The California mortgage market is central to understanding the chain of events that brought down the world economy. No doubt something else would have dragged it down eventually, but it would be nice to know what actually happened.
Fortunately, I finally found, buried away in a San Francisco Federal Reserve Bank report, some hints on who defaulted in California, the home to a sizable majority of all defaulted mortgage dollars.
Two economists at the San Francisco Fed made a study of mortgages originated in California in the Housing Bubble years of 2004-2006. They painstakingly matched federal Home Mortgage Disclosure Act data about mortgage originations, which track whether minorities get enough mortgage money but don't track whether they pay it back, with private (and expensive) Lender Processing Services (LPS) data, which don't care about ethnicity but do care about borrowers paying what they owe. The Fed economists came up with 239,101 successful matches of mortgages that show up in both databases. About 10,000 of them had entered the foreclosure process by the end of September 2007.
This is a good time period for looking at foreclosures, since these aren't 2009 foreclosures that were caused by the recession; instead, these are the foreclosures that caused the recession.
Most of this Fed report consists of a defense of the Community Reinvestment Act by showing lower foreclosure rates for banks (e.g., Washington Mutual) than for independent mortgage companies (e.g., Countrywide). Of course, that's not a very informative comparison since the Clinton Administration warned Countrywide-like firms that they would have the CRA extended to cover them legislatively unless they behaved like they already were under the CRA. Thus, Angelo Mozilo signed a deal with HUD secretary Henry Cisneros to lend more to minorities and lower income borrowers, and then put Cisneros on Countrywide's board, and even named Cisneros consultant to Mozilo's CRA-like trillion dollar pledge of January 2005.
No, what's really interesting is on pp 12-14. I put the most interesting stuff in bold at the end:
So, in the economists’ simple multiple regression model, after adjusting for income and FICO, minorities in California still had substantially higher foreclosure rates than whites:
- blacks 3.3X
- Latinos 2.5X
- Asians 1.6X
(These adjusted gaps are all statistically significant at the 0.01 level.)
Presumably, the raw differences in foreclosure rates are even greater. Unfortunately, the actual raw numbers aren't listed in the report, and the authors refused my repeated email requests to release the unadjusted numbers by ethnicity.
The raw ratios are important for estimating the overall share of defaulted dollars by ethnicity in California. We know from the federal HMDA data that minorities accounted for 77% of subprime home purchase dollars borrowed in California in 2006 (the worst vintage for defaults) and 56% of all home purchase dollars. You can see the graphs here. (I'm excluding borrowers of unknown ethnicity and mixed ethnicity couples).
Request 1: Would it be possible to reverse engineer the actual raw ratios from the numbers that do appear in this report?
Request 2: Also, is the Fed subject to the Freedom of Information Act?
According to Google, even though this report is eight months old, the part about the race differences in foreclosure rates has only been quoted once before, by E. Scott Reckard, an LA Times reporter who has done a lot of good work on the mortgage meltdown.
Fortunately, I finally found, buried away in a San Francisco Federal Reserve Bank report, some hints on who defaulted in California, the home to a sizable majority of all defaulted mortgage dollars.
Lending in Low- and Moderate-Income Neighborhoods in California:
The Performance of CRA Lending During the Subprime Meltdown
Elizabeth Laderman
Carolina Reid
Federal Reserve Bank of San Francisco
November 26, 2008
Two economists at the San Francisco Fed made a study of mortgages originated in California in the Housing Bubble years of 2004-2006. They painstakingly matched federal Home Mortgage Disclosure Act data about mortgage originations, which track whether minorities get enough mortgage money but don't track whether they pay it back, with private (and expensive) Lender Processing Services (LPS) data, which don't care about ethnicity but do care about borrowers paying what they owe. The Fed economists came up with 239,101 successful matches of mortgages that show up in both databases. About 10,000 of them had entered the foreclosure process by the end of September 2007.
This is a good time period for looking at foreclosures, since these aren't 2009 foreclosures that were caused by the recession; instead, these are the foreclosures that caused the recession.
