John Hood: Mortgage discrimination complaints redundant (copy) | Editorial columnists


A few weeks ago, The Associated Press and a nonprofit journalism firm called The Markup released a set of data and news articles purported to prove pervasive discrimination against racial minorities by lenders. mortgage. North Carolina’s McClatchy newspapers (The Charlotte Observer, The News & Observer in Raleigh, and Herald-Sun in Durham) broadcast the Markup / AP results on their front pages and contributed to additional reports on the data specific to the North Carolina.

I winced at the headlines. I moan as I read the stories.

These kinds of claims are outdated. Long ago they probably had validity, when bankers and other lenders were stupid enough to let personal bigotry interfere with their responsibility to maximize return on asset investment.

Prejudice is morally wrong. In business, it is also immensely stupid. If you refuse to hire the best people because of their gender, sexuality, or skin color, your smarter competitors will win at your expense. In the case of mortgages, the past practice of redlining has harmed not only targeted minorities but also institutions that refused to offer them loans. They were leaving money on the table – interest payments on principal that they had refused to lend to qualified borrowers who were unlikely to default.

Market pressures tend to reverse discriminatory behavior. I am not claiming that free enterprise works perfectly, on this or any other subject. Some economic players really prefer to lose income in order to indulge their prejudices. But beware of those who claim that the only tools against discrimination are legislation and litigation. Competition is very helpful.

Returning to the issue of mortgages, attempts to prove discrimination by looking at loan approval rates, as the Markup / AP team attempted to do, are wrong. External analysts don’t have the full set of information about loan applicants, including credit scores, that financial institutions use to guide their decisions.

A more revealing approach is to look not at the “front end” of the process, so to speak, but the “back end”. How often do borrowers default on their mortgages? If lenders make their decisions without prejudice, then the default rates for, say, white and Hispanic customers should be about the same.

If, on the other hand, a lender takes ethnicity into account and assumes that whites are more trustworthy – more likely to repay their loans – than Hispanics, then the lender will give more loans to white applicants than are Hispanics. ‘to Hispanic applicants with the same income. , debts, credit scores and financial history. This, in turn, means that the aggrieved lender will experience a lower average default rate for Hispanic customers than for white customers.

The statistical analysis involved is a bit more complicated than any brief explanation can express, I admit, and over time economists have argued convincingly that default rate data must themselves be risk-adjusted. Yet if someone claims to assess the extent of loan discrimination without paying close attention to default rates, that person is either misinformed or is actively trying to misinform.

You won’t be surprised to learn that Markup / AP analysis, picked up by some newspapers, did not pay close attention to default rates. Edward Pinto and Tobias Peter, both American Enterprise Institute Housing Center Fellows, performed precisely the analysis that should have been done at the time. They found that the risk-adjusted default rates on mortgages are either the same or higher for black and Hispanic borrowers than for white borrowers.

There is, in other words, no evidence here of systematic discrimination against racial minorities by mortgage lenders. The AEI Housing Center study is the latest in a series of studies that reach a similar conclusion. Most of those who allege pervasive discrimination are well aware of this flaw in their argument. If they continue to peddle it, it looks bad on them – and those who help them.

John Hood is a columnist for the Carolina Journal.

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