The evidence of racial disparity in lending is growing, as is the evidence that the subprime mortgage crisis has disproportionately affected minority borrowers.
The most recent evidence is the study released yesterday showing that banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.
The study found that Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites.
During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites.
Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites.
Although the recent study is getting far more press coverage than earlier reports, the idea that the subprime mortgage crisis has hit minorities harder than whites isn’t new. A similar study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.
Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.
Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they caution against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.
In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance, and co-developer of the Case-Shiller National Home Price Index, put the issue in context. As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:
“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”
“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”
“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”
While it is now clear that the subprime mortgage crisis has disproportunately impacted minority borrowers and that this was sometimes the result of racism, we agree with Professor Shiller that the financial innovations created by the mortgage and banking industries in the past decade have delivered benefits to all Americans, “including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”
The same point was made by University of Chicago economics professor Austan D. Goolsbee in his essay in the New York Times entitled ‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.
Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.” He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market, showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”
Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”
In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”
He concluded that, contrary to the current hysteria about the mortgage industry, “the mortgage market has become more perfect, not more irresponsible” and that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”
We share the hope of Shiller and Goolsbee that when the governmental regulators begin to search for villians in the subprime mess and rewrite the rules for mortgages, they will preserve many of the finiancial innovations created by the mortgage and banking industries that have opened doors for so many of the excluded and allowed so many to achieve the American Dream.