Friday, October 10, 2008

Hummina Hummina HMDA (pronounced humda)

Just to continue a little more on the mortgage crisis, I think it is necessary to understand the Home Mortgage Disclosure Act. In a nutshell, mortgage companies are required to report the age, ethnicity, gender, and race on the people they lend (or don't lend) money to. So groups can look at the reporting a see if there is a certain demographic that's not being represented. The report doesn't give credit information, and that's the problem.

Using the TV show House to illustrate, anyone who has every watched the show knows that a patient comes in with on obvious problem like drug abuse, and one doctor thinks that is the cause, but that would make boring TV. Over the course of the hour Dr. House digs further into the problem to find what REALLY is wrong with the patient. Dr. House has the credit score.

Is it possible that the African American or Hispanic communities have lower credit scores than whites? Yes it is, but it's not a matter of racism. In my 13 or so years in the credit and collections industry, one thing I have learned is that education seems to be the contributing factor. For the most part, the higher educated borrowers have better income and a better understanding credit and how it works. Thus they have fewer defaulted loans because they either have the ability to keep up to date or they set their priorities based on protecting their credit.

I don't have exact figures, but I know what has been the case for a long time, minority groups have had lower education levels than whites and women makes less money than men. Those group have more credit challenges, so of course they may be declined for loans at a greater rate than, say, a white male. There has been a history of discrimination, the effects still have yet to be overcome, but the decision to lend money is based on risk not race or gender. Banks want to make money, they make money off of good loans, they don't care of the race or gender of the borrower.

So take a group like ACORN who looks at the HMDA data and start accusing banks of denying African Americans for loans. The bank cannot defend itself because they can't hold up their credit scores. Instead, they loosen their standards and get backing from Fannie Mae and Freddie Mac to write riskier. This is where the Option Arms and stated income loans come into play in order to make sure more people could get a loan regardless of risk.

I have heard complaints about how deregulation got us here, but it is the misuse of the regulations in place and the overwhelming pressure for banks to fulfill the American Dream for everyone, whether they could afford it or not, that has caused this mess.

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