SUBPRIME CITIES Studies in Urban and Social Change Published Subprime Cities: The Political Economy of Mortgage Markets Manuel B. Aalbers (ed.) Locating Neoliberalism in East Asia: Neoliberalizing Spaces in Developmental States Bae-Gyoon Park, Richard Child Hill, and Asato Saito (eds.) The Creative Capital of Cities: Interactive Knowledge of Creation and the Urbanization Economics of Innovation Stefan Krätke Worlding Cities: Asian Experiments and the Art of Being Global Ananya Roy and Aihwa Ong (eds.) Place, Exclusion and Mortgage Markets Manuel B. Aalbers Working Bodies: Interactive Service Employment and Workplace Identities Linda McDowell Networked Disease: Emerging Infections in the Global City S. Harris Ali and Roger Keil (eds.) Eurostars and Eurocities: Free Movement and Mobility in an Integrating Europe Adrian Favell Urban China in Transition John R. Logan (ed.) Getting Into Local Power: The Politics of Ethnic Minorities in British and French Cities Romain Garbaye Cities of Europe Yuri Kazepov (ed.) Cities, War, and Terrorism Stephen Graham (ed.) Cities and Visitors: Regulating Tourists, Markets, and City Space Lily M. Hoffman, Susan S. Fainstein, and Dennis R. Judd (eds.) Understanding the City: Contemporary and Future Perspectives John Eade and Christopher Mele (eds.) The New Chinese City: Globalization and Market Reform John R. Logan (ed.) Cinema and the City: Film and Urban Societies in a Global Context Mark Shiel and Tony Fitzmaurice (eds.) The Social Control of Cities? A Comparative Perspective Sophie Body-Gendrot Globalizing Cities: A New Spatial Order? Peter Marcuse and Ronald van Kempen (eds.) Contemporary Urban Japan: A Sociology of Consumption John Clammer Capital Culture: Gender at Work in the City Linda McDowell Cities After Socialism: Urban and Regional Change and Conflict in Post-Socialist Societies Gregory Andrusz, Michael Harloe, and Ivan Szelenyi (eds.) The People’s Home? Social Rented Housing in Europe and America Michael Harloe Post-Fordism Ash Amin (ed.) The Resources of Poverty: Women and Survival in a Mexican City* Mercedes Gonzal de la Rocha Free Markets and Food Riots John Walton and David Seddon Fragmented Societies* Enzo Mingione Urban Poverty and the Underclass: A Reader* Enzo Mingione Forthcoming Globalising European Urban Bourgeoisies?: Rooted Middle Classes and Partial Exit in Paris, Lyon, Madrid and Milan Alberta Andreotti, Patrick Le Galès, and Francisco Javier Moreno-Fuentes Paradoxes of Segregation: Urban Migration in Europe Sonia Arbaci From Shack to House to Fortress Mariana Cavalcanti Iron Curtains: Gates, Suburbs and Privatization of Space in the Post-socialist City Sonia A. Hirt Urban Social Movements and the State Margit Mayer Contesting the Indian City: Global Visions and the Politics of the Local Gavin Shatkin (ed.) Fighting Gentrification Tom Slater Confronting Suburbanization: Urban Decentralization in Post-Socialist Central and Eastern Europe Kiril Stanilov and Ludek Sykora (eds.) Social Capital Formation in Immigrant Neighborhoods Min Zhou * Out of print SUBPRIME CITIES The Political Economy of Mortgage Markets Edited by Manuel B. Aalbers A John Wiley & Sons, Ltd., Publication This edition first published 2012 © 2012 Blackwell Publishing Ltd Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing program has been merged with Wiley’s global Scientific, Technical, and Medical business to form Wiley-Blackwell. Registered Office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK Editorial Offices 350 Main Street, Malden, MA 02148-5020, USA 9600 Garsington Road, Oxford, OX4 2DQ, UK The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK For details of our global editorial offices, for customer services, and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell. The right of Manuel B. Aalbers to be identified as the author of the editorial material in this work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data Aalbers, Manuel. Subprime cities : the political economy of mortgage markets / Manuel B. Aalbers. – 1st ed. p. cm. Includes index. ISBN 978-1-4443-3776-1 (hardback) – ISBN 978-1-4443-3777-8 (paper) 1. Subprime mortgage loans. 2. Mortgage loans. 