In the 1980s, we saw a large scale dismantling of civil rights gains and the triumph of “trickle-down” economics. As part of the trickle – down economics strategy, government implemented broad financial deregulation, specifically in the mortgage industry. Unfortunately, the strategy set the stage for the 2008 housing crisis.
Since the Great Depression, the U.S. government built and maintained a strictly regulated, lending process, which, due to segregationist polices, created an almost exclusively white American middle class. Then, during the 1960s and 1970s, the civil rights community helped the nation change course by convincing government to enacted policies to break down the barriers for African American homeownership.
However, the Reagan’s era of deregulation stopped this progress in its tracks. Our country began to partially dismantle policies designed to protect homeowners and the financial markets from unsustainable lending products. By the mid-90s, a new regime of exotic lending was in full effect, with balloon payments, ARMs, and other new types of loans that made use of the new space created by deregulation.
This process led to frantic lending activity. Initially, it appeared that after being excluded for so long, black and Hispanic buyers were being welcomed into the housing market. At long last, it seemed they would gain middle-class American status.
But then warning signs emerged that this was not a solution to low homeownership rates for African Americans. The vast amount of money flooding the U.S. mortgage market drove prices up during a time of stagnant wages. Households were forced to devote a larger portion of their income to their mortgage and savings began to decline as people went farther into debt to maintain their place in the new housing market.
Lenders took this opportunity to target communities of color and geography long ignored by traditional banks. These new players in the housing market infiltrated these communities and sought out buyers or homeowners who they could sell new sub-prime mortgages. Homeowners in minority neighborhoods were far more likely to be been sold a subprime high cost loan than a homeowner in a white suburb. And subprime loans even paid the lenders more in commissions and fees.