November 7, 2007

The Subprime Meltdown: The NYT finally gets a clue (sort of)

"End of the Housing Bubble: Minorities Hurt Most" reports the New York Times for the umpteenth time:

What's Behind the Race Gap?

Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, to get high-cost loans as whites after adjusting for loan amounts and the income of the borrowers, according to an analysis of loans reported under the federal Home Mortgage Disclosure Act. (Asians are somewhat less likely than whites to take out high-cost loans.)

Researchers and industry officials agree that there is probably no single explanation for the lending patterns, though the history of banks’ avoiding minority neighborhoods, the practice known as “redlining,” is a good place to start.

It's the Original Sin Theory of Race: any time, any where blacks or Hispanics mess up, white people have to be the original cause. Obviously, income is hardly the only factor in creditworthiness: expenditures relative to income and other sources of wealth, such as inheritances, play a role. (It's bizarre that we've become so brain dead from political correctness that nobody dares even point out that white people tend to have wealthier relatives than blacks and Latinos have.)

If you read between the lines of the article, however, you'll see that one cause of NAMs (Non-Asian Minorities) getting hit harder by ridiculous subprime mortgages was the government's long war against redlining:

The biggest home lenders in minority neighborhoods are mortgage companies that provide only subprime loans, not full-service banks that do a range of lending.

It may be that these borrowers do not have access to traditional banks, because there are no branches near them. The Community Reinvestment Act, enacted 30 years ago, was intended to address redlining by forcing banks to make loans in lower-income areas. But the law’s provisions do not apply to banks in neighborhoods where they have no branches.

“You could go into a middle-class area in Queens County that is white and there will be lots of banks on the shopping street,” said Alfred A. DelliBovi, president of the Federal Home Loan Bank of New York and a deputy secretary of the Department of Housing and Urban Development in the first Bush administration. “If you go to an area that is equal income and that is black, you won’t see many.”

Banks typically locate branches where they believe they will get the most deposits. A lower savings rate and a distrust of banks stemming from a legacy of redlining may help explain why there are fewer branches in minority neighborhoods, Mr. DelliBovi said.

Huh?

Let's put it in plain English: a big reason that legitimate banks stay away from NAM neighborhoods is because if they operate in NAM neighborhoods but don't hand out loans to NAMs at the same rate they provide loans to WaAs (Whites and Asians), the government will sue them for racial discrimination. So, they just stay far away, leaving NAM neighborhoods to high pressure boiler room operations.

Finally, toward the end of the article, the reporters toss in an undigested quote that hints at the real story, but still ignores the government's role:

“If we turn the clock back 30 years ago, we had redlining,” said Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University. “In the last few years, we have had the opposite — an overextension of credit by lenders and an overextension by borrowers.”

My published articles are archived at iSteve.com -- Steve Sailer

14 comments:

simon newman said...

This really sucks: laws that try to force banks to discriminate in favour of NAMs with impaired credit cause banks to abandon NAM neighbourhoods entirely, leaving them to the subprime lenders. The people who lose out most are responsible NAM borrowers.

Retsinas:
"The country needs to find a balance, “a way to extend credit at a reasonable cost to people with impaired credit”

No, you Harvard idiot, the country needs to incentivise people building up a good credit record,
and not defaulting on loans.

The banks *want* to lend to people with good credit records, whether NAM or WaA. They want to make money. They don't want to provide low interest loans to people with poor credit, whether NAM or WaA. Forced to do so, they quit the NAM neighbourhoods.

So, you want to encourage the banks to return to the NAM neighbourhoods, and lend to the people they want to lend to - NAMs with good credit. You do this by scrapping the anti-redlining laws. The big lenders come back, they lend to whoever has good credit, other NAMs see this and realise that building up a good credit rating is in their interest. More NAMs become low-risk lenders, and a virtuous circle is created.

NAMs, on average, may never have as good credit ratings as WaAs. But they could have better ratings, and much better loan prospects, than they do now.

As John Roberts said, "The way to stop discriminating by race, is to stop discriminating by race".

Anonymous said...

I purchased a home 15 months ago. The first mortgage broker I spoke to quoted me an interest rate that was more than a point higher than typical for the time.

I said "no thanks" and kept shopping, until I found a broker that offered a great rate with low closing costs and a hassle-free application process.

I'm no expert nor am I "connected" in the industry. I just used my common sense and a little research to understand the marketplace.

And that's the key to the subprime story. It's about personal responsibility.

No one forced these people to accept subprime mortgages, or to respond to the obviously suspect Ditech come-ons (you don't have to be a genius to understand that an interest-only loan is a road to nowhere).

And all this business about banking options for blacks is silly. At my local Wells Fargo branches, not a single white person is pictured in any of their numerous promotional materials. So obviously Wells Fargo isn't afraid of black customers.

If it's such a problem, why haven't any enterprising black entrepreneurs started their own mortgage lending/brokering businesses catering to their communities? Where is the Magic Johnson Theaters of banks providing resources to black communities?

Anonymous said...

Anyone, of any color, using subprime mortgages to leverage far beyond their means in this well-publicized unprecedented housing bubble is a gambler, not a homeowner. These are generally greedy speculators, greedy financiers and greedy idiots who often have paid very little in “ownership” hoping to profit from unending housing appreciation on the bank’s dime. The majority of these gamblers are not losing “homes” because they never owned enough equity to ever get beyond debt service payments.

Our tax dollars should not go to support these relatively few idiots, thieves and an over-inflated housing market. Government taking over free-markets generally leads to more problems and abuse while such interventions will hurt the majority of responsible tax-paying middle class as well as future generations. The sick thing is that the savvy speculators and investors on Wall Street and elsewhere are using the “poor” and “racists” propaganda to get tax dollars to cover their speculation losses.

