the color of money

July 31st, 2011

(learn more about the book at the “Ask Me Anything” on Reddit)

A newly released report from the Pew Research Center about the inescapably color-coded impact of the recent recession brought some startling data to light: the median net-worth of a white family is now 20 times that of a black family, nearly doubling the size of the pre-recession gap.  The wealth differential between whites and minorities in America is now at an all-time high, a startling reality that was reported on by many major news organizations.

But no one explored the long-standing economic disparities that existed between races in America long before the current economic crisis emerged, or even attempts to get to the root of the issue.  Roots which extend back to the birth of sub-prime mortgages, an industry that wasn’t about classifying the mortgages themselves but instead about categorizing and labeling the people applying for them based on one important and decisive factor.

Plenty of articles mentioned the fact that between 2005 and 2009 although white families saw their median wealth fall by 16%, blacks watched their median wealth plummet 53%.  Much of the disparity is accounted for by the Pew Research Center as a result of declines in media home equity, but why should black and white homes have such different values?

Eminem seemed to have no sense of the irony that was invoked as his self-consciously white autobiographical film, 8 Mile, highlighted the hopeless plight of Detroit’s urban black community that’s existed for generations. The 8 Mile district was created in 1941, when a six-foot wall was built around a black enclave that was deemed unfit to accept loans from the Federal Housing Administration. This was “part of a system that divided the whole city, in theory by credit-rating, in practice by colour.” And so the segregation that emerged in Detroit “was not accidental, but a direct consequence of government policy.”1

This policy of segregated mortgages became known as “red-lining,” and by the 1950s blacks and whites were taking out mortages with drastically different interest rates.2  After all, sub-prime was originally coined to describe the people receiving the loans, and was simply code for “black.”

Hotlanta served as a case study for mortgage-based racism, as a Pulitzer-winning series in the Atlanta Journal and Constitution  so aptly captured.

It showed how blacks were routinely rejected for loans which whites in a comparable economic situation were accepted for. And this phenomenon wasn’t isolated to one city, as a 1991 study showed that out of 6.4 million mortgage applications nationwide, even after income was controlled for – blacks were rejected twice as often as their white counterparts. However that wasn’t the worst of it, in urban centers such as Boston, Philly, Chicago, Minneapolis, blacks were rejected three-times more often than whites.3

Even well-to-do blacks have been unable to escape from this institutional prejudice.

Wealthy black neighborhoods in the DC suburbs have a much tougher time getting loans than low-income white areas, and in Boston blacks living on the exact same street as their white neighbors and earning similar incomes found it much tougher to get a mortgage than their white neighbors. Joe Kennedy summed up the cumulative effect of this racial injustice well, describing “an America where credit is a privilege of race and wealth, not a function of ability to pay back a loan.”4

With home equity making up 44% of an average American’s family’s net worth and fully 60% among our middle class,5 the statistics around homeownernship help vividly delineate the racial schisms of American wealth. Not only do blacks pay higher interest rates, have higher downpayments, have less access to credit, get turned down more frequently for loans no matter what’s controlled for, and pay what amounts to an 18% “segregation tax” because homes in black neighborhoods have much less equity than homes in white neighborhoods6 – but since 1970 black homes have appreciated in value roughly half as much as white homes.7

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