3. Global Financial Crisis, 2008–2009. I. Title. HG2040.15.A33 2012 332.7′2–dc23 2011036441 A catalogue record for this book is available from the British Library. Set in 10.5/12pt Baskerville by SPi Publisher Services, Pondicherry, India 1 2012 Contents List of Figures vii List of Tables viii Notes on Contributors ix Foreword: The Urban Roots of the Financial Crisis xiii David Harvey Series Editors’ Preface xx Acknowledgments xxi Part I Introduction 1 Subprime Cities and the Twin Crises 3 Manuel B. Aalbers Part II The Political Economy of the Mortgage Market 23 1 Creating Liquidity Out of Spatial Fixity: The Secondary Circuit of Capital and the Restructuring of the US Housing Finance System 25 Kevin Fox Gotham 2 Finance and the State in the Housing Bubble 53 Herman Schwartz 3 Expanding the Terrain for Global Capital: When Local Housing Becomes an Electronic Instrument 74 Saskia Sassen 4 Building New Markets: Transferring Securitization, Bond-Rating, and a Crisis from the US to the UK 97 Thomas Wainwright vi Contents 5 European Mortgage Markets Before and After the Financial Crisis 120 Manuel B. Aalbers 6 The Reinvention of Banking and the Subprime Crisis: On the Origins of Subprime Loans, and How Economists Missed the Crisis 151 Gary A. Dymski Part III Cities, Race, and the Subprime Crisis 185 7 Redlining Revisited: Mortgage Lending Patterns in Sacramento 1930–2004 187 Jesus Hernandez 8 The New Economy and the City: Foreclosures in Essex County New Jersey 219 Kathe Newman 9 Race, Class, and Rent in America’s Subprime Cities 242 Elvin Wyly, Markus Moos, and Daniel J. Hammel Part IV Conclusion 291 10 Subprime Crisis and Urban Problematic 293 Gary A. Dymski Glossary 315 Index 324 Figures 3.1 Comparison of financial crises 85 3.2 Ratio of residential mortgage debt to GDP: Emerging Asia, 2007 86 6.1 US mortgage debt by holder, 1968–2007 154 6.2 Annual percentage growth in US real GDP and outstanding mortgage debt, 1968–2007 154 6.3 Annual percentage change in US mortgage debt outstanding for selected holders, 1979–2009 155 6.4 Subprime lenders and structured investment vehicles 162 6.5 Redlining and subprime outcomes in a credit market 167 6.6 Demand and supply shifts in the mortgage market during the 2000s due to housing/securitization boom 169 7.1 1938 Sacramento residential security map 196 7.2 1949 redevelopment survey area map of Sacramento 199 7.3 Preliminary map of areas with racially restrictive covenants and mortgage deficient areas in Sacramento County 207 7.4 Percentage of prime loan denials by census tract for Sacramento County in 2004 208 7.5 Percentage of subprime loans by census tract for Sacramento County in 2004 209 8.1 Percentage of loans originated 2000–03 in foreclosure in 2004, Essex County, New Jersey 232 9.1 Denial rate for conventional mortgage applications, vs. rate-spread share of conventional loan originations, by metropolitan area, 2006 263 9.2 Metropolitan coefficients of racial segmentation, non-Hispanic African American borrowers, 2006 272 9.3 Metropolitan coefficients of racial segmentation, Latino/Latina borrowers, 2006 273 9.4 Metropolitan coefficients of income segmentation and SPV sales conduits, 2006 274 9.5 Racialized circuits of capital and extent of state legal protections from predatory lending, 2006 276 2.1 Population adjusted rates of growth, 1991–2005 or 2006 57 2.2 Stock of international investment positions, 2007 63 3.1 New York City, rate of subprime lending by borough, 2002–06 83 3.2 Ten New York City community districts with the highest rates of subprime lending, 2006 84 3.3 Rate of conventional subprime lending by race in New York City, 2002–06 84 3.4 Ratio of residential real estate loans to total loans, developed markets (December 31, 2005) 88 3.5 Ratio of residential real estate loans to total loans, emerging markets (December 31, 2005) 89 3.6 Ratio of household credit to personal disposable income, 2000–05 90 5.1 LTV-ratio, average loan term, and default rate in eight EU countries, ordered by LTV-ratio, respectively 2001 and 2003 125 5.2 LTI-ratio and mortgage debt in nine European countries, ordered by LTI-ratio, 2003 125 5.3 Mortgage debt in the European Union and in the US, ordered by homeownership rate, 2004 126 5.4 Securitization issuance in Europe, 1996–2005 135 5.5 Securitization in Europe per country, total issuance 2000–05 136 5.6 Mortgage value chain and prospects for globalization 145 9.1 Action taken on loan applications, 2004–06 264 9.2 Race/ethnicity and subprime lending, 2004–06 265 9.3 Model fit diagnostics for credit history instrument 266 9.4 Subprime segmentation models 268 9.5 Segmentation and state regulatory space, 2004–06 278 Tables Notes on Contributors Manuel B. Aalbers – a human geographer, sociologist, and urban planner – is Assistant Professor in the Department of Geography, Planning and International Development Studies at the University of Amsterdam. Manuel