| | As for mortgage discrimination, the claim has been that banks engage in predatory lending, which means that they try to get people to take out mortgages who can’t afford them. But the Obama administration is now accusing them of doing just the opposite — of turning down credit worthy applicants because of their race or ethnicity. Clearly, both accusations can’t be true.
Besides, if racism rather than relative credit risk were the reason banks are turning down black applicants in disproportionate numbers, then to get approval for a loan, blacks would have to be more credit worthy than whites, not less credit worthy. But that would mean that the default rate for blacks would tend to be lower than for whites, because only blacks with better credit than whites would be approved for loans. In fact, however, a study by the Federal Reserve Board found that blacks defaulted at about the same rate as whites. Evidently, whites and blacks who received loans posed an equal credit risk to the lenders, meaning that there was no invidious discrimination between them.
The same Federal Reserve Board study, which examined over 200,000 mortgage loans made in the late 1980's, found that minority owned banks rejected loan applications from blacks three times more often than from Asians, and 50 percent more often than from whites, because Asians on average had better credit than whites; and whites, better credit than blacks. In Houston, Texas, where racism is just as likely as any place else, banks on the average approved black applicants 50 to 60 percent of the time, whereas the city's one black-owned bank, Unity National, approved them only 17 percent of the time. Yet, civil rights advocates would never think to accuse black bankers of racism against blacks, let alone accuse them of being more racist than white bankers.
Finally, if racism were common among lenders, one would expect it to be equally common among auto dealers or shoe salesmen. Yet there is no evidence that these latter businesses reject black customers unfairly, so why, in the absence of a poorer credit rating for blacks, would banks be expected to do so? There is no reason to believe that banks are any more racist than any other kind of business.
As the participants in this forum already know, the blame for this housing debacle lies with the Community Reinvestment Act, which required banks to increase their approval rate for poorer qualified minority applicants, literally forcing banks to make loans to people with poor credit, people whom they otherwise would have turned down. It also lies with the easy money policy of the Federal Reserve, which held interest rates so low for so long that people were encouraged to take out home loans in ever increasing numbers. The ensuing demand for housing drove up its prices, making it increasingly profitable to buy at lower prices and then turn around and sell a month or two later at higher prices, a process known as “flipping."
I could see the housing bubble developing as early as 2004. I told one of the realtors in my city that I thought house prices would eventually collapse, but she didn’t believe me. Very few people thought that we were headed for a disaster. A colleague of mine, who was far more prescient than most, had properties which he sold early in the decade -- perhaps a little too early -- to avoid taking a loss when their value eventually depreciated. He had graphed the housing bubble trend line, which clearly showed the overvaluation. The information was there for anyone to see.
While it may be true that in many cases lenders acted as irresponsibly as borrowers, the incentive for their doing so was created by the push to lower lending standards combined with artificially low interest rates. It is the government's irresponsible policies that encouraged the very behavior for which the government is now blaming them. It is the bad incentives that created the bad behavior.
(Edited by William Dwyer on 1/08, 8:54am)
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