Everybody knows that American blacks pay more for their groceries than American
whites do. The same, it seems, is true of mortgages. (Update: I just, you know, actually read this first sentence. And no, it doesn’t mean that American mortgages pay more for their groceries than American whites do. OK, you can continue reading now.)
Yesterday, the Federal Reserve released a major lending
survey (PDF), looking, among other things, at the question of whether blacks
pay more for their mortgages than whites do.
The answer, unambiguously, is yes. Subprime mortgages – housing loans
which cost about 2 percentage points more than those for people with good credit
– are a booming business at the moment: some $530 billion of such loans
were written in 2004, up from $35 billion in 1994.
And it turns out that among low-income homebuyers, about 39.2 percent of blacks
but only 12.9 percent of whites took out such loans.
Clearly, discrimination is going on, right? Not so fast. As the New York Times
"a large part of the contrast between mortgages to blacks and whites could
be attributed to differences in lending institutions". Here’s what the
report says:
Most of the reduction in the difference in the incidence of higher-priced
lending across groups comes from adding the control for lender to the control
for borrower-related factors. For conventional first-lien home-purchase loans,
the mean unadjusted incidence of higher-priced lending was 32.4 percent for
blacks and 8.7 percent for non-Hispanic whites, a difference of 23.7 percentage
points. Borrower-related factors account for about one-fourth of the difference.
Adding to this adjustment the control for lender reduces the remaining gap
markedly, to 7 percentage points.
In other words, we start off with an enormous gap, of 23.7 percentage points,
which needs to be explained. About a quarter of that gap – 6 percentage
points – can be accounted for factors relating to the borrowers themselves,
such as their income, the type of property securing the loan, whether there’s
a co-applicant, even property location down to census tract.
A much large chunk of the gap, however – about 11 percentage points
– is accounted for by differences in lenders. Blacks, it would seem, disproportionately
get their mortgages from high-priced (subprime) lenders rather than from other
sources – even after controlling for factors such as income and creditworthiness.
That brings the remaining gap down to 7 percentage points, and racism is by
no means the most likely explanation for it. Crucial factors such as borrowers’
credit scores and the amount they have available for down-payments are not included
in the Fed’s data, so they could account for that final bit of the difference.
Nevertheless, there’s no doubt that blacks pay more for their mortgages than
whites do, and that the single biggest reason for this is that they go to expensive
mortgage shops. The mortgage shops don’t discriminate between blacks and whites:
a white person going to the same shop would get the same rate. But it seems
that the shops selling mortgages mainly to blacks charge higher rates than the
shops selling mortgages mainly to whites.
Concludes the Fed report:
Black and Hispanic borrowers taken together are much more likely than non-Hispanic
white borrowers to obtain credit from institutions that report a higher incidence
of higher-priced loans. On the one hand, this pattern may be benign and reflect
a sorting of individuals into different market segments by their credit characteristics.
On the other hand, it may be symptomatic of a more serious issue. Lenders
that report a lower incidence of higher-priced products may be either less
willing or less able to serve minority neighborhoods. More troubling, these
patterns may stem, at least in part, from borrowers being steered to lenders
or to loans that offer higher prices than the credit characteristics of these
borrowers warrant.
So there are two things to worry about here. Firstly, why aren’t the low-cost
lenders lending to blacks as much as they lend to whites? Are the big national
mortgage shops less willing to operate in low-income black neighborhoods than
in low-income white neighborhoods? Secondly, are the shops which do
operate in low-income black neighborhoods taking undue advantage of the fact
that lower-cost shops aren’t operating there? Are they selling their customers
higher-priced products just because they can?
Loan sharks have known for centuries that the poor can be much more profitable
than the rich when it comes to lending money. It would make sense for subprime
lenders to set up shop in areas where major financial institutions with more
competitive lending rates are few and far between. And those areas, it would
seem, are predominantly black.
In other words, even if no one is behaving in an explicitly racist way, a result
starkly diffentiated along racial lines can still emerge. How to address that
problem is a major issue for the Fed, and this report should be welcomed as
the first step in doing so.
You write: “In other words, even if no one is behaving in an explicitly racist way, a result starkly diffentiated along racial lines can still emerge. How to address that problem is a major issue for the Fed, and this report should be welcomed as the first step in doing so.”
