Malo periculosam, libertatem quam quietam servitutem.



May 2011

Here We Go Again

Written by , Posted in Identity Politics, The Courts, Criminal Justice & Tort

I’ve noted before that we learned absolutely nothing from the causes of the 2008 financial market collapse. Clearly, that remains true:

Two lawsuits accusing Wells Fargo of discriminatory lending practices have been allowed to move forward, a victory for plaintiffs that have accused the bank of steering African-Americans toward predatory loans.

…Judge Anderson’s ruling came two weeks after Judge J. Frederick Motz, of Federal District Court in Maryland denied Wells Fargo’s attempt to dismiss a similar lawsuit brought by the mayor and city council of Baltimore. Two previous versions of that lawsuit, claiming reverse redlining, in which the bank steered African-Americans toward more predatory loans, had been dismissed by the court.

But this time, Judge Motz said city officials had narrowed the allegations enough to show a plausible link between Well Fargo’s actions and its impact on the city. The issue, he said, was whether “the city has plausibly alleged that the properties in question would not have become vacant but for the allegedly improper loans made by Wells Fargo.”

Redlining, we were told, was a horrible practice whereby banks refused to offer services to areas because of their racial make-up, rather than for simple financial or business reasons. These dubious accusations were frequently used as a cudgel to force banks to service loans to unqualified applicants, or face shakedowns and lawsuits should they refuse. This ill-conceived pursuit of ‘racial justice’ through home loans was one of the many market distortions contributing to the financial crisis.

Now the boogeyman is reverse redlining, where banks supposedly give worse rates or higher charges to minority borrowers. But once again, these charges ignore the economic realities that drive the determination of lending rates. As the New York Federal Reserve has demonstrated, the studies alleging reverse redlining are pure bunk:

Did lenders target minorities with higher-cost loans, relative to their white counterparts? Consumer advocates have long trumpeted this as fact, using studies commissioned by their own staff and publicly-available data via the Home Mortgage Disclosure Act to allege that banks routinely and deliberately offered disparate terms to minority borrowers. And legislators have taken these findings at face value, no questions asked.

The … problem is often the data itself: HMDA data is notoriously incomplete, meaning that conclusions based on analysis of that particular data often can be missing critical key credit indicators that might otherwise explain disparities that seem to be reported in previous studies.<

The NY Fed study is groundbreaking particularly because it uses a hybrid data set that isn’t reliant on just the HDMA data; the first such study to do so. The researchers matched approximately 70 percent of loan-level data in a database provided by First American LoanPerformance to unique mortgage data in the HDMA. Doing so was “extensive work,” Andrew Haughwout, Christopher Mayer, and Joseph Tracy — co-authors of the study — note in review.

The study, it turns out, actually showed more favorable rates for minority borrowers:

In contrast to previous findings, our results show that if anything, minority borrwers get slightly favorable terms, although the size of these effects are quite small. Black and Hispanic borrowers pay very slightly lower initial mortgage rates than other borrowers — about 2.5 basis points (0.0025 percent) compared with a mean initial mortgage rate of 7.3 percent. Black and Hispanic borrowers also have slightly lower margins (about 1.7 to 5 basis points, or 0.0017 to 0.005 percent) compared to a mean margin of 5.9 percent. Asian borrowers pay slightly higher initial rates and reset margins (about 3 basis points). We find no appreciable differences in lending terms by the gender of the borrower. These results control for the mortgage risk characteristics and neighborhood composition. While many of these differences are statistically significant, they are economically insignificant.

A second important finding is that 2/28 mortgages were cheaper in Zip Codes with a higher percentage of Asian, black and Hispanic residents, as well as in counties with higher unemployment rates, once we control for the individual risk characteristics of the borrower.

While there’s perfectly valid reasons to criticize lending practice generally, and loose lending standards (for whatever reason you may think they developed) there is no real evidence sustaining the hypothesis that such practices worked along racial lines. But don’t expect these facts to stop the racial grievance mongers from once again causing market distortions with their abuse of the law in the name of identity politics.

Update: Speaking of not learning lessons, the Obama administration is taking the tried and true approach to ruining the housing market and is now “cracking down” on redlining.