Fair Lending Isn't Fair


For those folks who still don't understand how government meddling is responsible for the housing crisis, Investor's Business Daily recently posted a nice explanation:

At President Clinton's direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

This came into effect in 1994 through the "Policy Statement on Discrimination in Lending", spurred on by a Boston Fed study that claimed the discrepancies in the proportion of mortgages given to blacks, Hispanics, and whites was a result of "discrimination." But there is nothing wrong with"discriminating" between bad lending practices and good ones:

It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower's credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults….

When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.

Still, the study was used to support a wholesale abandonment of traditional underwriting standards — the root cause of the mortgage crisis.

This outcome should have been obvious since about, well, 1994. But some people still don't get it. People like Attorney General Eric Holder who still thinks banks are racist for being simultaneously too tightfisted and too open-handed with minority borrowers.

Reason on Holder here, here, and here, and housing here.

H/T to the previously neglected John.