Back in August, John Edwards was blaming lenders for the fact that minorities pay more for mortgages because they have worse credit scores.
There's now a New York Post article called The Real Scandal | How Feds Invited The Mortgage Mess, [February 5, 2008]By Stan Liebowitz, a Texas professor of Economics who's been analyzing this phenomenon for some time. He writes
At the crisis' core are loans that were made with virtually nonexistent underwriting standards - no verification of income or assets; little consideration of the applicant's ability to make payments; no down payment.The answer goes back to a Boston Fed study in the Nineties that concluded that blacks were discriminated against,using a version of "disparate impact" theory, the same theory that holds that if blacks have lower average scores than whites on a written test, it's the test that's at fault.
Most people instinctively understand that such loans are likely to be unsound. But how did the heavily-regulated banking industry end up able to engage in such foolishness?
From the current hand-wringing, you'd think that the banks came up with the idea of looser underwriting standards on their own, with regulators just asleep on the job. In fact, it was the regulators who relaxed these standards - at the behest of community groups and "progressive" political forces.
According to Liebowitz,
No sooner had the ink dried on its discrimination study than the Boston Fed, clearly speaking for the entire Fed, produced a manual for mortgage lenders stating that: "discrimination may be observed when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants."So instead of politicians like John McCain talking about "greedy people on Wall Street who need to go to jail," they should be talking about "stupid and evil people on Capitol Hill who need to get a real job."
Some of these "outdated" criteria included the size of the mortgage payment relative to income, credit history, savings history and income verification. Instead, the Boston Fed ruled that participation in a credit-counseling program should be taken as evidence of an applicant's ability to manage debt.
Sound crazy? You bet. Those "outdated" standards existed to limit defaults. But bank regulators required the loosened underwriting standards, with approval by politicians and the chattering class.
If you want to know what lending was like in 1992 befeor the Fed rewrote the rule book, you need to read an article called The Hidden Clue By Peter Brimelow and Leslie Spencer, first published in Forbes, Jan 4, 1993. This established that in the absence of federal civil rights nagging, banks were as happy to lend to blacks as to whites, given an equal chance of repayment. The hidden clue of the title was the default rates, which were the same for blacks as for whites, showing that they were being held to the same color-blind standards.
Given that minorities are supposed to be the main victims of this "predatory lending" nonsense, this must be no longer true.