I can see how it may be part of the job of the Fed to identify this kind of discriminatory behaviour. But if the underlying cause is lack of effective competition or is racism, why is it the job of the Fed to do something about it? Surely the principal duties of the Fed are to do with prudential regulation and the money supply, and neither seems to be at issue here. Other branches of the Federal Government have relevant jurisdiction if necessary or perhaps this is an area where it is better to let markets take their own time about responding. Would you feel the same way if the discrimination was simply against poor white people? In the UK and in the US there is a depressing belief that if something is unfair or looks wrong, something must be done: but both the law of unintended consequences and cost argue for caution.
As an aside, Erika agrees someone needs to address the issue.
Roger, the Fed, specifically the OCC, is charged with policing the Fair Lending Act which applies to all people, including your poor whites.
“Firstly, why aren’t the low-cost lenders lending to blacks as much as they lend to whites?”
What’s important here is the rate at which Blacks’ mortgage applications are denied at the traditional, large financial institutions thus leading them to the higher priced ripoff shops.
I know the case with Hispanics, is that those expensive shops speak their language. They employ Hispanics who target the hispanic mortgage applicants. Larger institutions don’t go that far.
Michelle
this all sounds sensible. A quick web search suggests that it is HUD that is responsible for the Fair Housing Act (including its provisions about non-discrimination in lending) and OCC is responsible for the Equal Credit Opportunity Act (which has similar and I think wider effect) and I cannot find a reference to a separate fair lending act. But both these acts concern discriminatory behavior by a lender, which does not seem to be the issue here.
Similarly I fully support that the Fed should publicise the effective discrimination that is occurring. My only concern is that it is not the job of the Fed then to “do something” to address the structural problem. It is for HUD or OCC to act if there is discrimination within a lender, and (I guess) for the market if it is simply that some lenders are making extra profits by marketing effectively to minority ethnic communities. And from skimming the article Felix cites, I think this is what is intended by the legislation. For example it says:
“The disclosure of lending activity is intended to
help determine whether lenders are adequately serving their communitiesÌ housing finance needs, to facilitate enforcement of the nationÌs fair lending laws, and to guide investment activities in both the public and the private sectors. HMDA is implemented by the Federal Reserve BoardÌs Regulation C. Underlying HMDAÌs disclosure requirements is a presumption that more publicly available information will improve market performance and help prevent market failures.”
Yes, one certainly needs to beware the law of unintended consequences. The last thing anybody wants is a set of onerous restrictions on how much lenders can charge minority clients, leading to said lenders simply shutting up shop in black neighborhoods.
There is a clear trend, it would seem, from the days when the legislation was written. Back then, lenders would behave in explicitly racist ways: they would deny poor blacks loans at a rate much higher than that at which they would deny poor whites loans. Since the act came into effect, that behaviour has ended, and I don’t think I’m saying anything controversial when I say that there is a causal relationship there.
Now, the racism is less explicit, and we have to ask ourselves what exactly it was that ended the explicit racism in lending. Was it the mere existence of the act, was it the enforcement of the act, or was it the publication of the data collected as a result of the act? If it’s the last one, then we’re moving along the right path here. But if it’s one of the first two, then maybe more needs to be done at the legislative level.
Felix
We are nearer agreement, but your last paragraph still seems to me to be in “something must be done” mode. If the described behaviour is due to mainstream banks not making the effort to market themselves actively to ethnic (and poor?) borrowers, that is not racism as I conceive it. It may be bad business, it may reflect ignorance and lack of experience of how to market successfully in that kind of difficult environment, and it may be evidence of prejudice based on similar ignorance. But legislative action to correct any of these (even the last least attractive version) seems to me heavy handed. It is a bit like positive discrimination and quotas in university admission — perhaps justified when the problem is acute and materially affects the whole of society but dubious in its present form in the present environment.
If prejudice based on ignorance is not racism as you conceive it, then what is racism as you conceive it? Let’s say that MegaBank has two different mortgage lending arms, one which it generally opens in black neighborhoods and one which it generally opens in white neighborhoods. And that the arm in the black neighborhoods charges more than the arm in the white neighborhoods, even after adjusting for income, creditworthiness and everything else. If you were a legislator and learned about this, would you really want to do nothing?
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