Apr 02, 2009
NY Fed study debunks ‘reverse redlining’
02 Apr 2009
Posted by VAR
Story on Housing Wire today says a new study seriously calls into question assertions by consumer groups that banks and mortgage companies routinely offer less attractive terms to minority buyers. Here’s the money quote:
In contrast to previous findings, our results show that if anything, minority borrwers get slightly favorable terms, although the size of these effects are quite small. Black and Hispanic borrowers pay very slightly lower initial mortgage rates than other borrowers — about 2.5 basis points (0.0025 percent) compared with a mean initial mortgage rate of 7.3 percent. Black and Hispanic borrowers also have slightly lower margins (about 1.7 to 5 basis points, or 0.0017 to 0.005 percent) compared to a mean margin of 5.9 percent. Asian borrowers pay slightly higher initial rates and reset margins (about 3 basis points). We find no appreciable differences in lending terms by the gender of the borrower. These results control for the mortgage risk characteristics and neighborhood composition. While many of these differences are statistically significant, they are economically insignificant.
A second important finding is that 2/28 mortgages were cheaper in Zip Codes with a higher percentage of Asian, black and Hispanic residents, as well as in counties with higher unemployment rates, once we control for the individual risk characteristics of the borrower.
I can’t state this clearly enough: this is a stake in the heart of the argument, made by most consumer groups, that lenders used predatory practices to target minorities for the worst loans. And on the surface, any of us should know this without the need for hard data: during the boom, loans were being made to anyone and everyone that could fog up a window. And I mean everyone — why do you think we’re now seeing such strong and swift performance deterioration in prime jumbo mortgages? The argument suggesting that minorities were disproportionately targeted and offered comparatively more onerous loan terms shouldn’t have passed the smell test for anyone that actually worked in the mortgage industry during those go-go years.
To be sure, there are still plenty of unanswered questions here; the study does not address the question of “steering,” as consumer groups have also long alleged. The idea here is that minority borrowers were put into higher-cost subprime loans more often than white counterparts, when they could have qualified for a more traditional mortgage. But again, the results of this study should lead you to ask yourself: would this just be a phenomena limited to minorities?