What Redlining Had to Do With the 2008 Financial Crisis

At a Georgetown University forum in September 2008, then-New York City mayor Michael Bloomberg was asked about the major economic story of the day: the roots of the exploding global financial crisis. This was the month that Lehman Brothers had filed for bankruptcy and the federal government had placed Fannie Mae and Freddie Mac into conservatorship. What was behind the bust?

Bloomberg’s answer: The implosion of the nation’s housing market was the result of the prohibition of redlining, the discriminatory practice by which lenders denied African-American homebuyers access to loans in the same neighborhoods where white homeowners lived. “It all started back when there was a lot of pressure on banks to make loans to everyone,” Bloomberg said. “And once you started pushing in that direction, banks started making more and more loans where the credit of the person buying the house wasn’t as good as you would like.”

Bloomberg is now a Democratic candidate for president, and his campaign is working to reframe the former mayor’s comments, which the Associated Press resurfaced on February 12. The story arrived as Bloomberg tried to contain fallout from the revelation of a speech he made in 2015 defending the New York Police Department’s racist stop-and-frisk policy; he released a new statement apologizing for the policy on February 11. Campaign spokesperson Stu Loeser told the AP that, as mayor, Bloomberg fought predatory lending, and that as a candidate he has a plan to expand homeownership opportunities for African American buyers. CityLab reached out to the Bloomberg campaign and will update this story with any new comments.

But fair housing experts are pointing out that Bloomberg’s past understanding of the roots of the financial crisis matters a great deal now, since the next person to occupy the White House may be responsible for rewriting fair lending rules. And his comments point to enduring myths about race and responsibility—assumptions that both predate the financial crisis and persist today.

(Disclosure: CityLab was recently acquired by Bloomberg LP. Michael Bloomberg is the company’s founder and majority owner.)

“I think that Bloomberg’s comments are a kind of cynical way of shifting blame back onto communities that were most victimized by the unchecked practices within the banking and real estate industries in the late 1990s and through the early aughts until the crisis exploded,” says Keeanga-Yamahtta Taylor, professor at Princeton University and author of Race for Profit: How Banks and the Real Estate Industry Undermined Black Homeownership, in an email.

Bloomberg was hardly alone in his conviction that unqualified minority homebuyers triggered the financial crisis by being so susceptible to predatory lenders: That idea took root on Wall Street even as the meltdown was in process, according to historians.

The facts of the financial crisis, however, don’t fit an account that puts the blame on minority buyers or fair-lending reforms. More than half of the subprime mortgages originated between 1998 and 2006 were loans for refinancing, according to the National Community Reinvestment Coalition, a grassroots organization working to end discrimination in lending. Fewer than 10 percent of subprime loan originations went to first-time homebuyers.

“When people were looking for answers for why mortgages seemed to be falling into default at the rate they were, there were corners of the financial community that had a ready narrative about creditworthiness,” says Nathan Connolly, director of the Racism, Immigration, and Citizenship Program at Johns Hopkins University.

The foreclosure crisis dealt tremendous damage to black and Latino neighborhoods. But white investors were disproportionately responsible for foreclosures in minority neighborhoods, according to a 20112 paper from John Gilderbloom at the University of Louisville and Gregory Squires at George Washington University. Their research shows that, in Louisville, there were approximately 2,000 foreclosure sales each year in 2007 and 2008. This figure breaks down to roughly 39 foreclosures in black communities (measured as census tracts) compared to about 20 foreclosures in white communities. Yet on average, 15 of the foreclosures in black communities happened on properties owned by non-occupant white investors, while white communities saw on average just two foreclosures on investor properties.

The bipartisan U.S. Financial Crisis Inquiry Commission also concluded that fair-lending regulations were not to blame for the financial crisis (with one dissenting conservative saying otherwise). Bank of America’s then-chief executive Brian Moynihan defended fair lending law.

Still, commentators at Fox News and The Wall Street Journal’s op-ed page often insisted that lax standards that encouraged uncreditworthy minority borrowers were to blame. Former presidential candidate Steve Forbes and former Republican House Majority Leader Dick Armey propped up an astroturfed site, AngryRenters.com, that claimed to represent the voice of renters infuriated with mortgage bailout efforts. Fox Business’s Neil Cavuto said that “loaning to minorities and risky borrowers is a disaster.”

“It was a myth that tore around the country like wildfire,” says National Community Reinvestment Coalition CEO Jesse Van Tol. “It was a myth heavily promoted by a group of fringe conservatives who wanted to promote a narrative that something other than market forces caused the financial crisis.”

The Community Reinvestment Act, the 1977 banking reform law that ended redlining, remains a target of ire among conservatives and big lending institutions. The Trump administration has proposed changes to the rule that would streamline and vastly simplify what banks are required to do in order to meet fair lending standards. Civil rights advocates warn that Treasury is designing reforms that would water down the law.

Discriminatory lending practices did not end after the passage of the Fair Housing Act, a cornerstone of civil rights law passed after the assassination of Martin Luther King Jr. in 1968. Lenders in California in the late 1970s would write “COLORED” backward on mortgage applications—“DEROLOC”—in order to flag them for denials, Connolly says. Even today, more than 40 years after the passage of the Community Reinvestment Act, black homeownership rates are dismal. African Americans have rarely had the combination of living wages and non-predatory mortgages to support homeownership.