has been a guest researcher at Columbia University (New York), New York University, City University of New York, the University of Milan- Bicocca, and the University of Urbino (Italy). He is the author of Place, Exclusion, and Mortgage Markets (Wiley-Blackwell, 2011) and two Dutch books; the associate editor of the Encyclopedia of Urban Studies (Sage, 2010) and the journal TESG; and book review editor of Dutch urban planning journal Rooilijn. His main research interest lies in the intersection of housing and finance. Manuel has published extensively on redlining, social exclusion, financialization, gentrification, safety and security, and the Anglophone hegemony in academic writing. His website is http://home.medewerker.uva. nl/m.b.aalbers/. Gary Dymski is Professor of Economics at the University of California, Riverside. He received his B.A. in Urban Studies from the University of Pennsylvania in 1975, and an MPA from Syracuse University in 1977. Gary received his Ph.D. in Economics from the University of Massachusetts, Amherst in 1987. From 2003 to 2009, Gary was the founding Executive Director of the University of California Center, Sacramento. Gary has been a visiting scholar in universities and research centers in Brazil, Bangladesh, Japan, Korea, Great Britain, Greece, and India. His most recent books are Capture and Exclude: Developing Nations and the Poor in Global Finance (Tulika Books, New Delhi, 2007), co-edited with Amiya Bagchi, and Reimagining Growth: Toward a Renewal of the Idea of Development, co-edited with Silvana DePaula (Zed, London, 2005). x Notes on Contributors Kevin Fox Gotham is a Professor of Sociology and Associate Dean of Academic Affairs in the School of Liberal Arts (SLA) at Tulane University. He has research interests in real estate and housing markets, urban redevelopment policy, gentrification, race and ethnicity, and the political economy of tourism. He is currently writing a book with Miriam Greenberg (University of California-Santa Cruz) on the federal response to the 9/11 and the Hurricane Katrina disasters (under contract with Oxford University Press). He is author of Race, Real Estate and Uneven Development (SUNY Press, 2002), Authentic New Orleans (NYU Press, 2007), Critical Perspectives on Urban Redevelopment (Elsevier Press, 2001), and dozens of peer-reviewed articles and book chapters on housing policy, racial segregation, urban redevelopment, and tourism. Dan Hammel is Associate Professor and Director of the M.A. Program in the Department of Geography and Planning at the University of Toledo. His work focuses on structural and policy changes in the American city, particularly the operation of the housing market in driving nearly four dec- ades of gentrification and other polarizing dimensions of neighborhood change. His research has been published in Urban Studies, Urban Geography, Housing Policy Debate, Geografiska Annaler B, the Journal of Urban Affairs, and Environment and Planning A. David Harvey is a Distinguished Professor at the City University of New York (CUNY), Director of the Center for Place, Culture and Politics. He is the author of numerous books, most recently The Enigma of Capital and the Crisis of Capitalism (Oxford University Press, 2010), A Companion to Marx’s Capital (Verso, 2010), and Cosmopolitanism and the Geographies of Freedom (Columbia University Press, 2009). He has been teaching Karl Marx’s Capital for nearly 40 years. His research interests include: geography and social theory; geographical knowledges; urban political economy and urbanization in the advanced capitalist countries; architecture and urban planning; Marxism and social theory; cultural geography and cultural change; environmental philosophies; environment and social change; ecological movements; social justice; geographies of difference; utopianism. Jesus Hernandez is currently completing his Ph.D. in Sociology at the University of California at Davis. His research focuses on how institutional structures and market interventions articulate the nexus between race and economy. For this volume, his work connects the current subprime loan crisis to historical processes of mortgage redlining and residential segrega- tion, and demonstrates how racialized lending practices reproduce long- standing spatial and social patterns of inequality. [...]