3 - Predatory Lending Practices Prior to the Global Financial Crisis

Summary

Chapter 3 examines the predatory and subprime lending that occurred in the years leading up to the collapse of the subprime mortgage market, during which mortgage lenders developed a number of new products with opaque and predatory terms. At the time of the subprime market collapse, 20 percent of homes in the U.S. mortgage market were purchased with subprime loans. A “dual mortgage market” emerged, in which borrowers of colour were served primarily by subprime lenders, while higher-income and white borrowers were served primarily by conventional lending institutions. Even after controlling for differences in borrower and neighbourhood risk characteristics, African-American and Latinx borrowers were more likely to receive subprime loans and/or loans with other risky product features than similarly situated white borrowers. This chapter examines the various mechanisms used in predatory mortgages, including inappropriate and sometimes fraudulent conduct. Many borrowers mistakenly believed the mortgage brokers acted in borrowers’ best interests. These practices and many others created a pernicious downward cycle for African Americans in terms of loss of wealth and of homes.