Comments on ?race, redlining, and residential mortgage loan performance?

Abstract

This provocative paper hypothesizes that systematic racial discrimination owing to lender bias may result in lenders holding minority applicants or applicants from minority neighborhoods to loan qualification standards well in excess of those required by objective assessments of default risk .... This implies that discriminatory behavior may result in higher returns to home loans, as evidenced by lower default rates or smaller dollar losses, among minority borrowers or neighborhoods than those observed for other borrowers. The authors find that results are opposite to this prediction, and they are robust with respect to numerous stratifications of the sample, model specifications and methodology. The paper is twice controversial: The topic of discrimination in mortgage lending is politically charged and the results are inconsistent with strongly held priors. The paper is twice puzzling: If discrimination is widespread in our culture, why is there no evidence of it in mortgage lending? If the one price law of markets holds, why is there strong evidence of reverse discrimination? I believe that to resolve these conundrums we must delve into the black box of mortgage credit scoring and explore optimal default decisions for mortgage loans. Let's begin with the strongly held priors. As members of a modern multicultural society we have all learned from experience that prejudice, bias, and discrimination are endemic to our culture. We are all members of some minority whether it be based on race, religion, ethnicity, or gender. In a world where one-up/one-down is a favorite game for people to play, it is impossible not to be on the one-down side some of the time. Racial discrimination is easily practiced because the targets are readily identifiable. Therefore I start from the premise that we live in a society that practices discrimination, albeit less blatantly than in decades past. Why then is there no evidence of discrimination in this data set on mortgage lending practices? For an economist, a second equally strongly held prior would ordinarily provide the answer. Mortgage lending is a highly competitive business with thousands of suppliers. Economic discrimination in competitive markets is impossible because even if some individuals are prejudiced; free entry and transactions costs place an upper bound on the ability of any one group to penalize another economically. If just one supplier of a product or service is not biased, all groups will receive the service for about the same price. Alternatively groups that are discriminated against can form their own cooperative or corporation to supply the service at competitive rates. But the results of this study are inconsistent with this prior as well. There is evidence of reverse discrimination and it is statistically significant.