OPINION: How Segmented Financial Markets in the U.S. Are Contributing to the Current Subprime Meltdown

November 02, 2007
Divisions in the U.S. based on ethnic lines remain a guarded secret from the rest of the world. As a result, conspicuously absent from analyses of the subprime meltdown by international organizations and media was any mention of color or ethnicity. But, it is well-known in the U.S. that the market for financial services, and for credit in particular, is segmented along lines of color. Studies by the Center for Responsible Lending, ACORN, and the U.S. Department of Housing and Urban Development all confirm that subprime lending is disproportionately concentrated on African American and Latino homeowners. These studies also show that subprime lending is highly concentrated in minority neighborhoods (both urban and suburban). In fact, higher-income African American and Latino borrowers are more likely to receive subprime loans than lower-income white borrowers. Commonly, subprime lending is defined as lending to people with impaired credit history. But this is a flawed definition; subprime lending is better defined as high-cost lending—loans that are more costly than prime credit. It is the segmented nature of the credit market which forces borrowers with equivalent credit histories as prime borrowers to settle for more expensive credit. A study by Freddie Mac estimated that 15 percent to 35 percent of subprime borrowers had high enough credit scores to qualify for prime credit; yet they ended up with subprime loans. It remains a fact that certain neighborhoods are not served at all or underserved by mainstream financial institutions, leaving a gap to be filled by alternative lenders that take advantage of the situation.