Mortgage Lending and Discrimination
By Arnold Kling
If you’re a high-income Latino with a mortgage, you’re almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, the foreclosure crisis is hitting blacks and Latinos much harder than it is whites, according to a startling new report from the Center for Responsible Lending.
Pointer from Mark Thoma.
About twenty years ago, the Boston Fed did a study which showed that minority mortgage applicants were turned down at a much higher rate than white applicants. This was deemed evidence for racism. However, economists who criticizes the study pointed out that if banks were more lenient with white applicants, then this should show up as a higher default rate among white borrowers, which was not observed.
Again, the economic argument was that those who benefit from racial disparity in lending standards should end up with higher default rates. So, my first thought in reading the results that Salmon cites is that minorities must have experienced favorable discrimination in lending standards.
Instead, Salmon suggests that minorities were given loans with more onerous terms. However, the main driver of defaults is not loan terms. It is the decline in home prices.
Let me summarize possible explanations for the foreclosure disparity, with the weight I give to each.
1. Discrimination against minorities by giving them more onerous loans. (3 percent)
2. Discrimination in favor of minorities by giving them lenient underwriting in order to meet CRA and Freddie/Fannie “affordable housing goals.” (15 percent)
3. Aggressive lending aside, minorities might have had a higher propensity to jump into the housing market at the wrong time and to overpay for houses. This would mostly be due to lack of experience with the housing market, but it could also be a contagion effect as they saw friends and relatives taking the plunge into real estate. (80 percent)
4. Other explanations, which I cannot come up with at the moment. (2 percent)