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Doesn't the recent record settlement by BOA over minority discrimination by the former Countrywide suggest there was in fact an issue. $300M+ buys a lot of lawyers to fight such charges if they thought it was an easy out.
It's not particularly difficult to see if minorities were charged more than whites for given credit/income/debt data. If you plug in all the decision factors in a mortgage and then separate by race...you can probably figure out on a given day if a minority was charged more than a white person w/ identical credit profile. Honestly I don't think it was a systemic attempt to profiteer off minorities since by the time higher ups see mortgages, they just see at most a name/address/credit data. The only they'd be able to tell is certain loans were more generous for themselves and how fat a bonus the broker earned for themselves. It's far more likely local mortgage brokers picking up that minorities tended to be less savvy to all the options available to them and would wind up w/ less than optimal loans. If the banks didn't actively attempt to prevent this, they probably deserve a bit of a haircut since it is and has been explicitly illegal.
Having worked in the financial tech industry, I know race data isn't in the file but that's not to say they can't reverse engineer some decision factors that are discriminating against minorities. With all the data out there, they could correlate shopping patterns, existing credit lines, and even student loan patterns toward figuring out a person's race and determining lending that way. I was actually surprised to learn that Equifax had a geocoded demo data they sold for extending credit terms in Canada for people w/o established credit or thin files. Imagine using this in the US...deny credit for a few people in minority dominated zip codes and the lawyers would absolutely own the banks.
On another note, I'm not for the overt push for unqualified people (of any race) to buy homes. I can see there was empirical evidence of discrimination in the past but that's not a free pass to hand out mortgages to anyone of color. Also...plenty of non-minorities jumped in very big on the housing bubble. Of the many amateur real estate speculators I've met through the years who were very big on creative financing, not a ton of them were minorities. Most were otherwise financially stable people who just got very drawn into the get rich quick schemes that "financial gurus" touted everywhere. Don't forget about all those classes Robert Kiyosaki and his ilk sold for years in the 00's pushing passive income by buying up homes w/ zero down and renting at impossible rates.
I think the last couple posts are spot on. To me the other part of the equation is that in congress they are always trading this for that and thus over the last ~10 years the republicans got the bush tax cuts and all kinds of other money makers/tax reducers for their constituents while the democrats got more freebies/entitlements for their constituents which combined are resulting in the bankrupting of America. Since everyone was happy while the money was flowing nobody really cared, but when the SHTF everyone started pointing fingers. Hey, the truth of the matter is the culprits of this financial mess can be found by looking in the mirror! We elected the officials and they did what we allowed!
Doesn't the recent record settlement by BOA over minority discrimination by the former Countrywide suggest there was in fact an issue. $300M+ buys a lot of lawyers to fight such charges if they thought it was an easy out.
It sounds almost as if you are assuming the courts are fair and just, as if the Supreme Court didn't rule four decades ago that minority underperformance is automatically the fault of the majority (Duke Power 1971).
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It's not particularly difficult to see if minorities were charged more than whites for given credit/income/debt data.
It's not particularly difficult to see that minorities default on loans more often than whites given similar credit/income/debt data.
Courts aren't always fair but BOA decided to settle before letting a court decide. More than likely, they ran their own far more accurate regression analysis of the hundreds of thousands of mortgages they hold(as well as the plaintiff's data) and realized they probably could pick out some discrimination. They took that, multiplied by the cost of making it right + punitive damages and figured 300M was getting off cheap. Lawyers and bean counters don't exactly make snap decisions for 1/3 of a billion dollars.
The study you cited leverages data that's over 20 yrs old. FICO scores weren't introduced until most of the way through the study range and mortgage rates were much less scientific since information wasn't as broadly published. The option ARM and CDO were just some quant PhD's fantasy back then. Hugh McColl was still buying up regional players to build BOA. Also, the study looks at default rate rather than whether or not terms were comparable. It doesn't seem to be a single bank's data so it would neither prove nor disprove discrimination by a bank. The only thing the study proves is that the 5% of Blacks in the study were poorer, had lower equity, more likely to live in a recession state, and since they were more likely underwater, they'd more likely walk away. The study claims that blacks aren't more profitable which is rather obvious since foreclosure is never the goal given its high transaction costs and unpredictability during liquidation. I don't understand why the study doesn't look at effective interest rates normalized for front end income-debt ratios(not even mentioned)? Two people making 50k have very different risk profiles if one has 40k of consumer debt outside of their mortgage. The study does account for age/income/equity but skips outside debt and uses a very general state control variable. They need to drop a lot more variables into this regression to say anything substantive.
Banks these days can slice/dice data to far greater granularity and identify risk at a lower cost w/o being discriminating. You can build a new model, back test it against your existing mortgage pool to see if you pick out the losers w/o specifically picking out minorities, and run it for all new mortgage decisions w/o opening yourself up for a lawsuit. The only area where they tend to have errors is when you have human beings making the call on what rates to quote someone or multiple products to offer. If BOA and others incentivized employees to sell bad products to minorities, then they deserve to take a hit.
