The Minority Mortgage Meltdown: More Evidence—But Our Elite Doesn't Want To Know

We keep satirizing this, but now a Washington Post news story really is headlined

Minorities hit harder by foreclosure crisis

 "Minority homeowners have been disproportionately affected by the foreclosure crisis and stand to lose homes at a faster pace than white borrowers in the future, according to a report released Friday by a nonprofit research group. … The 'analysis suggests dramatic differences in how the foreclosure crisis has affected racial and ethnic groups,' the report said. 'African American and Latino borrowers have borne and will continue to disproportionately bear the burden of foreclosures.' "

(By Renae Merle, Saturday, June 19, 2010)

If you translate this out of the evasive passive voice and into the active voice, you come up with something more informative, namely:

AFRICAN AMERICAN AND LATINO BORROWERS DEFAULTED AND WILL CONTINUE TO DEFAULT DISPROPORTIONATELY.

But defaults couldn't possibly be the fault of the defaulters, if the defaulters are minorities, could they? So instead, Felix Salmon of Reuters asks Are foreclosures racists? June 18, 2010:

"If you're a high-income Latino with a mortgage, you're almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, the foreclosure crisis is hitting blacks and Latinos much harder than it is whites, according to a startling new report from the Center for Responsible Lending."

Now, you might think that foreclosure rate has something to do with, say, blacks and Hispanics having remarkably fewer financial assets to use as safety cushions in case housing prices don't continue to rise. After all, a 2007 Federal Reserve Board report to Congress (PDF) noted:

"Black and Hispanic families are less likely than non-Hispanic white families to have any financial assets, so the disparity in median financial assets for all families (rather than just those with financial assets) is even larger, with the overall medians for black and Hispanic families roughly 5 percent to 7 percent of the non-Hispanic white median."

Moreover, African-Americans and Latinos are less likely than whites to have prosperous relatives who can help them out with a loan if they are in danger of defaulting.

You might think that, but being aware of those facts just shows you are a racist. Salmon [Email him] writes:

"I'll hazard a guess and say that this probably has something to do with a lot of middle- and high-income Latinos in California and Arizona being sold subprime mortgages, even when they qualified for a prime loan."

The Washington Post's Merle agrees that discrimination is the cause:

"Research has shown that minority borrowers were more likely to receive subprime loans during the housing boom even if they had credit scores, incomes and loan sizes similar to those of whites. Some housing experts say that minority borrowers received higher rates on subprime loans compared with similarly situated white borrowers, resulting in higher monthly payments and quicker defaults.

"'I think it reflects that minority borrowers were targeted by the sellers of these [risky] mortgages,' said Barry Zigas, director of housing and credit policy at the Consumer Federation of America."

Obviously, minority borrowers were targeted—the federal government has been promoting mortgage lending to minorities for more than 30 years.

But if blacks and Hispanics were more creditworthy than lenders were giving them credit for being, then they'd have lower foreclosure rates than whites, right? But this report is about how they have higher foreclosure rates. (This point was first made in Forbes magazine by Peter Brimelow and Leslie Spencer back in 1993—when it could have saved us all a lot of trouble).

In fact, blacks and Hispanics have even worse foreclosure rates than this study claims. Although the Post and Salmon don't mention it, the report flat-out admits that its crude methodology underestimates the gap in default rates between whites and Non-Asian Minorities:

"Like all estimates, ours has limitations. Most importantly, our method only captures differences in foreclosure rates between racial and ethnic groups that are due to differences in distributions of loans along the four dimensions that we use when calculating foreclosure rates (i.e. loan year, state, occupancy and loan segment). … Within the list of potential factors not included in our analysis, several tend to be associated with both higher foreclosure rates and borrowers of color. As a result, our results are likely to underestimate racial and ethnic disparities …"

The three researchers from the Center for Responsible Lending (Debbie Gruenstein Bocian, Wei Li, and Keith S. Ernst) don't actually have data on foreclosures by race. Instead, they have federal data by race on who receives mortgages and they have private data on who fails to pay them back (but the foreclosure data doesn't mention the race of the defaulter). Instead, the CPL is, as they confess, "implicitly assuming" that the foreclosure rates are identical across races for each type of loan (e.g., 2006 California owner-occupied subprime).