Most of this Fed report consists of a defense of the Community Reinvestment Act by showing lower foreclosure rates for banks (e.g., Washington Mutual) than for independent mortgage companies (e.g., Countrywide). Of course, that's not a very informative comparison since the Clinton Administration warned Countrywide-like firms that they would have the CRA extended to cover them legislatively unless they behaved like they already were under the CRA. Thus, Angelo Mozilo signed a deal with HUD secretary Henry Cisneros to lend more to minorities and lower income borrowers, and then put Cisneros on Countrywide's board, and even named Cisneros consultant to Mozilo's CRA-like trillion dollar pledge of January 2005.
No, what's really interesting is on pp 12-14. I put the most interesting stuff in bold at the end:
In Table 3, we present a very simple model where we predict the likelihood of foreclosure, controlling for borrower risk factors including income, race, and credit score. We present the findings as odds ratios to assist in interpreting the coefficients. We also control for neighborhood characteristics that may influence the underwriting decision, including the CAP rate, the age of the housing stock, and the percent of owner-occupied housing. Given the importance of house values in predicting foreclosures, we control for house price appreciation in each of the model iterations.
Several findings from even this simple model stand out. First, metropolitan house price changes do have a significant effect on the likelihood of foreclosure. Rapid house price appreciation in the 2 years preceding origination significantly increases the likelihood of foreclosure. This is consistent with previous research that has linked foreclosures and delinquencies to local housing market conditions, particularly in California where house prices rose quickly in relation to fundamentals and where subsequent corrections have been quite dramatic (Doms, Furlong and Krainer 2007). The tract’s capitalization rate is significant only at the 10 percent level, but also increases the foreclosure rate as expected. A higher percent of owner occupied housing in a tract and more recent construction both also seem to increase the likelihood of foreclosure, but only slightly.
Second, and not surprisingly, FICO scores matter. A borrower with a FICO score of less than 640 is 12.6 times more likely to be in foreclosure than a borrower with a FICO score of more than 720; for borrowers with a FICO score between 640 and 720, the odds ratio is 4.7 times compared to borrowers with the highest credit scores. We also find that race has an independent effect on foreclosure even after controlling for borrower income and credit score. In particular, African American borrowers were 3.3 times as likely as white borrowers to be in foreclosure, whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers.
So, in the economists’ simple multiple regression model, after adjusting for income and FICO, minorities in California still had substantially higher foreclosure rates than whites:
- blacks 3.3X
- Latinos 2.5X
- Asians 1.6X
(These adjusted gaps are all statistically significant at the 0.01 level.)
Presumably, the raw differences in foreclosure rates are even greater. Unfortunately, the actual raw numbers aren't listed in the report, and the authors refused my repeated email requests to release the unadjusted numbers by ethnicity.
The raw ratios are important for estimating the overall share of defaulted dollars by ethnicity in California. We know from the federal HMDA data that minorities accounted for 77% of subprime home purchase dollars borrowed in California in 2006 (the worst vintage for defaults) and 56% of all home purchase dollars. You can see the graphs here. (I'm excluding borrowers of unknown ethnicity and mixed ethnicity couples).
Request 1: Would it be possible to reverse engineer the actual raw ratios from the numbers that do appear in this report?
Request 2: Also, is the Fed subject to the Freedom of Information Act?
According to Google, even though this report is eight months old, the part about the race differences in foreclosure rates has only been quoted once before, by E. Scott Reckard, an LA Times reporter who has done a lot of good work on the mortgage meltdown.
My published articles are archived at iSteve.com -- Steve Sailer
This is impressive reporting on your part, Steve. If I were the publisher of national newspaper, I'd hire you for the op/ed page in a heartbeat. A perfect fit for you would be Los Angeles-based Investor's Business Daily, with it's rightist op/ed page, except for one big problem: the IBD shares the same open-borders ideology that the WSJ and the NYT do. They should hire you anyway though.
ReplyDeleteSailer, I think you might comment on the LA Fitness gunmen as fit the stereotypical beta male casualty of feminism.