Floccina said...

On a realted matter accroding to Clark Howard wal-mart tried to start their own in store bank but the other banks stopped it. Wal-mart banks could have only helped the poor who often do not have bank accounts and so sometimes pay to cash checks.

Anonymous said...


Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, to get high-cost loans as whites after adjusting for loan amounts and the income of the borrowers, according to an analysis of loans reported under the federal Home Mortgage Disclosure Act.


Do these journalists ever think about writing sentences that remove ambiguity when they write?

How about:


Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, as whites to get high-cost loans after adjusting for ...

Anonymous said...

Banks typically locate branches where they believe they will get the most deposits. A lower savings rate and a distrust of banks stemming from a legacy of redlining.

Where banks locate is somewhat irrelevant, because even if they don't locate in parts of town where blacks and Hispanics live, they're quite likely to have a branch near where they work or shop. Many grocery stores these days have bank branches (though minority neighbborhoods often lack grocery stores, too).

Banks are a case where one white customer isn't worth 40% more than a black customer, but worth 10 or 20 customers. A respectable white or Asian middle class depositor is likely to have a decent savings and checking balance, a car and/or home loan, maybe a few CDs, and perhaps even a business loan. It could easily take 10-20-30 blacks to get that sort of business, with much higher management fees and risk involved.

But the implication of the whole article, as with so many millions of others, is that businesses are avoiding black neighborhoods just because the people are black. But the high presence of check cashing and payday loan stores, not to mention fast food chains, demonstrates that it's not because they're black, but because they have little money relative to the financial/safety risk involved.

When a businessmen leaves money on the table some other businessman will eventually come along to pick it up. No one but payday lenders has yet come along to pick up the mythical banking profits being left on the table.

Lugash said...

I am Lugash.

==========================================
Obviously, income is hardly the only factor in creditworthiness: expenditures relative to income and other sources of wealth, such as inheritances, play a role. (It's bizarre that we've become so brain dead from political correctness that nobody dares even point out that white people tend to have wealthier relatives than blacks and Latinos have.
==========================================

The Pew Hispanic Center has pointed out the great disparity in household wealth of NAMs and the rest of society:

http://tinyurl.com/3yutus

More or less it boils down to the fact that most blacks have nothing but unsecured debt and maybe a car. The few that own a house don't have any other assets. No savings account to tap, no 401(k) to liquidate or borrow against, no stock, no bonds.

Before the housing bubble any disruption in income would wipe them out.

Now post-bubble the same is true, as is any resetting loan terms that increase their monthly payments.

Hispanics are somewhat better but not anywhere near whites.

Of course these real world statistics got ignored, or kicked down the memory hole when it came time to write the legislation or prepare the loan.

I am Lugash.

Fred said...

The WSJ's Holman Jenkins raised a broader question in August: whether government policies to encourage low-income home ownership were even beneficial to low-income households. Citing research by Carolina Katz Reid, his conclusion was that, in most cases, they probably aren't.

Some excerpts from Jenkins's column:

"* Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36 percent returned to renting in two years, and 53 percent in five years.

* Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30 percent -- less than if their money had been invested in Treasury bills; this meager capital gain was about half that enjoyed by middle-income homeowners.

*A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Reid's counterintuitive discovery was that higher-income households were "twice as likely to move long distance if they're unemployed."

*Almost needless to add, the great squarer of circles for middle-income homeowners, the mortgage-interest deduction, won't turn a house into a paying proposition for those with little income to shelter."

dumb-dumb said...

I am very excited to help pay for the bailout. It will give me shivers knowing that my taxes will be helping these unfortunate folks, I'm sure.

Ron Guhname said...

This subprime thing is interesting and all, but I'm digging the NAM and WaA acronyms. But how does one pronounce WaA?

Anonymous said...

Blacks are never at fault. For anything. Ever.

Anonymous said...

So what Retsinas and the rest of these uh, experts are arguing is that 30 years ago, racist banks hated NAMs and showed this by not loaning them money (the bastards). Now, plenty of loans have been made to NAMS and these morons are complaining these banks love them too much? Or maybe, just maybe they still hate them and loaned them the money knowing they would default! Yes, that must be it. Another vast, carefully orchestrated conspiracy. Guess who gets to clean up the mess, again.

Let's! said...

As a corollary, when NAMs accomplish something they are entitled to all the credit. (Except for Clarence Thomas.) They did it because of their own indomitable NAM spirit sprinkled with the sage advice of their NAM ancestors. No whites ever supported them in any way. Every single white person they encountered did everything in their pale, pasty power to bring them down.

none of the above said...

I'm curious how this story overlaps with the research from a few years back, hashed out on Gladwell's blog, about how blacks get worse deals at car dealerships. We might be dealing with the same sort of phenomenon here, where blacks go into the mortgage process less informed, or more susceptible to sales tactics based on attacking their pride ("well, if you can't afford it, maybe we can find something a little cheaper").

As with the car dealership story, the least plausible explanation is that the car salesmen/mortgage brokers, who could give sharks lessons on ruthlessness, are somehow letting their prejudices lead them to make bad business decisions that just happen to screw blacks over. (I have no trouble believing they make good business decisions that screw blacks over; that's what I'd expect.)

The thing about alleged discrimination in mortgages is easy to test, though, and the test is a painful bit of irony here. To see if blacks are getting unreasonably lousy terms on their mortgages, you should see if they default on their mortgages more or less often than whites. If blacks are defaulting less often than whites on the same terms of mortgage, then they're being offered lousy terms, because the terms of the mortgage are supposed to reflect the risk of default to the lender. (This is almost the same way you can see whether the SAT is biased against blacks; do blacks with a certain SAT score do better or worse than whites with that SAT score?)