Hood: Claims of mortgage discrimination are redundant | Opinion
RALEIGH – A few weeks ago, The Associated Press and a nonprofit journalism firm called The Markup published a set of data and news articles purported to prove the existence of pervasive discrimination against racial minorities by mortgage lenders. The McClatchy newspapers in North Carolina (The Charlotte Observer, The News & Observer in Raleigh, and The Herald-Sun in Durham) broadcast the Markup / AP results on their front pages and contributed to additional reporting on the data specific to North Carolina.
I winced when I saw the headlines. I moan as I read the stories.
These kinds of claims are outdated. They probably had some validity a long time ago, back in the days 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. That is, default rates would show that lenders are just as willing to take a risk with a white candidate as they are with an otherwise comparable Hispanic candidate.
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, American Enterprise Institute Housing Center Fellows, have now done precisely the analysis that should have been done all along. 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 just the latest in a series of studies that reach a similar conclusion. Those who allege pervasive discrimination are well aware of this flaw in their argument. That they keep peddling it hurts them – and those who help them.
John hood is a member of the board of directors of the John Locke Foundation and author of the new novel Mountain Folk.