“The Gods Of The Copybook Headings With Terror And Slaughter [a.k.a. The Minority Mortgage Meltdown] Return.”


What went wrong with the economy?

Lots of things, obviously.

Yet, there is one thread of cause and effect that is more central than any other.

I`ve begun, with the assistance of a sociologist, a sizable statistical analysis of the causes of the crash.

  • First—what happened?

We can observe the crash all the way back to the winter of 2007, when subprime lenders, frequently headquartered in Southern California, began to go belly-up at an accelerating rate.

The big banks and investment houses had put too much trust in mortgages, and thus fell victim to predatory securitizing—the 21st Century mirror image of old-fashioned predatory lending. The Street was snookered by conmen—borrowers, mortgage brokers, and lenders—closer to the actual street, who had a more realistic idea of how little chance there was of these mortgages ever being paid back.

The financial wizards assumed that if a recession came along, the default rate would subsequently go up, but they never counted on defaults causing a recession. Of course, it`s exactly what you are not expecting that you are most vulnerable to.

  • Second—where did it happen?

So far, though, defaults haven`t been a massive problem nationwide. RealtyTrac reported last month that the top 26 foreclosure rates in the country are all found in metropolitan areas in just the four Sand States: California, Arizona, Nevada, and Florida.

Indeed, due to its enormous population and outlandish home prices during the Housing Bubble, California alone accounts for a substantial majority of defaulted dollars.

  • Third—when did it happen?

If California, more than anywhere else, was the place, then 2006 was the time. Subprime lending exploded in the wake of President George W. Bush`s 2002 White House Conference on Increasing Minority Homeownership, which served as the Housing Bubble`s kickoff rally. By 2006, borrowers were scraping the bottom of the barrel.

DataQuick reported recently on California mortgages:

“Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice. Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far. Of the 3 million in 2006, 8.5 percent have so far resulted in default.”

So, we know the What, the Where, and the When. What about—

  • Fourth—Who did it happen to?

 

Look at this pie chart:

 It
shows subprime lending in California by ethnicity. In 2006,
lenders handed minorities 77 percent of subprime dollars.
Hispanics alone got a majority: 53 percent.

This data is from the federal Home
Mortgage Disclosure Act
website.
(See reports

4-2
and

11-3
). The federal government keeps careful track to
make sure that minorities get enough mortgage money. But,
strangely, it pays no attention whatsoever to whether or not
minorities are paying back their mortgages.

Private firms such as
RealtyTrac and
DataQuick count
foreclosure filings, but they don`t record them by
ethnicity.

To get a sense of who is defaulting
on their mortgages, we can match data up geographically from
the government`s HMDA database and from RealtyTrac`s Q1-2009
table of foreclosure rates in metropolitan statistical areas
(MSAs) with populations of at least 200,000. (Thanks to
RealtyTrac for
emailing a file not publicly online.)

Let`s first focus on subprime
lending, which accounted for over a quarter of all dollars
lent in California in 2006 for home purchases—i.e., to buy a
home, not for refinancing or repairing an already owned
home. (The ethnic patterns for refis are similar but not
quite as ethnically skewed. But it was

easy home purchase mortgages
that

inflated the Bubble
the most.)

In California, subprime only
accounted for 14 percent of all borrowing by non-Hispanic
whites, but 47 percent of borrowing by Latinos and 52
percent by blacks.

This graph shows the strikingly
close relationship between ethnicity and default rates among
California metropolitan areas.

Let`s focus first on the lower left
corner of the chart. Among the 20 largest MSAs in
California, the lowest foreclosure rate is found in bucolic

Chico in Northern California
(0.80 percent), followed by
three affluent coastal regions: San Luis Obispo (0.84),
Santa Cruz (0.90), Santa Barbara (0.98).

In these towns, subprime loans to
non-Asian minorities accounted for merely six to ten percent
of mortgage dollars (prime and subprime).

The worst foreclosure rates are in
the graph`s upper right: Merced (4.21 percent), Stockton
(3.72), the huge Inland Empire of Riverside and San
Bernardino counties (3.54), and Modesto (3.42).

In these hot inland regions,
subprime loans to non-Asian minorities accounted for 30 to
36 percent of all mortgage dollars.

The correlation coefficient showing
the goodness of fit of this very simple model is
r = 0.89, which is
extremely high. (A rule of thumb in the social sciences is
that an r of 0.2
is “low,” 0.4 is “moderate” and 0.6 is “high.”)

What about all the white people who
took out subprime loans—like that defaulting
New York Times

reporter
who covers the Federal Reserve Board?

Well, in California, the epicenter
of the economic collapse, there just weren`t all that many
white subprime borrowers relative to the large number of
subprime minorities. Subprime loans to non-Hispanic whites
accounted for only 6 percent of all home purchase dollars
lent in 2006, while subprime loans to minorities accounted
for 21 percent.

Not surprisingly, there is only a
vague relation between white subprime loan shares of total
lending and the default rate:

The correlation coefficient is just
0.21.