... and Wainwright, will discuss the issue of secondary mortgage markets The globalization of mortgage markets is not only a result of the financialization of borrowers and markets, but also of the globalization of mortgage lenders, although the latter, according to Chapter 5 by Aalbers in this book, is empirically less important than the first two It is the powerful combination of financialization and globalization... changes in the mortgage market have a central place Some chapters present evidence of the changes that have resulted in what is often called the subprime mortgage crisis; others are more focused on some of the structural changes in the mortgage market than on the crisis itself The term subprime mortgage crisis” is misleading, not only because the problem has spread throughout and beyond the mortgage. .. are either offered loans that are more expensive than the risk profile of the borrower would suggest, or they are offered overpriced mortgage insurance that they often do not even need As Wyly et al argue in their chapter: the theory of risk-based pricing has become doctrine and ideology, used for well over a decade to blame consumers for the consequences of an abusive industry, to justify a de-regulatory... living through another episode of turmoil and change in mortgage markets, and again the work of political economists of different traditions sheds new light on what is actually happening in the mortgage market This book will not so much focus on how this crisis has spread to other sectors of the economy, but will look at the mortgage market and how problems have spread throughout mortgage markets In all... demands that tradables become more liquid Mortgages therefore need to be standardized so they can be priced in packages in secondary mortgage markets Until the summer of 2007, the fastest growing part of the secondary mortgage market was the trade in subprime RMBS The problem is that now the mortgage bubble has burst, RMBS (and not just subprime RMBS) – which in theory are supposed to be very transparent,... Vancouver, Canada In the months in between, the US mortgage market, and in particular the subprime market, had been falling apart, exactly what some of the authors of this book had suggested previously Elvin Wyly, one of the contributing authors, was one of the local organizers of the conference I would like to thank him and the other organizers for allowing us a forum to discuss the issues of this book,... the value of one’s land This is the basis for the formation of a mortgage market A mortgage is “a conveyance of an interest in real property given as security for the payment of a debt” (Dennis and Pinkowish 2004: 386); it “gives a lender contingent property rights over an asset of the debtor, and in the event of default the lender may activate those rights” (Carruthers 2005: 365) Although the mortgage. .. particular) – in the production of the terrifying rat-infested living conditions in the areas wracked by riots in the wake of the assassination of Martin Luther King the year before The vestiges of redlining of areas of low income African American population were clearly visible but now justified as a legitimate response to high credit risk (a view that the financial institutions and the FHA clearly... liquidity/tradability, thereby creating opportunities for both risk-averse and high-risk investors (Gotham 2006; Wyly et al 2006) Because securitization increasingly connects the mortgage market to other financial markets, securitization embodies the financialization of the mortgage market It increases the volatility of the mortgage market (and, as the recent crisis demonstrates, it also increases volatility in the wider... supporters of continuing this project, and I truly believe that thanks to all your work, the sum of the chapters of this book is greater than its parts Manuel B Aalbers Brooklyn, December 2010 Part I Introduction Subprime Cities and the Twin Crises Manuel B Aalbers Introduction: Urban Political Economy From the early 1970s to the late 1980s debates on homeownership and mortgage markets were at the center of . sought. Library of Congress Cataloging-in-Publication Data Aalbers, Manuel. Subprime cities : the political economy of mortgage markets / Manuel B. Aalbers. – 1st ed. p. cm. Includes index. ISBN 97 8-1 -4 44 3-3 77 6-1 . particular) – in the production of the terrifying rat-infested living conditions in the areas wracked by riots in the wake of the assassination of Martin Luther King the year before. The vestiges of. City University of New York, the University of Milan- Bicocca, and the University of Urbino (Italy). He is the author of Place, Exclusion, and Mortgage Markets (Wiley-Blackwell, 201 1) and two Dutch