ReplyDeleteHere's a rather intelligent nerd, not obviously bad looking, okay-enough personality according to multiple testimonials, who runs his life well (savings, house, decent job) but can't get laid.
Should this happen?
Didja see this?
ReplyDelete"NEW YORK (Reuters) – The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.
Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements."
http://news.yahoo.com/s/nm/20090805/bs_nm/us_usa_housing_deutschebank?sec=topStories&pos=1&asset=&ccode=
Awesome riot porn from a recent autoworker strike in South Korea:
ReplyDeletehttp://www.guardian.co.uk/world/gallery/2009/aug/04/south-korea-automotive-industry
2 typos in the last §, Steve
ReplyDeleteGood work Steve. I am suprised that there are not politicians demanding that we keep better records on where our money is going. Perhaps somebody needs to file a law suit. If the politicians feel uncomofortable demanding records of defaults by race they could simply claim they wanted to be sure that whites were not given discriminitory preference and they are just making sure they were paying their loans back to the multi-racial tax payers. (by the way, has anybody ever figured out what percentage of our taxes are paid by race? That would be an interesting read).
ReplyDeleteIts fun to imagine how increasingly freaked out Caroline Laderman and Elizabeth Reid became by Steve's "repeated email requests to release the unadjusted numbers by ethnicity".
ReplyDeleteAlso, is the Fed subject to the Freedom of Information Act?
ReplyDeleteYou'll probably get this answered a dozen times but:
U.S. judge rules for Fed in Fox News Network request
The owner of the Fox Business cable network made an initial request for documents in November last year under the Freedom of Information Act (FOIA) [...]
"I rule that one document, which the Board determined is not a record, is indeed, a record. The Board shall identify this document and either produce it or claim an exemption," Hellerstein said in a written order.
"In all other respects, I grant the Board's motion and deny Fox's motion, finding that the Board performed an adequate search and that Exemption 4 permits the Board not to disclose the documents that Fox seeks."
Under Exemption 4 of the FOIA, an agency must demonstrate that the information sought is a "trade secret" or "commercial or financial" in character and "obtained from a person" and "privileged and confidential."
[...]
The case is Fox News Network LLC v Board of Governors of the Federal Reserve System 09-272 in U.S. District Court for the Southern District of New York (Manhattan)
~Svigor
Steve,
ReplyDeleteExcellent post. You can make online FOIA requests here:
http://foia.state.gov/foiareq/foialetter.asp
There are 9 exemptions; you should look out for #9:
http://www.corporateservices.noaa.gov/~foia/foiaex.html
Fred, you surely know Steve would be fired after his first piece, not to mention pilloried and made public enemy no.1 on national media
ReplyDeleteConsidering that Bailout Bernanke ignored Congress, the organization that is ostensibly his boss, when it came to a document request, I'd say the odds of a commoner getting anything out of the Fed with the Freedom of Information Act are slim to none.
ReplyDeleteNo way can you exactly reverse-engineer the raw difference by race. You could do a back-of-the-envelope calculation to get kinda sorta close, however, if you had enough information. You would need to know, for each variable with a coefficient much different from 1.00 in, say, Table 6 of the paper what the difference is in that variable between blacks and whites. This would be hard for most of those variables, as many of them either come from the proprietary data or are calculated by the authors. Even worse, the authors have chosen inexplicably to measure income in units which make its odds ratio 1.00 after rounding, and this completely hides the size of the income effect. This even though income is highly statistically significant.
ReplyDeleteOn the FOIA question, there is a web page here: http://www.federalreserve.gov/generalinfo/FOIA/default.cfm.
One random comment on your post: you say that the authors painstakingly matched the two databases. The authors, on the other hand, say "data were matched using a probabilistic matching method." I doubt most people would consider probabilistic matching painstaking were it to be explained to them --- that usually means pushing a button to have the computer guess at matches. It certainly does NOT mean a smart, careful person looking with his eyes at the data to try to figure out the matches. This is important to your point, since it means that there is probably a fair amount of measurement error in the race, income, and other HMDA variables, and it's reasonable to believe that this biases the estimates of the effect of those variables towards 1.00 (though it does not always work this way). So the true race effect might be bigger than what is estimated in the paper.
