RateWatch #197 - A Topic That Few Can Talk About Objectively

What's Happening?

Mortgage rates were killed this week as good economic news translated into concern about another Fed hike. Let's get into the game of speculating about the size of the Fed hike. It has gotten popular to speculate that the Fed will do a double whammy" 50 basis point hike. Let me explain why they may not. Greenspan has done an excellent job of diddling with the Fed funds rate to keep the economy under control. The current cycle of inflation fear and rate hikes is not near its end. A 50 basis point hike now is premature. If it doesn't slow down inflation then another 50 point (or 75 point hike) will be needed next. A 50 point hike will be appropriate when the perception is that the cycle is near its end and signal that the Fed has taken the final step. Rolling out the heavy artillery at this stage is premature.

A Topic That Few Can Talk About Objectively

I was in New York City several weeks ago. One morning, I was having breakfast and overheard a conversation at the counter. An African American woman came in and started a conversation with a white woman who was sitting to her left. The woman on the left said that she was in the mortgage business. The African American woman spoke of a disturbing story that she had heard on TV the evening before. It said that African Americans were turned down for mortgages twice as often as whites. It said that blacks who earned $60,000/year were turned down more often than whites who earned $50,000/year.

These are facts. They are accurate. But they are not the whole story of the mortgage business. Whites are turned down twice as often as Asians. No one is likely to conclude that the mortgage business is run by a group of Asians who are discriminating against whites and African Americans.

I do not believe that a significant number of African Americans or whites are turned down as a result of their race. The fact lurking in the background is credit. Having looked at too many thousands of loan applications over the years I would offer that race is highly correlated with credit score. Asians have higher credit scores than whites who have higher credit scores than African Americans.

Credit score is, to some extent, correlated to the various ethnic cultures that exist in the U.S. Asians are more likely to have college degrees than whites. Whites are more likely to have college degrees than blacks. College degrees translate into higher incomes. Higher incomes translate into better credit, usually.

I make the assumption that credit scoring is "per se" color blind. That is, it looks only at the raw data in one's credit history. It does not add or subtract points for race.

What I do believe is that there is virtually no racial motivation from mortgage lenders. The differences in "turn down" ratios are not the result of race but the result of credit.

The question that must next be asked goes something like this: is it not simply the case that credit score reveals the history of 350 years of slavery followed by racism? This misses the point. Establishing who ultimately caused the problem is irrelevant. The important thing is a solution. Having a low credit score is akin to having a high temperature. It is a symptom of a problem. It makes sense to accept credit scoring as an indication of credit problems and solve the credit problems.

When I first started in the mortgage business I thought that it was strange that loan applications ask for race. The reasoning, I presume, is that the Federal government wants to look at the data on loan disposition by race and make sure that there is no racial discrimination. Yet, the fact is that the person making the underwriting decision has, in most cases, no way of knowing the person's race or, more accurately, no way of knowing if they are black or white apart from the box on the loan application. The proposition then is somewhat illogical. The mortgage industry says to a borrower: "Tell me your race and I can assure you that I will pay no attention to it when making a decision." Sort of a "Do ask, won't tell". On the surface this proposition makes no sense to me.

Several years ago some lenders looked at applications that said "I do not wish to furnish this information" and called the loan officer to ascertain what race the person was. They would ask the loan officer to state an opinion as to what race they thought the applicant was if the application indicated that the interview was done "face-to-face". I once remember a lender asking me to state an opinion of the race of a couple that I had never met but who's application I had received in the mail.

A Solution

Assuming that the mortgage industry is 1) trying to make money and 2) achieving some social benefit as a result of providing people with the opportunity of home ownership, I would suggest that it not stop here and simply say, "sorry, black folks, but the problem is you have bad credit". That is not acceptable. What must be done is twofold: 1) have some aggressive programs to help folks clean up their credit and 2) recognize that next to education and access to the labor market, home ownership is perhaps the next best "mainstreaming" force and have the government sponsor, with major lenders, expanded credit criteria for blacks and other minorities who would otherwise be deprived of "the American dream" of home ownership.

When I am suggesting programs to help people clean up their credit I am not talking about the 800 number credit repair advertisements. I refer to real educational classes and proactive involvement in management of debt and to see that all credit obligations are made on time. Everyone who's credit score is substandard should be offered the access to hands-on help to reestablish credit and gain access to the American dream of home ownership.

The results of many years of racial discrimination are a shame to us as Americans. This is one case in which something significant can be done by this industry.

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