Thursday, December 15, 2005

Minority Report: abuse or free market?


Today, a report by the California Reinvestment Coalition (CRC) was released and the conclusion the local media drew was reflected in the headline "Minorities pay more for home loans". Of course the CRC is happy with that headline since their mission is advocating for increased access to credit on behalf of California's low income communities. Wouldn't it be important, for the analysis of home loan data, to compare loan costs and rates for consumers with the same income level, job history, credit report score all against race?

Of course it would. That would in fact be the only way to say "minorities pay more for home loans" Otherwise you better say "minorities who as compared to a white counterpart make less, have less job history and have poorer credit scores pay more for home loans"! This study is so flawed its a total joke. For all we know even if they took into account the variables I mentioned it might be that yet another variable is the key, like education. In the end this is a free market, you don't need to take a loan from any particular bank or institution. You can shop for the best deal, but you have to be smart enough to do so. If you're not smart enough to open up a simple bank account so that you don't have to pay a fee to one of those strip mall check cashing stores then whose fault is that? In case you like to do your homework, the CRC's study is 50 pages and I scanned it. They do admit they don't have the ESSENTIAL credit score as part of the study but they, of course, blame it on the industry. The only mention of credit score is this two sentence disclaimer on the very last page.

"HMDA data is limited in that certain elements of conventional underwriting such as credit scores, loan to value ratios, and debt to income ratios are not available. While CRC and other community groups continue to call for HMDA reporting requirements to be strengthened, the industry continues to fight adamantly against any and all expansions of HMDA."

Groups like the CRC are why the HMDA (Home Mortgage Disclosure Act) exists. It requires lenders to report certain data but the key piece of data is race. Any guesses how many lenders asked for race on their loan applications prior to the passing of the HMDA? Oh, I'm sure before the HMDA the loan officer was secretely tagging applications for higher rates and fees based purely on the applicant being a minority! This is the same failed logic employed by affirmitive action propenents. They believe most business owners and hiring managers will not hire the best candidate if that candidate is of a certain race. You would only think that's a systemic problem if you have never been a business owner or hiring manager, or you work in a government or union job where there is no reason to hire the best.

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