The New Triangle: Racism to Greed to Subprime Lending

Ever since the motto of the Triangle Trade ("molasses to rum to slaves") found its way into one of the songs in 1776, it has been part of our public consciousness (although at least some of us did not need a musical to inform us). Well, if we are to believe a report from the Woodcock Institute, discussed by Rebecca Knight in a piece for the Financial Times, then, in the words of that ghostly giant from Twin Peaks, "It is happening again." The new triangle basically picks up where the old one left off and casually glides into the new millennium; it runs from racism to greed to subprime lending. Having already reviewed the discouraging evidence of the race factor in the job market, it should be no surprise that a similar skeleton should have come out of the mortgage market closet. You have to wonder, though, how long it might have stayed in the closet had the financial institutions not been thrown into crisis this week by an unanticipated high number of defaults of such loans.

This crisis reminded us that the financial sector still lives by Gordon Gecko's greed-is-good philosophy. Apparently, the number crunchers came up with a good argument for the tail end of the triangle: properly managed, subprime loans tied to an adjustable interest rate could make for a very tempting cash cow. The dirty secret that the Woodcock Institute uncovered was how the front end of the triangle covered the customer base for those loans:

A study conducted by the Woodcock Institute, a Chicago-based organisation that promotes community development, and four other groups found that home loans are more expensive for minorities in Boston, Charlotte, Chicago, Los Angeles, New York City and Rochester, New York.

In these six cities, blacks were 3.8 times more likely to receive a higher-cost home loan than were white ­borrowers, while Latinos were 3.6 times more likely than white borrowers to receive a higher-cost loan. Subprime loans – mortgages tailored to homebuyers with poor credit ratings – typically have interest rates at least 3 percentage points above regular mortgages.

Knight reinforced these findings with a report of another study:

A separate study on the subject showed that the trend is particularly pronounced in Boston. Jim Campen, an economics professor at University of Massachusetts Boston, found that high-income minorities were six to seven times more likely to have an expensive mortgage than high-income whites. Around 70 per cent of black and Latino borrowers in Greater Boston with incomes between $92,000 (£48,000, €70,000) and $152,000 took out mortgages with high interest rates in 2005, according to the study.

At this point, however, my attention shifted from the new racist triangle to the choice of words in talking about it:

“This is just one manifestation of the great inequality of American society,” said Prof Campen, a long time analyst of mortgage lending to minorities. “This is news because it’s not just black people losing their homes; it’s white investors on Wall Street losing their money.”

It's the second clause of that second sentence that really gets you in the gut. Campen is probably as well-intentioned as any other scholar (at least in economics); but he seems to have stumbled over the connotation that the triangle is only important because the crisis in an unanticipated level of defaults caused the stock markets to take a big dive. He may not have meant to say it, but what came out was the claim that this was only important because "white investors on Wall Street" were losing money.

Back in January when I reported on the second of the job market studies, I concluded by asking how many more of these studies we would be encountering. I guess my question has now been answered. My guess, however, is that still more studies will emerge. I just hope that the American media pays as much attention to them as the Financial Times is currently doing.