Wrong, Again

The New York Times relates exactly how Wells Fargo ran a racist policy of steering blacks into subprime loans when they were qualified for better ones.

As she describes it, Beth Jacobson and her fellow loan officers at Wells Fargo Bank “rode the stagecoach from hell” for a decade, systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.

These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services.

Wells Fargo, Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”

“We just went right after them,” said Ms. Jacobson, who is white and said she was once the bank’s top-producing subprime loan officer nationally. “Wells Fargo mortgage had an emerging-markets unit that specifically targeted black churches, because it figured church leaders had a lot of influence and could convince congregants to take out subprime loans.”

Ms. Jacobson’s account and that of the other loan officer who gave an affidavit, Tony Paschal, both of whom have left Wells Fargo, provide the first detailed accusations of deliberate racial steering into subprimes by one of the nation’s top banks.

When Megan McArdle read about these practices many months ago, she denied it could happen.

Baltimore sues to bring back redlining
08 Jan 2008 10:59 am

That headline was suggested by the friend who emailed me this little gem from the New York Times:

The recent surge in homeowner defaults nationwide, generated by lax lending practices during the real estate boom, has officials bracing for a range of problems that often accompany foreclosures. Some municipalities, including Cleveland and Buffalo, are trying to make lenders responsible for abandoned properties to ward off crimes like arson, drug use and prostitution.

But the civil suit that officials in Baltimore are filing in United States District Court may presage another type of litigation against lenders by municipalities facing shortfalls in their budgets.

In the suit, Mayor Sheila Dixon joined with the City Council to ask that the court bar Wells Fargo from charging higher fees to black borrowers. Many of these borrowers paid more under the bank’s subprime lending program, designed for less creditworthy consumers, and are more likely to default on their loans.

I hear a lot of complaints that borrowers were shifted into rates "higher than their credit profiles" merited. But the articles never actually tell me what I want to know, which is: were these borrowers charged higher rates than their loan packages merited? Your FICO score is just one part of the package; others include things like assets and income, and the size of the loan relative to the house value. The sad fact is that, even in a (previously) decaying urban core like Baltimore, blacks are likely to have lower assets and income than whites. So far I've seen little evidence that, taking these things into account, banks are discriminating against minority borrowers.

I have no doubt, mind you, that some unscrupulous mortgage brokers have put clients into inappropriate mortgage packages. Mortgage brokers work for the lender, not for you, and you forget this at your peril; unfortunately, financially unsophisticated first time buyers may never have learned this in the first place, and their social networks may not have that information to impart.

But if I were an evil conspirator who wanted to ensure that poor borrowers have a hard time accessing conventional credit, this sort of lawsuit is exactly the strategy I'd take.

That very lawsuit brought about the proof of Wells Fargo's racism and dishonesty. McArdle would rather banks were not questioned about their practices--free markets good, regulation bad, Greenspan good, yadda yadda. Because Ideological Megan can't imagine that markets can act irrationally (meaning people act irrationally) and because she never bothers to imagine what it is like to be anything other than a nearly-but-not-quite-upper-class white person, McArdle is constantly wrong.

Credit is one of those weird areas where there is a lot of belief in discrimination, but as far as I can tell, not all that much evidence. Most credit checks are part of an automated procedure that either happens or it doesn't, and most loan issuance is done virtually automatically by a computer that either says yes or no based on your credit history. Now, there are border cases that require human review, and it's possible that had my name been "Malika" instead of Megan, they would have turned me down.

But if that were happening on a widespread basis, loans to minorities would be insanely profitable. They're not; rather, they seem to be about as profitable as other types of loans. Yes, I've seen the research arguing that people in black communities get worse loan terms than their credit score suggests. As far as I can tell, this research failed to control for some pretty major factors, like assets.

I don't want to go to far down the Gary Becker line--it's possible that companies could all be behaving irrationally. But the evidence that they are seems pretty thin--in fact, just barely solid enough for plaintiff's lawyers and journalists to revive it every few years. If the companies were statistically discriminating against African Americans, giving them worse loan terms than they really qualify for, they should be paying off those loans at higher rates than whites.

They're not. Most of the aggregate research I've seen fails to reject the null hypothesis that there is no discrimination in loan markets, which means that if there is discrimination, it is not catching huge numbers of people who are more likely than their loan terms would suggest to pay their bills on time. Just to be clear, we're not talking about research that says that blacks who get a higher interest rate don't pay off at the same rate as whites who get a lower one--you can't blame the default rate on the higher interest rate. We're talking about the fact that minorities do not outperform their own loan class. If loan companies really were discriminating, issuing subprime mortgages and car loans to credit-worthy minorities should be a license to print money.

The evidence for discrimination in the labor market seems strong--nay, nearly incontrovertible--to me, at least at lower skill levels. And it's clear to me that African Americans have a lot of structural barriers to wealth accumulation, But I remain unconvinced that credit rationing is one of those barriers.

She is unable to think logically or in anything but a very narrow spectrum. She's utterly useless as an economics reporter. Anyone who read the Financial Times and muttered a few opinions over the breakfast table would perform her job just as well.

I owe you guys an article on her ARM reset posts, because when the resets start Miss Megan McArdle will once again attempt to pick apart the work of the competent economic reporters and advisers, saying their bad methodology explains that while they might be right, they were all right for the wrong reason, and therefore McArdle was really the only one right all along.