Fortunately, other researchers have actually done the hard work of matching public race information with private foreclosure information, mortgage by mortgage. And they have found the CPL's assumption of racial equality in foreclosure rates within segments to be wrong.

For example, the 2008 study Lending in Low- and Moderate-Income Neighborhoods in California (PDF) by Dr. Elizabeth Laderman and Dr. Carolina Reid of the San Francisco Federal Reserve Bank calculated foreclosure rates by race on 239,000 mortgages in California handed out during the Bubble:

They concluded:

"We also find that race has an independent effect on foreclosure even after controlling for borrower income and credit score. In particular, African American borrowers were 3.3 times as likely as white borrowers to be in foreclosure, whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers."

This shouldn't be a new discovery.

The March 2004 report Analysis of FHA Single-Family Default and Loss Rates for the Department of Housing and Urban Development by Robert F. Cotterman showed that black and Hispanic default rates on Federal Housing Administration mortgages handed out in the 1990s were more than twice as bad as the white rate. Even when adjusted for FICO scores and other objective factors related to credit risk, minority default rates still look worse.

Cotterman observes:

"Blacks, Hispanics, and those in judicial foreclosure states and underserved areas have higher conditional loss rates, other things the same."

A careful 2008 Boston Federal Reserve study, Subprime Mortgages, Foreclosures, and Urban Neighborhoods, by Kristopher S. Gerardi and Paul S. Willen found that blacks and Hispanics had higher foreclosure rates on subprime mortgages in Massachusetts back through the late 1990s.

Minority default rates are not a minor technical issue. The volume of lending to minorities during the Housing Bubble was much vaster than is widely understood. According to the federal Home Mortgage Disclosure Act database, minorities received half of all subprime mortgage dollars nationally during the 2004-2007 Housing Bubble. At the Ground Zero of the disaster, California in 2006, minorities got 77 percent of all home purchase subprime dollars and 56 percent of total home purchase dollars.

Mortgages were the fundamental units out of which the financial industry, private and public, built their pyramid schemes.

These fast-buck artists could get away with it for a simple reason: in our culture today, when bankers (such as Angelo Mozilo of Countrywide, Roland Arnall of Ameriquest, Richard Syron of Freddie Mac, and Kerry Killinger of Washington Mutual) and politicians (such as Henry Cisneros and George W. Bush) demand more lending to minorities, they aren't derided as conmen, moonshooters, fast-buck artists, usurers, boiler-room operators, suckers, or fools.

Instead, they are praised as financial statesmen winning the war against racist redlining.

Which brings us to today.

It's time once again to trot out the biggest cliché in all of journalism: philosopher George Santayana's observation that

"Those who cannot remember the past are condemned to repeat it."

Here we are, almost three years after the subprime market tanked in the summer of 2007 and 20 months after the economy as a whole followed subprime down the drain. And our country's big guns are still trained not on learning from our mistakes, but on continuing to obliterate supposed stereotypes about the creditworthiness of minorities—the same obsolete obsession that helped get us into this mess.

This isn't to say that the subprime-initiated mortgage meltdown was the only cause of the crash, or that the crash wouldn't have happened later anyway. What I'm saying is that mortgages were the direct impetus of the economic disaster, just as the Wall Street Crash of October 1929 led to the Great Depression or the assassination of Archduke Franz Ferdinand in the summer of 1914 was the direct cause of the Great War. Similarly, America may well have eventually gotten involved in WWII if Pearl Harbor had never happened, but Pearl Harbor was the direct cause of our entry into the Second World War.

In the cases of 1914, 1929, and 1941, a huge amount of intellectual effort has been devoted to understanding these precipitating events. In contrast, the Main Stream Media account of the causes of the Housing Bubble and Bust are still severely lacking, largely because everybody who was anybody—e.g., Bill Clinton, George W. Bush, and Barack Obama—were all in essential agreement that minorities should get more mortgage dollars.