Yes, you can make a Freedom of Information Act request.
ReplyDeletehttp://www.federalreserve.gov/generalinfo/foia/
Presumably, the raw differences in foreclosure rates are even greater.
ReplyDeleteExcept for Asians. I would expect the raw difference for Asians to be smaller (or even negative).
Is the Fed subject to FOIA
Why would they be? The Fed isn't a part of the government. Ha ha.
The authors of that paper don't seem to have a very strong handle on what their results mean, in context.
ReplyDeleteThe anti-CRA argument goes something like: CRA causes increased lending to minorities, minorities are less likely to pay, therefore CRA causes more poorly performing loans.
What sense does it make to CONTROL for minority status in a regression to test that theory?
Yes, the Fed is subject to FOIA (see here: http://www.zerohedge.com/article/federal-reserve-responds-aig-foia-request-davis-polk-and-morgan-stanley-data-forthcoming).
ReplyDeleteGood luck.
I wonder whether household wealth is the hidden explanatory variable there? That would explain the big gap between Asians and Blacks/Hispanics, and the smaller gap between Asians and Whites. Not sure it would explain the Black/Hispanic gap, though (I would actually have thought Hispanics had, for equivalent income and FICO, considerably lower household wealth than Blacks, since so many more of them are recent immigrants or from immigrant families). Did the databases used for the study track household wealth statistics?
ReplyDeleteMost notably with clinical-trials research with big pharma sponsorship, we've seen cases of The Dog That Didn't Bark. Findings of lack-of-efficacy (etc.) that never got published.
ReplyDeleteOr, that saw the light of day in obscure places, in hard-to-understand formats.
So authors Laderman and Reid decline to provide you with more data.
I suspect they found interesting, unexpected things in their results, and that honesty compelled them to discuss them in print. But that the sort of attention that iSteve brings is very unwelcome.
It seems unlikely that they see this development as a net positive for their careers as Fed researchers, either.
Wonderful work, as usual!
ReplyDeleteOff topic, it appears the Times has decided to allow the good Dr. Watson to partially rehabilitate himself. Perhaps the stark relief provided by Crowley's courage made them nervous. A carrot for the capitulators.
http://www.nytimes.com/2009/08/06/opinion/06watson.html?_r=1
"According to Google, even though this report is eight months old, the part about the race differences in foreclosure rates has only quoted once before...
ReplyDeleteWell naturally, Steve, why would anyone care about the ethnicity of the defaulters?
Our culture is scrupulously color-blind when it comes to racial differences.
Or is that selectively color-blind.
Fertility rates in rich countries on the rebound:
ReplyDeletehttp://scienceblogs.com/notrocketscience/2009/08/fertility_rates_climb_back_up_in_the_most_developed_countrie.php
THis is good, but really, it means little. Liberals will just say that the mortgagors went and picked out gullible NAMs on purpose because they're all rich white Republicans who love to torture NAMs but wouldnt dream of causing trouble for poor whites in California.
ReplyDeleteCuriously, "3.3 times" is exactly the ratio between black and white violent crime rates (excluding murder-- blacks commit on the order of 8 times as many murders).
ReplyDeleteI suspect both numbers are tied to the Fundamental Constant of Sociology somehow.
The Fed considers itself subject to the FOIA, and offers a web page outlining that view:
ReplyDeletehttp://www.federalreserve.gov/generalinfo/foia/
However, they might withhold the data you seek under (most likely) either exemption 4 or 5:
http://www.federalreserve.gov/generalinfo/foia/exemptions.cfm
If I were you I'd file an FOIA request and find out...
Well, these are certainly interesting relative ethnic-default numbers, the first solid ones I've seen anywhere. But they hardly settle the question.
ReplyDeleteFirst, the overall default rates are extremely low. Remember, these are the home mortgages taken out at the absolute height of the CA Bubble, 2004-2006, and the total default rates are just 4% over 2-3 years, or maybe something like 1.5% per year. If the default rates for those mortgage-years had stayed anything like that, there never would have been a Meltdown. I think the actual default rates for this overall cohert of CA mortgages was something like 10x or more higher than that.