Banks these days can slice/dice data to far greater granularity and identify risk at a lower cost w/o being discriminating.
Since learning how to "slice and dice the data", banks have done a MUCH WORSE job in assessing minority credit risk. That is what set off the worst real estate disaster in over a century. The vast majority of the defaults have been by minorities.
Stop denying the reality: banks were doing a good job assessing credit risk until politicians started egging them on to increase lending to minorities.
Given the fact that African Americans are so much less likely to consider the consequences of committing a violent crime, why on earth would you expect them to consider the consequences of a financial transaction as well as other races do? That's really bizarre.
Since learning how to "slice and dice the data", banks have done a MUCH WORSE job in assessing minority credit risk. That is what set off the worst real estate disaster in over a century. The vast majority of the defaults have been by minorities.
Stop denying the reality: banks were doing a good job assessing credit risk until politicians started egging them on to increase lending to minorities.
Given the fact that African Americans are so much less likely to consider the consequences of committing a violent crime, why on earth would you expect them to consider the consequences of a financial transaction as well as other races do? That's really bizarre.
It's all our fault. We blacks are a violent breed indeed.
Since learning how to "slice and dice the data", banks have done a MUCH WORSE job in assessing minority credit risk. That is what set off the worst real estate disaster in over a century. The vast majority of the defaults have been by minorities.
Stop denying the reality: banks were doing a good job assessing credit risk until politicians started egging them on to increase lending to minorities.
Given the fact that African Americans are so much less likely to consider the consequences of committing a violent crime, why on earth would you expect them to consider the consequences of a financial transaction as well as other races do? That's really bizarre.
You realize that during the bubble nobody at the banks sat around saying "hey, the last 9 mortgages we wrote were to rich white guys, we need to give the next black guy a mortgage no matter how scary his credit is b/c we're gonna have the NAACP all over us" right? Much more likely, bank brokers looked around and said who is desperate enough to take this complex teaser rate mortgage that triples in 3 yrs b/c there's no other way they'll qualify.
During the housing bubble, banks were actively seeking out high risk borrowers not b/c of their skin color or some gov't mandates. CDOs and CDSs created a perverse environment where it was most profitable to find high rate(read high default risk) mortgages b/c when packaged up they were marked triple A and could be sold off w/o giving the risk officer an ulcer (although it should have). Prime borrowers weren't going to make them much money no matter how much the loan is repackaged so the big bonuses went to brokers that sold absolute junk. A nice jumbo no doc option ARM could be a solid five figure bonus to a mortgage broker. A prime loan w/ docs only creates a fraction of that. Any person w/ a pulse and the ability to sign on the dotted line would do and outright fraud was tolerated as long as the origination happened.
You're confusing the inability to calculate risk w/ the ability of greed to override it. Banks knew a lot of these borrowers were bad risks and they didn't care. They put a huge risk premium on the loan over prime and sold it off b/c it made them lots of money w/o hanging onto the risk. Have you looked at the terms on some of these subprime loans? The borrowers were either incredibly naive, insane, or criminal to take on those terms that would overwhelm the most optimistic person. Ask yourself who needs a No doc loan? A lower income person white or black generally has documented income and it's not hard to produce a W2 for a few years. A mortgage is probably still a bad idea but a No doc pretty much says I can't validate any claim to my income and I'm willing to pay through the nose to get a house anyway. Obviously it didn't help that Fannie/Freddie willingly bought these packaged up loans to meet their minority quotas but a whole lot of these loans were sold w/o gov't cajoling as evidenced by the fact the GSEs weren't the only ones holding these loans when the music stopped. In fact many of these loans by far violated any underwriting that FHA or any gov't entity recommended.
Of course all of this doesn't matter b/c your last paragraph suggests a level of bigotry that won't accept greed as an overriding factor and that minorities suffering greater losses during the housing crisis were a symptom and not necessarily the cause. Don't act like you've never seen a white person run a subprime loan for 4X as much house as they could really afford or speculate on a lot of homes (1/2 of the shows on HGTV). Housing went wrong b/c everybody bet on the same side and all rationality went out the window since everyone was playing the lottery. Low income minorities(and anyone else taking on subprime loans) were but a pawn in the game that banks were playing to create huge risk pools to polish up and call them investments.
Poor people got hurt the most. Yes, it so happens that much of the poor are minorities. But if you compare white vs. black mortgages on-par (say, both with $35K/yr household income and $275,000 loan) I'm sure you'll find similar default rates.
You realize that during the bubble nobody at the banks sat around saying "hey, the last 9 mortgages we wrote were to rich white guys, we need to give the next black guy a mortgage no matter how scary his credit is b/c we're gonna have the NAACP all over us" right? Much more likely, bank brokers looked around and said who is desperate enough to take this complex teaser rate mortgage that triples in 3 yrs b/c there's no other way they'll qualify.
