The growth in subprime lending, coupled with rising defaults and record-level foreclosure rates, has gripped the nation since 2008. Blame is being directed at ill-informed consumers, lax underwriting by loan originators, failure of regulatory agencies, predatory lending practices, greedy investors, misguided appraisers and credit rating agencies, job loss in economically distressed regions, and a range of other institutional and individual factors (Baily, Elmendorf, and Litan 2008; Gramlich 2007). Virtually ignored in this debate is the role of structural and contextual forces, most notably various trajectories of inequality, uneven metropolitan development, and racial segregation. While there is widespread recognition that lower income households and communities, racial minorities, women and other vulnerable populations are hardest hit, the context of racial segregation as a driver of subprime lending, and as an explanation for the variance in such lending across cities and communities, has not received serious consideration. Yet there are theoretically plausible reasons why the segregation of minorities may establish a context in which these lending practices would flourish (Squires 2008a).

It is plausible that in highly segregated cities, minority populations are more susceptible, for at least three reasons, to high-cost financial products. One explanation is that in segregated cities, minority communities are more isolated, and may be less experienced with purchasing financial products. Consequently, subprime lenders might more effectively target those areas in their marketing strategy and exploit differences in financial education. There is some evidence that some financial institutions have targeted low-income and minority neighborhoods for subprime products (Avery, Brevoort, and Canner 2006; Bocian, Ernst, and Li 2008; Squires 2008a). Second, mainstream, prime lenders might avoid segregated, low-income areas and there may be less competition among lenders, leaving borrowers, regardless of their financial education level, little choice other than high-cost products. Finally, lenders may place a higher risk-based premium for those living in low-income, segregated areas. In more segregated cities, there may be more at-risk areas (or at least the perception of greater risk) and people in these communities, and this might affect the city’s overall proportion of high-cost loans. These mechanisms may explain why segregation might contribute to variation in subprime lending across cities.