Academic journal article Sociological Focus

Subprime Loans: A Reversal of Capital and a New Means of Inequality

Academic journal article Sociological Focus

Subprime Loans: A Reversal of Capital and a New Means of Inequality

Article excerpt

This article provides a socio-historical analysis of particular financial instruments in the housing market. I argue that the production and consumption of subprime loans continue to evince a pattern of racial discrimination. Whereas racialized loans in the mid-1900s were based on providing credit to whites and precluding blacks from accessing credit (Wave I), a new means of financial production was predicated by the opposite (Wave II). Although the first wave of home ownership led to real increases in wealth, the second wave led to a housing bubble that resulted in less or negative wealth. Under the subprime era, banking institutions could reap profits when homeowners paid their loans on time or defaulted. White homeowners continued to fare better than black homeowners.

Buying a home has been a traditional means to build wealth in America throughout the twentieth century. Proprietorship rates fluctuated around 64 percent from 1984 to 1994 and then increased each year until they peaked at 69 percent in 2004 (U.S. Department of Commerce 2012) while home prices generally increased yearly between 1975 and 2007 (Office of Federal Housing Enterprise Oversight). In fact, home prices increased each quarter from 1991 through the third quarter of 2007 (Baily, Litan, and Johnson 2008).

At the turn of the twenty-first century it seemed as if homeowners and everyone else related to the housing industry benefitted from rising home values (Rotemberg 2008:1). However, like other economic downturns, the recent collapse in the housing market disproportionately affected geography, income groups, and race. In terms of regions, for example, 35 counties accounted for more than half of all foreclosure filings, and four states in 2008 (NV, CA, AZ, and FL) accounted for 47 percent (Cobb 2009). Concerning income groups, the relationship between home value and net worth became more important the lower the household income (Barth et al. 2009). Concerning race, home equity accounted for two-thirds of the mean net worth of black and Hispanic households at the turn of the twenty-first century (Kochhar 2004:2). By the end of the first quarter of 2012, 31 percent of homeowners were underwater with a negative balance of about $1.2 trillion and negative home equity widened extant racialized wealth gaps (Taylor et al. 2011).

Douglas Massey (2005:150) stated while the housing market was peaking: "As problematic as minority access to mortgage lending may be, being offered predatory loans is probably better than being offered no loans at all." Under certain conditions, brokers may bridge "structural holes" (Burt 2005:17) and connect social networks whereby all parties involved may benefit from what would otherwise market be disconnections. Unfortunately, these connectors can also foster asymmetrical power and information dynamics, which may be further exacerbated by racial inequalities (Courchane, Surette, and Zom 2004).

Abuses in the mortgage industry have been recently addressed by the Department of Justice (DOJ) as noted on their website (2012; 2013). Regarding "robo-signing" and premature foreclosures, the DOJ settled cases with Bank of America, J.R Morgan, Wells Fargo, Citigroup, and Ally Financial in 2012. In the same year, the DOJ also reached a settlement with Wells Fargo, the nation's largest residential mortgage lender, with respect to predatory lending practices against black and Hispanic homeowners for loans originated between 2004 and 2009. One year later, the DOJ settled cases with J. P. Morgan, Citigroup, and Goldman Sachs concerning the securitization of faulty derivatives; Goldman not only sold faulty derivatives (mortgage backed securities [MBSs]) they also purchased swaps on those securities.

While the discussion of subprime loans has been thoroughly examined by legal, economic, business, and finance scholars, this paper provides a socio-historical analysis of particular financial instruments in the housing market. …

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