, Rusk also engages with other factors such as deindustrialization, gentrification, neighborhood age, and immigration patterns. He readily provides examples of places where increased elasticity through annexation or consolidation are either unlikely or will provide no real benefit. This thorough exploration of regional planning and its impacts is a significant contribution to planning practice and decline theorization. The book lacks in two areas that are perhaps outside of the scope of Rusk’s argument. First, the limitations of regional governance and discussion of appropriate scale are not fully addressed. The county appears to be the optimal scale of metropolitan governance, but it seems that there are instances when metros span multiple counties, and specific concerns could merit either a larger or smaller scale. Environmental and economic development issues may require a larger scale than the county while concerns of minority political power dilution could call for smaller or alternate governance structures. Second, Rusk acknowledges the growing diversity of suburbs, specifically citing the needs of older, inner suburbs. Despite this, the inherent assumption still stands that outer suburbs are growing and wealthy. As poverty in inner and outer suburbs becomes increasingly problematic, some suburbs may not have the resources to contribute to central cities and may in fact bring additional burdens to a regional arrangement. Given that decline and poverty exist throughout the metro, investment prioritization and the dynamic of regional relationships is increasingly important. Cities without Suburbs contributes to our understanding of regional processes. Rusk lays out compelling evidence that planners and policy makers should consider the regional scale when addressing housing, transportation, and economic development strategies. The book is a valuable volume for urban and suburban researchers, state legislators, federal policy makers, and grassroots coalitions. Additionally, the book could serve as a supplemental text for regional planning, social equity, and public policy courses.