During the housing bubble, banks were actively seeking out high risk borrowers not b/c of their skin color or some gov't mandates. CDOs and CDSs created a perverse environment where it was most profitable to find high rate(read high default risk) mortgages b/c when packaged up they were marked triple A and could be sold off w/o giving the risk officer an ulcer (although it should have). Prime borrowers weren't going to make them much money no matter how much the loan is repackaged so the big bonuses went to brokers that sold absolute junk. A nice jumbo no doc option ARM could be a solid five figure bonus to a mortgage broker. A prime loan w/ docs only creates a fraction of that. Any person w/ a pulse and the ability to sign on the dotted line would do and outright fraud was tolerated as long as the origination happened.
You're confusing the inability to calculate risk w/ the ability of greed to override it. Banks knew a lot of these borrowers were bad risks and they didn't care. They put a huge risk premium on the loan over prime and sold it off b/c it made them lots of money w/o hanging onto the risk. Have you looked at the terms on some of these subprime loans? The borrowers were either incredibly naive, insane, or criminal to take on those terms that would overwhelm the most optimistic person. Ask yourself who needs a No doc loan? A lower income person white or black generally has documented income and it's not hard to produce a W2 for a few years. A mortgage is probably still a bad idea but a No doc pretty much says I can't validate any claim to my income and I'm willing to pay through the nose to get a house anyway. Obviously it didn't help that Fannie/Freddie willingly bought these packaged up loans to meet their minority quotas but a whole lot of these loans were sold w/o gov't cajoling as evidenced by the fact the GSEs weren't the only ones holding these loans when the music stopped. In fact many of these loans by far violated any underwriting that FHA or any gov't entity recommended.
Of course all of this doesn't matter b/c your last paragraph suggests a level of bigotry that won't accept greed as an overriding factor and that minorities suffering greater losses during the housing crisis were a symptom and not necessarily the cause. Don't act like you've never seen a white person run a subprime loan for 4X as much house as they could really afford or speculate on a lot of homes (1/2 of the shows on HGTV). Housing went wrong b/c everybody bet on the same side and all rationality went out the window since everyone was playing the lottery. Low income minorities(and anyone else taking on subprime loans) were but a pawn in the game that banks were playing to create huge risk pools to polish up and call them investments.
This is the keenest grasp of what happened, in my opinion.
An interesting side effect of the housing bubble, also, is that it led to an abnormal shift of blacks from cities to suburbs. Cities all across America have experienced a large loss of black residents and an increase in suburban percentages. I believe that the majority of this shift was due to the housing bubble and the remainder was the normal gradual pattern of suburbanization that had existed prior to 2000.
Whats amazing to me is that the print media has not really linked this shift to the housing bubble. The media seems to be heralding this shift as due to increased racial tolerance and declining residential segregation in America. While I do believe that America has improved in that regards, the shift was too dramatic to be attributed to a change of attitudes. Why would people have a dramatic change in attitudes over the last 10 years?
Since learning how to "slice and dice the data", banks have done a MUCH WORSE job in assessing minority credit risk. That is what set off the worst real estate disaster in over a century. The vast majority of the defaults have been by minorities.
Stop denying the reality: banks were doing a good job assessing credit risk until politicians started egging them on to increase lending to minorities.
"Everything is the fault of the Community Reinvestment Act (CRA) and minorities who were pushed into home ownership". This is a conservative narrative that is easily discredited with facts.
The Financial Crisis Inquiry Commission reported in January 2011 that "the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law."
Yeah, that's right, only 6% of subprime loans had any connection to the CRA. And exactly no commercial loans (let's recall, the commercial housing market also collapsed) had any such connection.
GSE (Gov’t Sponsored Enterprises – Fannie and Freddie) mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders into subprime lending.
So in fact, the portfolio of GSE loans did better than the (presumably non-coerced, for sheer profit) loans that banks made completely of their own accord.
The vast majority of sub-prime mortgages were written by banks without any government support, coercion, or requirements. They had cheap money to loan and easy profits to make and the coverage (collusion) of the rating agencies to do so. For the first time in 100 years, banks could make bad underwriting decisions and then easily pass the risk onto other investors, who in turn bundled bad mortgages into packages and continued passing the risk (via Mortgage Backed Securities and Collateralized Debt Obligations).
Mortgages that were written under the government programs actually had higher standards for borrowing, and held up better, through the crisis, than the non-government sponsored loans.
Not that the government was without fault. The poor enforcement of existing regulations, and the repeal of previous regulations (most notably the Glass-Steagal act) provided plenty of cover for banks to run wild.
And yes, this is the liberal, socialist, not-to-be-trusted wikipedia. So if you have time, follow all their links and come to your own conclusions.
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