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2 Tim 149

2 Tim 149

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Published by whentheycome

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Published by: whentheycome on May 17, 2012
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The Hidden Clue
ByPeter Brimelowon January 5, 2005 at 2:00am[First published in
, Jan 4, 1993]Media hoopla to thecontrary, the evidencesuggests that banks are color-blind when it comesto mortgage lending.
"Definitive--changes the landscape." -
-Officeof the Comptroller of the Currency.
"Comports with common sense, no morestudies needed."--
Richard F. Syron, president,Federal Reserve Bank of Boston.These ecstatic press notices greeted the BostonFed's recent study claiming to prove racial bias inmortgage lending--the social problem of theseason, with coverage in the
Wall Street Journal 
 (five stories in eight weeks), regulatory rumblesfrom the Federal Reserve, legislative leers fromCongress. The pressure is on mortgage lenders tochange credit standards for minorities.But the study's analysis makes an elementary
error about a crucial question: minority defaultrates. Queried by
,Alicia H. Munnell,Boston Fed senior vice president and researchdirector, conceded that the study's handling of default rates was
"definitely not an adequatelook at all."
Minority mortgage applicants do tend to berejected more than whites. A Federal ReserveBoard survey of 6.6 million home mortgageapplications in 1991 showed that 37.6% of blackapplicants and 26.6% of Hispanics were deniedhome loans, compared with only 17.3% of whites.This finding held across all income levels. But wasthe difference the result of racism? Or of anobjective, color-blind application of sound creditstandards? The data on default suggest the latteris true. Mortgage lenders consider a range of criteria going far beyond income, such as networth, age, education, probability of unemployment and credit history. Minoritiesfrequently fare worse by such measures. Perhapsthat's because society gives them feweropportunities. But mortgage lenders would still beobjective, not prejudiced, in rejecting them. TheBoston Fed study did correct for standard creditcriteria, based on a sample of Boston-areamortgage applications. It found that these criteriadid explain about two-thirds of the differencebetween white and black/Hispanic rejection rates.
But even after this correction, minorities seem tobe rejected at a rate of 17%, as opposed to only11% for whites. This difference, the Boston Fedclaimed, must be caused by racism. . [
Mortgagelending in Boston: Interpreting HMDA data
(Working Paper 92-7)]Oh, yeah? But what about those default rates?
"We were aware that people say, 'Oh, thismay berational discrimination,becauseminorities default more,'"
the Boston Fed'sMunnell told
. But her study sample was toorecent to check default rates directly. Instead, theBoston Fed compared default rates across censustracts.
"And what we found was, there wasno relationship between the racialcomposition of the tract and the default rate.So it wasn't true that tracts with largeminority populations had higher defaultrates."
Think about this carefully. The Boston Fedauthors apparently assumed that equal defaultrates meant all minority applications are an equalcredit risk compared with whites. But they'rewrong. These census tract mortgages had alreadypassed through the loan approval process-whichhad presumably rejected a higher proportion of minority applicants on the way. So the fact thatwhite and minority default rates finished up equalmeant mortgage lenders knew what they were

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