Everybody knows that American blacks pay more for their groceries than American
whites do. The same, it seems, is true of mortgages. (Update: I just, you know, actually read this first sentence. And no, it doesn’t mean that American mortgages pay more for their groceries than American whites do. OK, you can continue reading now.)
Yesterday, the Federal Reserve released a major lending
survey (PDF), looking, among other things, at the question of whether blacks
pay more for their mortgages than whites do.
The answer, unambiguously, is yes. Subprime mortgages – housing loans
which cost about 2 percentage points more than those for people with good credit
– are a booming business at the moment: some $530 billion of such loans
were written in 2004, up from $35 billion in 1994.
And it turns out that among low-income homebuyers, about 39.2 percent of blacks
but only 12.9 percent of whites took out such loans.
Clearly, discrimination is going on, right? Not so fast. As the New York Times
"a large part of the contrast between mortgages to blacks and whites could
be attributed to differences in lending institutions". Here’s what the
Most of the reduction in the difference in the incidence of higher-priced
lending across groups comes from adding the control for lender to the control
for borrower-related factors. For conventional first-lien home-purchase loans,
the mean unadjusted incidence of higher-priced lending was 32.4 percent for
blacks and 8.7 percent for non-Hispanic whites, a difference of 23.7 percentage
points. Borrower-related factors account for about one-fourth of the difference.
Adding to this adjustment the control for lender reduces the remaining gap
markedly, to 7 percentage points.
In other words, we start off with an enormous gap, of 23.7 percentage points,
which needs to be explained. About a quarter of that gap – 6 percentage
points – can be accounted for factors relating to the borrowers themselves,
such as their income, the type of property securing the loan, whether there’s
a co-applicant, even property location down to census tract.
A much large chunk of the gap, however – about 11 percentage points
– is accounted for by differences in lenders. Blacks, it would seem, disproportionately
get their mortgages from high-priced (subprime) lenders rather than from other
sources – even after controlling for factors such as income and creditworthiness.
That brings the remaining gap down to 7 percentage points, and racism is by
no means the most likely explanation for it. Crucial factors such as borrowers’
credit scores and the amount they have available for down-payments are not included
in the Fed’s data, so they could account for that final bit of the difference.
Nevertheless, there’s no doubt that blacks pay more for their mortgages than
whites do, and that the single biggest reason for this is that they go to expensive
mortgage shops. The mortgage shops don’t discriminate between blacks and whites:
a white person going to the same shop would get the same rate. But it seems
that the shops selling mortgages mainly to blacks charge higher rates than the
shops selling mortgages mainly to whites.
Concludes the Fed report:
Black and Hispanic borrowers taken together are much more likely than non-Hispanic
white borrowers to obtain credit from institutions that report a higher incidence
of higher-priced loans. On the one hand, this pattern may be benign and reflect
a sorting of individuals into different market segments by their credit characteristics.
On the other hand, it may be symptomatic of a more serious issue. Lenders
that report a lower incidence of higher-priced products may be either less
willing or less able to serve minority neighborhoods. More troubling, these
patterns may stem, at least in part, from borrowers being steered to lenders
or to loans that offer higher prices than the credit characteristics of these
So there are two things to worry about here. Firstly, why aren’t the low-cost
lenders lending to blacks as much as they lend to whites? Are the big national
mortgage shops less willing to operate in low-income black neighborhoods than
in low-income white neighborhoods? Secondly, are the shops which do
operate in low-income black neighborhoods taking undue advantage of the fact
that lower-cost shops aren’t operating there? Are they selling their customers
higher-priced products just because they can?
Loan sharks have known for centuries that the poor can be much more profitable
than the rich when it comes to lending money. It would make sense for subprime
lenders to set up shop in areas where major financial institutions with more
competitive lending rates are few and far between. And those areas, it would
seem, are predominantly black.
In other words, even if no one is behaving in an explicitly racist way, a result
starkly diffentiated along racial lines can still emerge. How to address that
problem is a major issue for the Fed, and this report should be welcomed as
the first step in doing so.