Tim Worstall

Sub Prime Mortgages.

Shock and horror at the fact that racial minorities seem to have higher rates of sub-prime mortgages (and thus pay more in interest) than whites.

Regardless of income levels, blacks were about three times as likely
as whites to borrow through more expensive "subprime" mortgages last
year, according to a nationwide lending survey released Tuesday by the
Federal Reserve.
   

The new report, based on data
collected from 8,853 lenders, is the Fed’s first attempt to look for
evidence of racial and ethnic discrimination in the booming business in
exotic mortgages and subprime lending.

Among low-income
homebuyers, about 39.2 percent of blacks but only 12.9 percent of
whites took out high-priced mortgages, which the Fed defined as loans
with interest rates about 2 percentage points higher than those for
"prime" customers with good credit.

Is this prima facie evidence of racial discrimination in lending practices? Dean Baker seems to think so. Me, I’d look at this line:

Even among high-income borrowers, which the Fed defined as people who
earned more than 120 percent of the median income in their area, blacks
and Hispanics were far more likely to take out high-cost mortgages.

Ahh. "In their area". Much as it may surprise Europeans the US is highly segregated in the areas in which people of different races live. We also know that Blacks and Hispanics tend to have lower incomes. Both of these are things which, I would argue, should not be true but the bank’s reaction to this doesn’t come as much of a surprise. So someone has a slightly higher income in a low income neighbourhood. That doesn’t make them a better mortgage risk than someone with the median income in a higher income neighbourhood now does it?  (Unless house prices exactly cancel out the income effects.)

There is also this:

Put another way, the gap between blacks and whites who borrowed
from the same lenders was much smaller that the overall gap between
blacks and whites.

According to the Fed’s data, the vast bulk
of high-priced subprime lending was handled by a small number of
institutions. Of the 8,800 mortgage lenders that provided data, only
500 said they had made more than 100 subprime loans last year. Ten
lenders accounted for 38 percent of all the loans that were made.

Ten years ago such sub prime lending didn’t exist. Markets spotted an opportunity and now many who could not buy at all can. A solution to the problem then? No, not the way that some see it:

The Fed study could provide new ammunition to critics of subprime
lenders who accuse such institutions of predatory lending practices.

Tsk tsk, can’t have markets solving problems now can we?

 

In

4 responses

  1. Remittance Man Avatar
    Remittance Man

    OK. I’m going to venture into relatively unknown territory here. Please don’t be too nasty if I make a stuff up.
    Firstly interest rates charged are an indication of how good or bad a risk the lender considers the borrower. Risk, from the lender’s point of view is based on the likelyhood that the borrower will pay back the loan on time or earlier than required.
    I’m reasonably confident so far, but now for the more chancy stuff.
    It may be that ethnic minorities are not only more likely to be low-income earners, but perhaps their risk profile (likelyhood to change job more frequently, be made unemployed etc.) is worse.
    I beleive that any responsible lender would look at individual customers and define the risk category based on individual circumstances. Money is, after all, colour blind. If this is the case then the lenders are not “racist” in themselves. In fact, all they have done is highlighted the fact that Blacks and Hispanics are more likely to live at the less affluent (and thus more “risky”) end of the social spectrum.
    One other point, does this study include all ethnic minorities or just a select few? Are Chinese and Asians included or just Blacks and Hispanics?
    I remember several years ago my father, a bank manager, complaining when a similar kerfuffle was doing the rounds in the UK banking sector. There the “problem” was the number of business loans being made to minorities. The Indian community, which did start businesses, was more likely to be self assisting rather than asking banks for money. In the black community a lower proportion of people seemed to start businesses at all.
    As he said he couldn’t drag people off the street and force them to take loans. Then again, he was an old style bank manager, nowadays the banks do seem to operaste on this pinciple.
    As to Mr. Baker; I think he’s jumping to the wrong conclusions based on prejudice of his own rather than engaging in some analytical thinking.
    RM

    Reply
  2. Rob Read Avatar
    Rob Read

    Now if they did a study on the default rate…

    Reply
  3. Merideth Carleton Avatar
    Merideth Carleton

    Have you seen this before? It’s a number guessing game: http://www.amblesideprimary.com/ambleweb/mentalmaths/guessthenumber.html. I guessed 45356, and it got it right! Pretty neat.

    Reply
  4. proofpudding Avatar
    proofpudding

    Predatory? No, If certain borrowers qualified for prime loans, they wouldn’t need sub-prime lenders. It has nothing to do w/race, just individual circumstances. If you were a sub-prime consumer, you would want a chance at homeownership, right?

    Reply

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