One problem is that for most of the period under examination, housing prices were still rising sharply, meaning that homeowners in financial trouble could just sell at a profit, avoiding any foreclosure. Presumably, that's part of the reason for the very low default rate. Maybe the relative-ethnic default rates stayed constant as the overall defaults zoomed upward, or maybe they didn't. It's hard to be sure.
Another thing which makes me suspicious of the data is that on an income-adjusted basis the Asian homeowners have default rates 60% *higher* than the white homeowners (and don't forget that a pretty good fraction of the "whites" were probably Middle Easterners or whatever, rather than Northern Europeans). Perhaps I'm revealing my racial basis, but such very high relative Asian default rates seem doubtful to me. It also makes the use of the "NAM" term look pretty silly.
Personally, I've always suspected that a large fraction of the initial wave of defaults which triggered the Meltdown were probably by speculators, and the extremely low total default rates by this set of 240,000 homeowners up to 9/2007 might tend to support that theory.
On the other hand, I'm also not convinced by the central conclusion of the study, namely that the CRA had no relationship to higher default rates, and may have actually helped to lower mortgage default rates.
This link http://www.freddiemac.com/corporate/reports/moseley/chap6.htm
ReplyDeletesays that African-Americans are three times more likely to have a low FICO score than non-hispanic whites, and hispanics are twice as likely to have a low FICO score. You might multiply these two factors to estimate that African-Americans are 9.9 times more likely to be in foreclosure than whites, and Hispanics 3.2 to 5 times more likely. The definition of low FICO score in the link is less than 620, versus less than 640 in the fed paper, so that would throw the figures off a little.
As always Steve, thanks for treading where few men tread. I used to think that the independent effect of race would be minimized(though still present) by controlling for income, and credit score. The effect is larger than I thought.
ReplyDeleteIn part, maybe this racial disparity even when controlling for income and credit score is due to affirmative action. It's a lot more pervasive and destructive than its supporters care to admit.
It would be even better if we could control for IQ(and education) as well as income and credit score to compare the races. Unfortunately, this info isn't available.
Don't these statistics undermine the argument that giving loans to illegal immigrants is what caused the financial meltdown? Unless you're arguing that these were illegal alien blacks who defaulted more often than Hispanics? 239,101 mortgages to minorities and only 10,000 had entered the foreclosure process, isn't that less than 5%. Is it your argument that these 10,000 foreclosures were responsible for the housing crisis? Please explain.
ReplyDeleteIt would be even better if we could control for IQ(and education)
ReplyDeleteIndeed. I say we control for breathing and prove once and for all there are no racial differences.
(J/K, obviously there are some things to be teased out by controlling for all those things, I just couldn't resist)
~Svigor
As I understand it, FOIA only allows you to get information that already exists. So if the authors were careful enough never to calculate the raw summary statistics for foreclosures by race, they wouldn't have to give them to you. Probably they wouldn't have to even if they did calculate it, but never typed it up as a document, or kept it on file somewhere.
ReplyDeleteI think that's what public universities do now--- they make sure never to have any memos, even internal ones, listing student admission scores by race.
Also, the raw data is surely exempt from FOIA.
"...after adjusting for income and FICO, minorities in California still had substantially higher foreclosure rates than whites"
ReplyDeleteThis caught my eye. I have been assuming that once you control for FICO score and income, race plays no role in loan default rates. Wasn't that the point that Brimelow made in the 90's about the Boston Fed report on redlining?
Let me hazard a guess what's going on here. Living, working, and socializing in a diverse community in California for the past 15 years, I noticed an almost money madness that seemed to grip non-whites, especially the Chinese, during the housing bubble. Never a day went by during these years when I didn't overhear some Chinese person talking about how they were investing in real estate, working part time as a realtor or loan broker, selling some property at a profit, or buying another investment property to fix up and rent out. Oftentimes, the day job got short shrift as these people jabbered away on the office telephone in their native tongue while closing deals, negotiating interest rates, or fishing for opportunities.