Another related myth informs Bloomberg’s worldview, or at least as he expressed it during the financial crisis, Connolly says—that credit scores convey an objective truth about renters or owners. Here Bloomberg has an opportunity, even in light of his gaffe, to embrace policies that will undo the “mythology of credit,” he adds. (In January, Bloomberg outlined his plan to boost black homeownership in part by pushing lenders to change their credit-score models.)

In the decades that followed the end of redlining, Taylor notes, lawmakers weakened the regulations meant to protect black communities from speculation and predatory practices. That made historically marginalized communities more vulnerable to predatory practices that emerged specifically to target these renters and owners.

“All of these factors would contribute to the notion that these were places that could be considered ‘risky’ and with risk came the supposed colorblind pretext that Black buyers should be treated differently: higher interest rates, more expensive loan products and all of the other tools of what I refer to as ‘predatory inclusion’ into the conventional real estate market,” Taylor says by email.

More than a decade out from the financial crisis, myths about its cause still endure. As do myths about work, welfare, safe neighborhoods, and credit risks. Wall Street is still susceptible to many of these myths. “The notion of the undeserving poor,” says Connolly, “migrated directly into the notion of the undeserving buyer.”

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Foundations and Financial Institutions Recommit to Work for Racial Equity

I don’t have to look hard at the world around me today to find reasons for despair. We are being confronted daily with the fragility of institutions and norms that many of us took for granted. Inequality and racial gaps continue to grow relentlessly despite decades of well-intentioned work. A shockingly large number of Americans seem, at best, indifferent. The weight of these challenges and the complexity of their solutions can feel overwhelming.

It’s impossible to live in America today without being conscious of the ever-growing racial inequities, and the racism that has been in the groundwater of the country since our founding.

But for me, my role as president and CEO of Living Cities has served as a source of hope and optimism in these pretty dark times. That’s because I am seeing 18 of the world’s largest and most powerful foundations and financial institutions honestly grapple with how to effect change closer to the root causes of today’s mess. By acknowledging the limitations of working alone, exploring ways of collaborating differently, and confronting difficult realities around historical and ongoing injustice, the impact of members’ collective efforts may actually stand a chance of being commensurate with the scope of the problems we face.

This past May, those 18 institutions agreed to fund and govern the collaborative for another three-year period. This was the tenth time—dating back to 1991—that members have made this commitment. In fact, almost all of the foundations and financial institutions making up the Living Cities collaborative today have been at the table for more than half of our 28-year history. Just like the previous nine times they have been at this juncture before, the board recognized the ongoing importance of taking the long view, and having the patience to invest in and observe real, long-term change.



Living

However, unlike previous periods, the stated purpose of their work together is very different. For most of Living Cities’ history, our mission was broadly defined as achieving better outcomes for low-income people in US cities. But it’s impossible to live in America today without being conscious of the ever-growing racial inequities, and the racism that has been in the groundwater of the country since our founding. As we dug into root causes of economic inequality in the United States, we couldn’t escape the fact that race remains one of the strongest predictors of life outcomes. Without putting race and racism at the center of our work and our analysis, we simply had no hope of achieving our mission of achieving economic security for all. Therefore, today our collaborative is unapologetically about race and closing the racial gaps in income and wealth.

Cities

The board’s willingness to stay together for more than two decades, fund in three year rounds, and focus squarely on closing racial gaps is an anomaly within our current system. Our board recognizes that change takes time; the results we set for ourselves, and the partnerships and programs we develop to achieve them, are oriented around a ten-year or longer time horizon. Importantly, board and staff members have also been reckoning with and strengthening our analysis of the history and legacy of structural racism in this country and in our own institutions. I am encouraged by the way this collaborative model goes to the heart of criticism that philanthropy incentivizes programmatic, short-term fixes that don’t upset the status quo and have little accountability to achieving results.

Working together differently—centering race and a focus on a shared result—has also opened the door to different types of questions around the boardroom table: What could we do differently as an institution—or, perhaps, stop doing—to bring us closer to our shared goal? As individual leaders, what research, resources or relationships do I have access to that could support our collective progress?

What could we do differently as an institution—or, perhaps, stop doing—to bring us closer to our shared goal?

This has resulted in anything but business as usual. Over the last three years, sparked by these kinds of questions, board members and their staff have collaborated on issues ranging from racial inequity within the halls of local government—giving rise to our Racial Equity Here initiative—to shifting narratives in corporate America to promote equity as a business imperative. Participants in these narrative change efforts have used their own personal relationships to connect with C-suite leaders in the private sector, and begin to build a coalition of the willing.

Individual board members have shifted internal practices within their own institutions to combat the racism in our groundwater—interrogating hiring practices, measurement and evaluation practices, procurement and more within their own institutions. One member vastly increased funding for racial equity competency building among the foundation’s grantees. In the last year alone, we’ve co-hosted Undoing Racism workshops around the country with a variety of partners including the City of Austin, the Ford Foundation, the Boston Federal Reserve, and the Collective Impact Forum. These workshops were aimed at supporting changemakers in our networks to center race in their work, to see themselves as anti-racist organizers within their institutions, and to connect them to a broader cross-sector movement. Through survey responses, we have received overwhelmingly positive feedback about the value and impact of this training for participants in their own work.

We have a long way to go. But the ambition and commitment of member institutions, the Living Cities board of directors, and their staff is a source of inspiration for me as we continue working toward a world where race is no longer a predictor of outcomes. It’s on all of us—within philanthropy and beyond—not to rest on good intentions, but to hold up the mirror to our own institutions and to ourselves in order to create renewed hope in the promise of America, this time very intentionally for all.

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