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Lending

Housing shouldn’t look at any color but the color of money

People with bad credit and bad habits should be squeezed out of housing

August 29, 2014
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I wrote up a story on Wednesday citing concerns about housing discrimination raised by everyone from the Department of Housing & Urban Development and the National Urban League to the various attendees at the Bipartisan Policy Commission’s housing summit last week in Idaho.

The centerpiece was the concern that post-housing crisis credit tightening is “squeezing minorities” out of homeownership and thus, the ability to build generational household wealth through home value appreciation.

In a newsroom where the pace is frenetic and we put out literally dozens of market stories each day, we don’t always have time to reflect on the subjects we write about.

I’ve had time to digest the story from Wednesday, as well as the input and feedback from informed readers, the implications of the information presented, and the assertions of some of the sources. I’ve come to a conclusion on the central premise.

My conclusion is: So what?

The National Urban League and HUD presented the findings of their study earlier this year with an emphasis on how minorities apply for fewer mortgages, and are turned down for mortgages at a much higher rate.

Leave aside that when they say minorities they don’t mean all minorities. They really mean black and Hispanic borrowers and would-be borrowers. (Asians are conveniently shunted aside and tucked in with white borrowers.)

And why is that?

Because the reality is that borrowers aren’t turned down because of the color of their skin.

They are turned down because of one of two primary reasons, and they are good, cold reasons untouched by empathy, sympathy or sob story – money for down payment and credit scores.

Yes, there are always going to be outlier incidents, but this ideal of color-blind underwriting is something that the industry is closer to having reached than any time in history.

Of course, there is the human factor in even the most automated underwriting. While the algorithms keep out most all subjective bias, there is a human element needed to make judgments with respect to details that are harder to quantify. But those harder-to-quantify things carry little weight compared to the hard, cold, big factors like income, credit scores and debt-to-income ratio.

The bottom line is the bottom line:  A black borrower with a 750 FICO and 10% will have an easy time getting a mortgage — the exact same easy time as a white borrower with a 750 and 10%, and the same as a Martian with a 750 and 10% down. Neither a white nor a Hispanic borrower with a 510 and less than 2% down are going to get approved for a conventional loan.

“Minority” borrowers are not being squeezed out of housing. People with bad credit and without down payments or the ability to repay (calculated by various means including the DTI ratio) are being squeezed out.

And you know what? They should be squeezed out.

People who have bad FICOs and don’t put in the effort to save up a down payment – regardless of the color of their skin – aren’t ready for the responsibility of homeownership, and thus they are dialed out of the benefits that come with it.

Why should anyone get the benefits of a thing if they can’t handle the responsibility of that thing?

Yes, by and large more black and Hispanic borrowers have lower credit scores and less in savings, but that is not the responsibility of the housing industry to address.

Time and again in recent months I’ve interviewed former HUD secretaries, FHA officials, U.S. senators, housing market experts, CEOs, financiers and mortgage bankers, and a question I often ask is “How does housing strike a balance between the need to have tight enough borrowing standards to avoid another housing crash, and yet open up opportunities to those with marginal credit and assets?”

Invariably I get the usual repeat of my question back to me, “We have to strike a balance and blah blah blah.”

But the reality is that’s a stupid question on my part. Lending needs to be done based on nothing more than the cold hard numbers on the ledger, regardless of color, creed, or circumstance.

I’ve said before – and I know a lot of people in the housing industry that we are dedicated to moving forward will disagree – but there is a maximum threshold of homeownership, and it’s probably right around where it is now in the low to mid 60%.

Three in 10 Americans aren’t financially responsible, or aren’t financially ready for the responsibility of homeownership, and what a 30-year or even 15-year mortgage involves.

So why, through policy and politics, are we trying to push them into failure under the guise of helping them?

There are compelling reasons that blacks and Hispanics have, as a group, lower credit scores and fewer resources than whites and Asians. And society should work towards solving these problems. 

But the causes of, and the solutions to, income disparity and bad credit scores are to be found in social, culture and political institutions -- not in the housing business.

People look at homeowners who, by and large, are more financially stable and responsible than renters, and they think that if we just made homeowners out of people who aren’t yet stable and responsible, just being in that home will make them so.

There’s a Latin phrase for this mistaken thinking that will just make me sound uppity or like I know how to Google if I use it, so I’ll put it in plain English: People who are responsible homeowners (and thus getting the benefits ownership conveys) are so because they put in the hard work to earn good credit scores and save their down payments. They didn’t become responsible because they suddenly had a house.

There are myriad racial disparities and racial problems that society needs to address, but dragging housing into it all isn’t going to solve any of those problems, but it will damn sure hurt housing to make it serve two masters that are pretty much incompatible.

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