The May 15
New York Times

noted
in the passive voice:

Minorities Hit Hardest by Foreclosures in New York

[by Michael Powell and Janet Roberts]. One of my readers

commented
:


“As

Orwell might have said
, this shows why good writing
produces clear thinking. To put the headline in the active
voice:  `Minorities
Default More than White Borrowers.
`

The
NYT `s Powell and
Roberts blamed reverse
redlining
and argued that the high minority default
rate observed in New York was the fault of lenders charging
too high a risk premium. Yet a recent

study
by the Federal Reserve of New York economists
Andrew Haughwout, Christopher Mayer, and Joseph Tracy,


Subprime Mortgage Pricing: The Impact of Race, Ethnicity,
and Gender on the Cost of Borrowing
, did not find
that black or

Hispanic
borrowers had to pay too much relative to their
risk factors.

Indeed, if you stop and think about
it, you`ll realize that the fact that so many of the lenders
who

strove to serve
“underserved”
minority communities, such as

Washington Mutual
and

Countrywide
, are now out of business or are on taxpayer
life support suggests that lenders charged blacks and
Hispanics on average too
low of a risk
premium.

This is exactly how Peter Brimelow
and Leslie Spencer said

risk premiums worked
in their definitive


Forbes refutation

of the mortgage discrimination myth back in 1993. Of course,
nobody
listened
.

What if we look at total lending,
with prime and subprime aggregated together?

Minorities borrowed 56 percent of
all dollars, prime and subprime, in California in 2006.

The correlation between total
non-Asian minority borrowing and default rates is still very
high, with an r = 0.81:

In sharp contrast, the white share
of total lending is inversely correlated with defaults;

One problem with this analysis is
that it`s not granular enough. For example, RealtyTrac`s
report lumps together Los Angeles County and Orange County
into one vast MSA.

If you look within MSAs, however,
this pattern of the Housing Bust being worse in heavily
Non-Asian Minority neighborhoods is even
more evident.

For example, DataQuick

has a useful list
of the change in average home sale
price from 2007 to 2008 for hundreds of

California neighborhoods.
(Price declines correlate
closely with foreclosure rates.)

Within vast Los Angeles County, the
seven communities with the sharpest price declines are
rapidly Hispanicizing Palmdale, Lancaster, and Little Rock
in the
high
desert
, San Fernando and Pacoima in the all-minority
north end of the San Fernando Valley, and

Maywood
and Compton in South Central. (Maywood is
all
Latino
, while

Compton
, the

spiritual home
of
gangsta
rap
, is now majority Latino.)

 In
contrast, the only LA County communities to enjoy price
increases in 2008 were the expensive beach towns of Malibu
and Venice, idyllic

Avalon
on Catalina Island, San Marino (Pasadena old
money and Hong Kong zillionaires), and Brentwood (which you
may recall from the OJ Simpson trial).

Perhaps it`s not fair that the rich
got richer while the poor got, well, free rent until the
sheriff finally tossed them out. Yet, it`s important to
understand what happened—even though few politicians and
pundits seem interested.

This is hardly the only cause of the
financial crisis. Still, this is, more than anything else,
the central chain of cause and effect of recent history.

Which brings us to the final
question:

  • Fifth—Why did it
    happen?

Why did California crash the
country?

In a word:

diversity
.

Diversity is a word with diverse
meanings these days. And, not surprisingly, diversity
contributed in diverse ways to the mortgage catastrophe.
It`s important not to oversimplify this explanation and
blame everything on the

Community Reinvestment Act
or any other single mistake.

Instead, the root cause was the
elite`s intoxication with the concept of diversity—and its
concomitant suppression of dissent.

For example, the massive immigration
into California unsurprisingly increased demand for housing
while decreasing the percentage of the population who were
good credit risks. Last week, the Pew Hispanic Center
released its multiple regression study of foreclosure rates
by county, “Through
Boom and Bust: Minorities, Immigration, and Homeownership
.”
It wound up with an unwelcome finding much like mine:


“Of the several demographic attributes included in the
analysis, the immigrant share of the county population is
the one that emerges as the most important correlate with
the foreclosure rate. And within the immigrant population,
the share of foreign-born Latinos stands out as a more
notable influence than the share of non-Hispanic
immigrants.”

(Appendix Table A5).

One obvious reason for this
correlation: Latin American immigrants brought with them
a
fiesta culture
not conducive to thrift.

But the federal government`s

war against redlining discrimination

 made it a legal
offense for financial firm employees to point out
inconvenient facts like this—engendering what

Orwell called

“protective stupidity”
.

In the long run, however, stupidity
isn`t terribly protective. Reality always gets its revenge.

Or, to
quote Kipling, as I

did
on VDARE.COM in a

now-forgotten
context long ago:

“The
Gods Of The Copybook Headings With Terror And Slaughter
Return.”

[Steve Sailer (email
him) is


movie critic
for


The American Conservative
.

His website

www.iSteve.blogspot.com

features his daily blog. His new book,

AMERICA`S HALF-BLOOD PRINCE: BARACK OBAMA`S
“STORY OF RACE AND INHERITANCE”, is
available


here
.]