And they were all wrong.

Unfortunately, public discourse in modern America mostly doesn't exist to find answers to important questions. Instead, it exists to furnish talking points to partisans for attacking other partisans. Since there was broad agreement that minorities should borrow more, nobody is in any hurry to revisit this bipartisan blunder.

Consider the Federal Reserve Board dissertation from which I quoted above:

Report to the Congress on Credit Scoring and Its Effects on the Availability and Affordability of Credit

Submitted to the Congress pursuant to section 215 of the Fair and Accurate Credit Transactions Act of 2003

August 2007

The second paragraph of this Fed study mandated by the 2003 Equal Credit Opportunity Act (ECOA) explains that it was done to determine if "credit-scoring models may have adverse effects on certain populations, particularly minorities". The legal Theory of Disparate Impact states that any evidence of black or Latino underperformance in anything is evidence of "discrimination" unless rigorously proved otherwise.

But, as this graph from the Fed study of 301,536 individuals' credit history through 2003 shows, blacks and Hispanics had lower credit ratings on average (using a 0 to 100 scale devised by the Fed researchers).

In other words, the Fed spent the Housing Bubble years of 2003-2007 compiling a 304-page report demanded by Congress on whether credit scoring systems (e.g., FICO scores) were irrationally preventing minorities from borrowing enough.

This report wasn't worked on from 1963 to 1967, when the Civil Rights movement triumphed, but from 2003 to 2007, a period in which exactly the exact opposite problem—minorities being loaned more than they could afford to repay—was about to bring down the American economy.

I've called that the Guns of Singapore Syndrome—although that's unfair to the otherwise incompetent British commanders who lost that city in early 1942 in what Winston Churchill called the "worst disaster" in the history of the British Empire. The British had famously installed 15" coastal cannons aimed to protect Singapore from attack by sea from the south, only to have the Japanese army attack by land from the north. (Actually, the British did manage to swivel most of the guns around—although, unfortunately, they were furnished largely with armor-piercing anti-battleship shells ineffective against infantry).

In contrast, our elites haven't managed to swivel much at all. They're still acting as if it's 1967 and the perceived problem is discrimination against minority borrowers. They'll go so far as to change the name of what they are denouncing from "redlining" (the bête noire of the Clinton and Bush Administrations) to "reverse redlining" (what Obama is out to stomp), but that's it. They aren't going to learn anything. They are simply allergic to facts.

Now, you might think that it would have been more sensible for Congress to have the Fed study why minorities were getting so many loans they couldn't pay back. But, no, our Guns of Singapore are permanently pointing out to sea.

For instance, that 2007 Fed study of the credit scores and repayment performance on all types of credit over the subsequent 18 months found that rather than credit scoring having an unfair impact on blacks, blacks had an unfair impact on credit scoring. The biggest problem with the predictive validity of credit scores turned out not to be that they were biased against African-Americans, but that credit scores were biased in favor of African-Americans. Blacks not only had lower average credit scores, but they were significantly less likely to repay their loans than whites with the same scores:

"The analysis conducted for this study finds that credit scores consistently predict relative loan performance within all population groups; that is, for all populations, the percentage of individuals experiencing a serious delinquency on one or more of their credit accounts consistently declines as credit scores increase….

 "The analysis also finds that some groups perform worse (experience higher rates of serious delinquency) on their credit accounts, on average, than would be predicted by the performance of individuals in the broader population with similar credit scores. For example, on average, blacks perform worse than other racial and ethnic groups with similar credit scores."

In other words, FICO scores work overall within groups at predicting likely deadbeats. The problem is between groups—but the bias is in the opposite direction of what Congress wanted to find!

You've probably read a lot about credit over the last three years. How often have you heard the conclusions of this 2007 Fed study mentioned?

I hadn't heard of it until last week! And I've written on the subject dozens of times going back some three years.

[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.]