As Barbara Walker is fond of reminding us over at Vdare, immigrants in the US are here for the money, while enjoying various statutory benefits for being in a minority. And it is often the most money-hungry of these third world gypsies who opt for a life in America. I knew one youngish woman who ditched her husband in Shanghai to become a mail order bride so she could come to the US and get her real estate license; her goal was to sell million dollar bungalows in Silicon Valley to Mandarin speaking technology workers.
So it would appear that Asians, who as a rule are known for thrift, careful planning, and organization, often end up being victims of dark forces that lie barely submerged in their personalities. Especially if you put them near a casino, which is basically what the California housing market was from 1999 to 2007.
Also, as RKU suggests, some not tiny proportion of white buyers in California in 2004-2006 were immigrants from the ex-Soviet Union and from the Middle East.
ReplyDeleteYes, differences in net worth are a huge factor in foreclosure rates. And it's not just personal net worth, it's relatives' net worth, as well. For example, about 15 years ago, I kept an in-law from getting foreclosed upon with a $5k interest free loan. The in-law found a job and paid me back within a couple of years. If all your relatives are in Chiapas, however, you are less likely to be able to scratch together the money you need from family borrowing to get over a hump.
ReplyDelete"Fertility rates in rich countries on the rebound:
ReplyDeletehttp://scienceblogs.com/notrocketscience/2009/08/fertility_rates_climb_back_up_in_the_most_developed_countrie.php"
That's right! Immigrants are moving in and having more kids, many of them on public assistance!
Anonymous RKU said...
ReplyDelete"Personally, I've always suspected that a large fraction of the initial wave of defaults which triggered the Meltdown were probably by speculators, and the extremely low total default rates by this set of 240,000 homeowners up to 9/2007 might tend to support that theory."
I was there in California at the height of the boom, and the vast majority of those buying expensive houses were Hispanics whose own mothers would have been reluctant to lend them five bucks. If a significant proportion of white speculators were involved, they were getting bums of politically correct ethnicity rounded up from the Home Depot parking lot to front for them - what they call in Malaysia a Baba Ali loan.
This appears to be a case-control study. Foreclosures were matched with controls. There is no way to estimate incidence rates in a case-control study.
ReplyDeleteAnother thing which makes me suspicious of the data is that on an income-adjusted basis the Asian homeowners have default rates 60% *higher* than the white homeowners
ReplyDeleteAnd why does that make you suspicious?
"as RKU suggests, some not tiny proportion of white buyers in California in 2004-2006 were immigrants from the ex-Soviet Union and from the Middle East"
ReplyDeleteOn the other hand, a large percentage of Asian buyers in the bubble period were of Vietnamese, Cambodian, Laotian, Hmong, and Philippino origin.
This link http://www.freddiemac.com/corporate/reports/moseley/chap6.htm
ReplyDeletesays that African-Americans are three times more likely to have a low FICO score than non-hispanic whites, and hispanics are twice as likely to have a low FICO score. You might multiply these two factors to estimate that African-Americans are 9.9 times more likely to be in foreclosure than whites....
Three times more likely equals four times as likely.
So, 4 x 3.3 = 13.2 as likely, or 12.2 times more likely. Learn what "more likely" means, for God's sake.
The authors need a lesson as well:
...whereas Latino and Asian borrowers were 2.5 and 1.6 times respectively more likely to be in foreclosure as white borrowers.
Unbelievable -- they mixed their idioms! What are they trying to say -- "2.5 and 1.6 times respectively more likely"? Or "2.5 and 1.6 times respectively as likely as"? The sentence has no meaning!
I was wrong. You an estimate the incidence of foreclosure by race from this case – control study if you know the number of loans originated in California from 2004 – 2006 and assume the percent of minorities in the control set is the same the target set. Unfortunately, the authors of the report do not break out the percent of minorities in their cases and controls sets. There might be a way to estimate it by educated guesses. If I figure it out I will put it on my blog.
ReplyDelete