Sailer Minority Mortgage Challenge To Researchers
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October 08, 2008, 08:57 AM
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As I`ve been pointing out for a long time, much of the "diversity recession" theory does not rest on minorities per se defaulting on home loans, but on contortions to the market rationalized in the name of diversity, such as Bush`s attack on down payments (for everybody) in the sacred name of raising minority homeownership by 5.5 million; or by the see no evil-hear no evil-speak no evil politically correct mindset about lending to heavily Hispanic states and black parts of town by fear of discrimination lawsuit discovery of intra-firm emails asking "Aren`t we out of our minds to lend $340,000 on a 500 square foot house in Compton? Do you know who lives in Compton?"

Still, ideas have consequences, and these ideas, which both parties supported, no doubt led to higher defaults among minorities.

The federal government has created a vast apparatus of of race reporting on lending to make sure that minorities get their "fair" share of loans, but there doesn`t seem to be as equally accessible data on defaults by race. Why not? Well, because the point is to badger lenders into giving more loans to minorities, not to call attention to problems that can cause.

One of my most insightful commenters started out assuming that minorities couldn`t have comprised more than a tiny handful of percent of the defaulted dollars. Now, he`s up to 10% to 15%, but doesn`t think it could possibly be 30%. I`m willing to bet him that when it all gets counted up, it will be closer to 30% than to 15%.

A few methodology issues. The first is that, normally, recessions cause defaults. Eventually, the new recession will cause a lot of defaults, but what we are interested in is not the defaults caused by the recession of, say, 2008-2011, but the defaults that caused that recession. So, therefore, let`s look at, say, calendar year 2007.

Second, lenders always have a baseline expectation of default dollars per year due to random tragedies. What we are interested in is not the total dollar amount of defaults in 2007, but the amount incremental to the expectation. For example, if lenders expected due to random sad events that 1% of prime mortgages would default in 2007 and 3% of subprime mortgages, but the real numbers were 2% of prime and 20% of subprime, then the numbers of interest to us are not 2% of prime, but the unexpected increments: 1% of prime and 17% of subprime. (I just made these numbers up for illustrative purposes.)

Third, there are a variety of technical issues involving when something is foreclosure vs. default vs. severely stressed. And there`s the complicating hybrid of short sales.

Fourth, a lot of sales in, say, 2005-2006 were fraudulent using straw buyers, so sorting out blame has its metaphysical aspects.

Fifth, I suspect, on no particular evidence, just a hunch, that more than few of the most enthusiastic speculators in the California housing markets were white immigrants from the Middle East and the ex-Soviet bloc.

I will leave all the details to disinterested researchers to handle in a fair manner.