Banks Lend, Charge, Too Much

The suit against BAC/Countrywide was based on disparate impact, basically looking at averages for Blacks and Latinos vs. EveryoneElse. Presumably they controlled for some kind of credit metric too, but as Thomas Sowell has noted many times, it is common to run a regression looking for discrimination with an incomplete proxy for education like whether they had a degree, then put in a dummy variable for race, and find discrimination by looking at the loading on the race dummy, even though given the lower socio-economic status of minorities the variable omits a lot of other important variables (eg, what kind of school? what kind of degree?).

The key point is as follows:

In 2007, for example, Countrywide employees charged Hispanic applicants in Los Angeles an average of $545 more in fees for a $200,000 loan than they charged non-Hispanic white applicants with similar credit histories. Independent brokers processing applications for a Countrywide loan charged Hispanics $1,195 more, the department said.

So, they were charging the victims too much. But another narrative of the 2008 crisis is that they foisted loans upon people who couldn’t afford to pay them back. Isn’t price the key way a supplier rations goods to consumers? As Jesse Van Tol of the National Community Reinvestment Coalition (NCRC) argues: “the major contributing factor to the foreclosures crisis was reckless and irresponsible lending.” By this, I presume he thinks banks lent too much. In 1994 Obama was party to a class-action lawsuit alleging banks rejected too many minorities.

Back in the bubble, I’m sure a lot of borrowers were less worried about closing costs because many builders, non-profits, and even our government’s own HUD would bundle those into a loan. The borrower then has a costless call option: if prices rose–as they had for the past 10 years–they would win big, if prices fell they could walk away and leave the bank with the property. Mortgages are non-recourse, banks can’t take anything more than your mortgage back. Thus, I don’t see the overpaying minorities as victims here so much as greedy dupes who were part of the mortgage fiasco.

So, banks lended too much at too high a price, when not lending enough. These are simply inconsistent allegations, highlighting the no-win situation for bank lenders. With such rules, no wonder political insiders like Peter Orszag, Henry Cisneros, and Bob Rubin are essential banking executive talent.

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