Posted on the Housing Wire by Paul Jackson:
Did lenders target minorities with higher-cost loans, relative to their white counterparts? Consumer advocates have long trumpeted this as fact, using studies commissioned by their own staff and publicly-available data via the Home Mortgage Disclosure Act to allege that banks routinely and deliberately offered disparate terms to minority borrowers. And legislators have taken these findings at face value, no questions asked.
The latest such study to allege such disparity in lending practices was released Thursday morning by Inner City Press / Fair Finance Watch, a New York-based consumer advocacy group, that argues “the seeming survivors of the banking meltdown, Wells Fargo, Bank of America and JPMorgan Chase, had worse disparities by race and ethnicity in denials and higher-cost lending than the banks they acquired, Wachovia and Countrywide.”
The problem of course, is that consumer groups aren’t disinterested observers of the data they’re analyzing — you’d be hard pressed to find a consumer group of any sort releasing a study that finds evidence that banks did not engage in so-called ‘reverse redlining,’ for example. Doubly so in the current economic climate, where it can be all-too-easy to vilify essentially any bank, and where standards for analyzing data (and, more importantly, interpreting it) can be set with such a seemingly sliding scale.
The other problem is often the data itself: HMDA data is notoriously incomplete, meaning that conclusions based on analysis of that particular data often can be missing critical key credit indicators that might otherwise explain disparities that seem to be reported in previous studies.
All of which makes this week’s release of a new joint study by researchers at the Federal Reserve Bank of New York and the Columbia School of Business something worth paying real attention to. And a study that should receive far more press and attention from regulators than it likely will.
For one thing, the researchers involved here are true researchers in the academic sense of the word — independent of an any agenda that might arise from the findings of their work, for one thing. But the NY Fed study is groundbreaking particularly because it uses a hybrid data set that isn’t reliant on just the HDMA data; the first such study to do so. The researchers matched approximately 70 percent of loan-level data in a database provided by First American LoanPerformance to unique mortgage data in the HDMA. Doing so was “extensive work,” Andrew Haughwout, Christopher Mayer, and Joseph Tracy — co-authors of the study — note in review.
This is important: whatever you know or don’t know about research, the garbage-in, garbage-out mantra applies here moreso than almost any other endeavor. And I’ve long been bothered by the notion that the analysis of HMDA data lacked any insight into the borrower’s credit risk profile.
All of which makes the findings of this study, which looked at more than 70,000 subprime 2/28s originated in 2005, an absolute barn-burner for anyone in the mortgage space:
In contrast to previous findings, our results show that if anything, minority borrwers get slightly favorable terms, although the size of these effects are quite small. Black and Hispanic borrowers pay very slightly lower initial mortgage rates than other borrowers — about 2.5 basis points (0.0025 percent) compared with a mean initial mortgage rate of 7.3 percent. Black and Hispanic borrowers also have slightly lower margins (about 1.7 to 5 basis points, or 0.0017 to 0.005 percent) compared to a mean margin of 5.9 percent. Asian borrowers pay slightly higher initial rates and reset margins (about 3 basis points). We find no appreciable differences in lending terms by the gender of the borrower. These results control for the mortgage risk characteristics and neighborhood composition. While many of these differences are statistically significant, they are economically insignificant.
A second important finding is that 2/28 mortgages were cheaper in Zip Codes with a higher percentage of Asian, black and Hispanic residents, as well as in counties with higher unemployment rates, once we control for the individual risk characteristics of the borrower.
I can’t state this clearly enough: this is a stake in the heart of the argument, made by most consumer groups, that lenders used predatory practices to target minorities for the worst loans. And on the surface, any of us should know this without the need for hard data: during the boom, loans were being made to anyone and everyone that could fog up a window. And I mean everyone — why do you think we’re now seeing such strong and swift performance deterioration in prime jumbo mortgages? The argument suggesting that minorities were disproportionately targeted and offered comparatively more onerous loan terms shouldn’t have passed the smell test for anyone that actually worked in the mortgage industry during those go-go years.
To be sure, there are still plenty of unanswered questions here; the study does not address the question of “steering,” as consumer groups have also long alleged. The idea here is that minority borrowers were put into higher-cost subprime loans more often than white counterparts, when they could have qualified for a more traditional mortgage. But again, the results of this study should lead you to ask yourself: would this just be a phenomena limited to minorities?
Likewise, the study does not address qualification standards, or a lender’s refusal to offer credit. But I doubt many consumer groups have been willing to argue that lenders were failing to extend credit to minority borrowers during the housing boom from 2003-2006 (roughly speaking). Nor does the study look outside of 2005 subprime 2/28s.
Nonetheless, I think it’s time we at least began to lend some real credence to the idea that lax lending practices were an epidemic in this country. It’s an epidemic that is now clearly hurting minority borrowers, absolutely — and especially so, given the gains in minority homeownership that are now evaporating — but not just minority borrowers and/or borrowers with lower incomes and poor credit. That’s something I think we all need to start considering, especially when faced with a growing set of data — repeatedly covered here at HousingWire, and largely ignored by the rest of press and, apparently, many consumer groups — suggesting that the least credit-worthy borrowers are more than twice as likely to receive a loan modification once they fall behind on their mortgage, relative to their prime-credit peers.