ABSTRACT
The United States subprime mortgage and foreclosure crisis would seem to provide an ideal case study of how racial and gender stratification (William Darity Jr. 2005), amplified by the exercise of power (Elissa Braunstein 2008), can impact economic outcomes. Subprime lending exploited spatial racial disparities built up during decades of racial redlining and discrimination in creditmarkets, as well as by banks’ withdrawal fromminority neighborhoods. Andgiven the concentrationof female-headedhouseholds among racial and ethnic minorities, this crisis has a clear gender dimension as well. Many sociologists, geographers, and urbanologists have emphasized the
connection between race and space in the subprime crisis since it emerged six years ago. But most economic explanations of the subprime crisis have
ABSTRACT
KEYWORDS
INTRODUCTION
The United States subprime mortgage and foreclosure crisis would seem to provide an ideal case study of how racial and gender stratification (William Darity Jr. 2005), amplified by the exercise of power (Elissa Braunstein 2008), can impact economic outcomes. Subprime lending exploited spatial racial disparities built up during decades of racial redlining and discrimination in creditmarkets, as well as by banks’ withdrawal fromminority neighborhoods. Andgiven the concentrationof female-headedhouseholds among racial and ethnic minorities, this crisis has a clear gender dimension as well. Many sociologists, geographers, and urbanologists have emphasized the
connection between race and space in the subprime crisis since it emerged six years ago. But most economic explanations of the subprime crisis have
ignored stratification, race, and gender, since economists see subprime lending as an innovation that brings more suppliers and more instruments into the mortgage market; as such, it should expand choice and enhance allocative efficiency. In this view, properly regulated financial markets are socially neutral vehicles for allocating credit and distributing risk. So any crisis in subprime lending must be due to distortions and misaligned incentives in these markets, borrowers’ over-optimistic assessments of housing price trajectories, or financial authorities’ failure to prevent unwise lending. The defining aspect of the crisis was not that subprime loans and other forms of predatory lending disproportionately victimized minorities and women, but that borrowers were myopic, overly greedy, or both. This rift between the explanatory frameworks of economists and other
social scientists can be traced to two sources: first, economists’ restricted view of when unjust – because it is unjustified – racial and gender discrimination can arise in credit markets; second, their inattention to the exercise of power in markets. In the wake of the subprime crisis, some economists are starting to rethink the premise of market neutrality. Michael R. Roberts and Amir Sufi (2009) have argued that financial structures may be systematically inefficient due tomisaligned incentives. Following this logic, Adam J. Levitin and Susan M. Wachter (2012) have suggested that credit was systematically oversupplied to the housing market during the recent bubble insofar as asymmetric information andmarket complexity led investors to under-assess lending risks in mortgage-backed securities. But links between misaligned incentives and risks, and unjust – and thus socially non-neutral – outcomes have yet to be made. We address two key questions about subprime lending that begin to
make these links. First, why were minority and women applicants, who had historically beendisproportionately excluded fromequal access tomortgage credit, superincluded in subprime mortgage lending? Second, why didn’t the flood of mortgage credit in the 2000s housing boom – an oversupply of credit suggesting supercompetition – reduce the proportion of minority and women borrowers burdened with unpayable subprime or high-cost mortgages? Our response to these questions is to argue that racial and gender
inequality, along with lenders’ exploitation of the differential social power that inequality generates, are central to the political economy of subprime lending and hence of the subprime crisis. What is missing in economists’ accounts of market inefficiency is what Diane Elson (1994) and others have called the “meso” level of analysis: attention to the social construction of the institutional mechanisms whereby subprime loans were created and distributed. This level enables us to see how market power was attained and used in the long, gendered history of the exclusion of minorities from equal access to housing and mortgage credit.
