Tuesday, May 25, 2010

White flight, anti-redlining, and the mortgage crisis

I had planned to start this post with the popular story, that the Community Reinvestment Act caused the mortgage crisis. The general story goes something like this: in the name of equality CRA forced banks to give mortgages to people who couldn't pay them back, leading to a surge in home prices out of proportion with income and inflation, peaking with the bubble that we just saw burst. And somewhere I'd seen the graph of home prices, incomes, and when CRA was enacted. It all fit. So obviously I had to prove it wrong.

So please accept this strange assumption: let's assume that the narrative which I disagree with is based on facts, but draws the wrong inferences.

Cancel that, this works. Sort of. It places the bubble at around 1995. But that doesn't fit the data so well. Let's not let facts get in the way of our opponents. Oh the comment makes me laugh.

Let's look at the other side of racism in real estate: where you can buy a home. Once upon a time people would write and accept contracts which stated that they would not resell the home to black people. This was an effective way of keeping white neighborhoods white. At about the same time that CRA went up, so did segregation contracts become illegal. Combine that with legislation for race-neutral lending, and suddenly black people can move into white neighborhoods.

If they can afford it. In fact there was not a flood of poor, uneducated, criminal blacks to white neighborhoods. Instead the black middle class, who wanted to go somewhere better and to get out of that mess, they moved. But why didn't they move to good black areas? Well, there weren't a whole lot, since race-based lending tends to bring down the middle class along with the poor who they are stereotyped with.

But white residents weren't entirely clear on the "middle class black people will not rape your daughter and rob your house while smoke pot" thing. So they left. Simple supply and demand, even without any discounting due to urgency, will drive down prices. That allows a lower class of black people to move in, driving down prices even more, bringing in more, and so on. Meanwhile the middle class blacks see that the neighborhood has gone to shit, so they leave too.

On the surface this would appear to cause prices to drop. On the contrary, it's actually a perfect scenario for both oversupply and higher prices.

Moving out means a new home, driving construction. There's also a rush, meaning the new houses will cost more. Meanwhile in the previous neighborhood the home values are plummeting, after they have been bought, resulting in upside down mortgages. Walk away from that and buy a new house.

Why would the banks give loans for this? Well sure the white people might seem to be overpaying and rushing, but they're responsible middle-class people who have been paying off their loans and have savings accounts and whatnot, so it would seem to make sense to loan money to them. The black middle class, well it is black, but it's middle class and they can't legally discriminate. As for the poor coming after, everything is so cheap, there's nowhere to go but up. It helps when you can just mislabel and sell off the loans if they don't look as good as expected.

So a wave goes out from the city, driving prices up at the front, crashing them behind, and creating the Alice in Wonderland scenario of overpriced homes, oversupply of homes, and a whole lot of unoccupied places.

This shouldn't be taken as factual, and hopefully hasn't, but just as a "maybe this is it?" theory. I'll have to do some more digging to see if it's actually worth anything.


Unknown said...

Well I didn't take it as factual, so don't worry about me. The CRA played a part in the mortgage/housing crisis our country as seen, but only a part. It was so huge, so widespread, so all encompassing very few who don't have intimate knowledge of it only sit and speculate but to little avail.

And I would never blame black people. I mean, my one black friend would have his feelings hurt. As a white guy I couldn't have that happen, I'd lose all my street cred.

Klepsacovic said...

I'm not blaming black people, but fear of them.

I wouldn't be surprised of CRA did play a role in the crisis, after all, a program which encourages lending to a group which has generally had higher default rates is likely to cause some increase in problems. But like you said, it can't have all the blame, after all, middle-class white families defaulted as well, not to mention the bubble being not isolated to America.

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