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Tuesday, November 6, 2007
Answers to credit woes are not in black and white
The Atlanta Journal-Constitution
Among blacks, 52 percent have credit scores that would classify them as subprime borrowers.
In metro Atlanta, 49 percent of blacks wind up with a subprime mortgage.
Among whites, 16 percent have managed their personal credit so poorly that they’d be classified as subprime borrowers.
In metro Atlanta, 13 percent of whites end up with subprime mortgages.
What’s the lesson here? In recent decades, a cult has grown on the premise that discrimination is a defining characteristic of business, banking, education, criminal justice, the federal response to disasters and most every other institution of the American culture and life. Often it’s based on some quick analysis of numbers, often done by advocacy organizations, showing racial differences in outcomes.
Without question, more blacks (49 percent) than Hispanics (34 percent), more Hispanics than whites (13 percent) and more whites than Asians (10 percent) used subprime loans to buy a house. As the AJC headline put it, black Atlantans are “frequently snared by subprime loans.”
“Frequently snared” suggests that individuals walking down the street were accosted by greedy or unscrupulous lenders on the basis of their race and impaled with subprime loans. A similar phrasing is often employed by activists convinced that discrimination is rampant in the criminal justice system because, disproportionately, more blacks are in prison. The usual entry point is “more in prison than in college,” failing to note that the college-age years, normally18-24, are a fraction of an adult’s life.
Similar “studies” — most often done by advocacy groups, sometimes done by news organizations and rarely done by serious researchers — ask individuals whether they “feel” victimized by discrimination or whether they “think” it exists.
The point here is that casting every phenomenon as discrimination based on a simple analysis of disparities or on what individuals think cultivates ill will and increases the perception that the world is cruel and foreboding place that whimsically “snares” individuals for punishment on the basis of some identifying feature, usually race.
Those who believe that naturally seek recourse in government. And more government. Activists and politicians cultivate the belief that discrimination is extant and entrenched because that belief is central to their power, wealth and re-elections.
It’s not surprising, therefore, that they look at numbers showing that blacks are more likely than whites to take out high-interest subprime loans, and that defaults and foreclosures on those loans have risen sharply, and see a need for more government.
But problems wrongly identified lead to the wrong solutions.
If individuals are making bad borrowing choices or if they’re failing to manage credit properly — which would seem to be the case when more than half the blacks in metro Atlanta are pushed into the subprime category — a different remedy is required.
A fix that requires lenders to push out more money, or to price credit differently, to “overcome” the presumption of race discrimination would worsen the problem. That’s especially true if, in fact, individuals are making uninformed choices about how much house they can buy, what to look for in a home, how to manage savings and debt, and how to shop for mortgages.
While discrimination may sometimes be real, the marketplace is brutal to lenders and to businesses that improperly price their risk or make foolish business decisions. The Citigroup Inc. board just canned its chairman and chief executive officer, Charles Prince, for bad-debt losses. The Merrill Lynch & Co. board just did the same with CEO Stan O’Neal for bad investment decisions in subprime debt. Besides that, government and news organizations would excoriate lenders suspected of discriminating racially.
It’s not as sexy as institutional discrimination, but the remedy here is education. Financial education and credit counseling. Potential borrowers should know where to look for loans and how much they can afford. Dealing with the neighborhood check-cashing outlet or the store-front broker or lender, not discrimination, is the likely culprit.
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