Diary

Clinton's Subprime Mortgages in 1990

See Peter Passell. “Race, Mortgages and Statistics; The Unending Debate Over a Study of Lending Bias.” New York Times 10 May 1996

Government compelled mortgages were based on a flawed 1990 FRB study.  In 1990, noticing that Blacks and Hispanics did not get as many mortgages as others, the Federal Reserve Bank of Boston commissioned a study to find out why.

Four years after the study’s release, economists and statisticians were divided over the interpretation of that study: “Detractors attack the study as defective in its methodology was tainted by ideological preconceptions. Supporters dismiss their concerns as overblown and wrongheaded.”


And the Clinton Administration intensified not-so-friendly efforts to persuade lenders to serve minorities. In one celebrated case, the Justice Department forced a suburban Washington bank that had few black mortgage applicants to open an office in a black neighborhood.

Given the choice between these to views, guess which one prevailed in the Clinton Justice Department:

The study has had an enormous impact on the banking industry. Both the Justice Department and the Massachusetts Attorney General began investigations of lending discrimination in the Boston area shortly after its dissemination.

Again, the True Believers in the Clinton administration sided with those seeing the world through discrimination glasses:

Unequal treatment of minorities isn’t necessarily motived by racism; it can also reflect lesser creditworthiness or other economic disparities. Indeed, while the Boston Fed’s finding that racial discrimination is a significant problem has stiffened regulators’ resolve to police lending practices, skeptics see little in it to justify new efforts to bully banks into lending more to minorities.

Guess who else interpreted the study as showing discrimination:

Not everyone who took a second look at the Boston Fed study has found it wanting. James Carr and Isaac Megbolugbe of the Federal National Mortgage Association’s Office of Housing Research eliminated application records they believed were polluted with inaccurate data and still found strong statistical evidence of bias. John Yinger, an economist at the Maxwell School of Citizenship and Public Affairs at Syracuse University and the author of “Closed Doors, Opportunities Lost” (Russell Sage Foundation) wrote that “despite a few extreme claims about data errors or omitted control variables, the results of the study have held up very well.”

How does this mistaken conclusion manifest itself today. See Andy McCarthy’s take on Obama’s wage and price controls:

In addition, and among other things, the Obama plan, in order “to protect consumers … will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules.”  There appears to be not the slightest reflection, in the plan or the Times story, that federal standards for mortgage lenders, and the aggressive enforcement thereof, are what caused the meltdown in the first place.

We now have plenty of empirical proof of who was right about the 1990 study.