read Tom Wolfe’s 1970 classic Mau-Mauing the Flak Catchers.

The big innovation in racial shakedown rackets since then, however, has been getting into the business of being pre-emptively co-opted by corporations.

Say that you are Vice President of Predatory Securitizing at an Orange County lender and you’ve come up with a great idea: you want to give subprime liar loans with exploding teaser interest rates to illegal immigrants, then bundle them up (“secretizing”) and sell these mortgage-backed securities to naive foreigners.

But, you don’t want regulators getting sniffy about your new strategy and accusing you of Predatory Lending. So, you find a leftwing community organizing group to conduct pseudo-negotiations with. They start out denouncing you for predatory lending but end up signing a deal with you that says that in the name of fighting the financial industry’s despicable and tragic history of racist redlining, you pledge to lend billions to Hispanic undocumented workers. (In return, you cut the lefties in for a little piece of the action, but you don’t have to give them much because they have so many competitors — the National Community Redevelopment Alliance lists 600 member organizations.) Then you wave that agreement in front of the noses of any regulators who start asking questions: “Look, capitalists and leftists have come together to fight racism and nativism! What, are you, some kind of nativist racist?”

My vague impression is that perhaps the most professionally cynical leftist group in this racket is The Greenlining Institute, which repeatedly publicly endorsed the ethics of Roland Arnall’s Ameriquest subprime boiler room operation in return for donations. ACORN, in contrast, is more anarchic and unprofessional, as the recent tapes show. But, parts of ACORN has played this game too, as Michelle Malkin points out using the example of the 2005 arrangement between Citigroup and ACORN to give loans to illegal immigrants.

From the New York Times, a new entry in the sweepstakes to put a politically correct spin on the emerging facts about the mortgage meltdown

The Recession’s Racial Divide

By BARBARA EHRENREICH and DEDRICK MUHAMMAD

… Despite the sense of white grievance, though, blacks are the ones who are taking the brunt of the recession, with disproportionately high levels of foreclosures and unemployment. And they weren’t doing so well to begin with.

In fact, you could say that for African-Americans the recession is over. It occurred from 2000 to 2007, as black employment decreased by 2.4 percent and incomes declined by 2.9 percent. During those seven years, one-third of black children lived in poverty, and black unemployment — even among college graduates — consistently ran at about twice the level of white unemployment.

So, maybe importing so many millions of foreigners from 2000 to 2007 to “do the jobs [African] Americans weren’t willing to do” wasn’t such a hot idea after all? Well, don’t ask Ms. Ehrenreich about immigration. She evidently has no opinion on the subject, since it doesn’t come up in her long spiel.

…Plenty of formerly middle- or working-class whites have followed similar paths to ruin: the layoff or reduced hours, the credit traps and ever-rising debts, the lost home. But one thing distinguishes hard-pressed African-Americans as a group: Thanks to a legacy of a discrimination in both hiring and lending, they’re less likely than whites to be cushioned against the blows by wealthy relatives or well-stocked savings accounts. In 2008, on the cusp of the recession, the typical African-American family had only a dime for every dollar of wealth possessed by the typical white family.

In other words, blacks weren’t as good credit-risks on average, even when incomes were the same. So, why, then, four decades of government effort to change the culture of lending in order to get more mortgage dollars into the hands of minorities? Maybe the old culture had a more accurate view of the creditworthiness of blacks than the new government-nurtured culture? (more…)

In this afternoon’s comments on my morning post offering to debate him on whether or not “Diversity was a major factor in the mortgage meltdown,” investment adviser, blogger (The Big Picture), and author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy Barry Ritholtz asks:

Ritholtz said…How about some evidence, hard data, facts?

Or are you more comfortable with nudges, hunches and squishy junk.

Show me some hard evidence!

Mr. Ritholtz apparently hasn’t been paying attention here, but I also fear I’ve overloaded my regular readers so much on the topic of diversity and mortgages over the last couple of years that many would rather hear that I’m about to start a new 9-part series on track & field statistics (my all-time least popular obsession) than hear the same old same old about diversity and the mortgage meltdown.

So, I’ll just link to a few highlights in chronological order. The data piles up as we get closer to the present, but it’s helpful to understand how my thinking evolved from the point when I had no idea what I was talking about regarding mortgages.

Let’s begin with my first blog post on the subject on August 12, 2007, a couple of weeks into the subprime collapse, where you can see my hesitancy to get involved in a topic with a topic where I didn’t know anything, but I did remember a few things that almost everybody else seemed to have forgotten:

A trillion here, a trillion there, pretty soon we’re talking about real money

I’m sure the private financial markets were quite capable of blowing up a big bubble by themselves in the eternal see-saw struggle between greed and fear, but this political pressure for lending to minorities with doubtful credit must have exacerbated the problem. About half of all mortgages for blacks and Hispanics are subprime, versus about one-sixth for whites.

A reader has sent me some links to articles from 5 to 9 years ago to show me I’m not hallucinating about what I remember. The first are from early in this decade about Fannie Mae’s big plans for boosting mortgages for minorities. Now, I don’t pretend to understand what Fannie Mae is (but does anybody?). It’s some kind of quasi-governmental publicly-traded for-profit thinga-ma-bob, but Fannie Mae’s past pronouncements do make interesting reading at present.

(more…)

Everybody has an opinion on Obama’s proposal for revamping financial regulation. I’ve been busy so I have no idea what’s in the plan, so I don’t have an opinion.

But, let me make one guess: I bet there’s not a single word in the proposal — nor, I presume, has there been a single word in all the commentary on the proposal — about moderating the anti-redlining push for more mortgage lending to minorities with poor creditworthiness that was so central to the Sand State subprime mortgage meltdown that set off the financial crisis.

After all, how can anybody talk about reforming this when nobody will even talk about the fact that the federal Home Mortgage Disclosure Act database shows that 77% of subprime home purchase mortgage dollars in California in 2006 went to minorities?

Update: Well, I was wrong. The White House White Paper talks about the new Consumer Finance Protection Agency intensifying the push for more lending to minorities:

The Agency should enforce fair lending laws and the Community Reinvestment Act and otherwise seek to ensure that underserved consumers and communities have access to prudent financial services, lending, and investment.

(more…)

From an article in the Maryland Daily Record:

The city of Baltimore has beefed up its groundbreaking racial discrimination lawsuit against Wells Fargo with sometimes shocking testimony from a pair of the megabank’s former subprime-loan officers.

The two whistleblowers claim their co-workers targeted black ZIP codes and churches, used software to “translate” marketing materials into African-American vernacular, and referred to subprime loans in minority communities as “ghetto loans” and to borrowers as “mud people.”

Their declarations were attached to an amended complaint filed Monday in U.S. District Court in Baltimore.

The loan officers, who worked for Wells Fargo in the Baltimore-Washington area from the late 1990s until 2007, also alleged bank employees deceptively steered prime borrowers into subprime loans for their own financial benefit and joked that they were “riding the stagecoach to Hell.”

The city also filed declarations from four city residents who live near Wells Fargo’s foreclosed properties. They complained of squatters, rats and burst pipes, all of which have required attention from some city department.

(more…)

Evidently, the New York Times just doesn’t get New York Times jokes. Here’s today’s actual NYT headline:

“Minorities Hit Hardest by Foreclosures in New York”

See, minority defaults are the fault of “reverse redlining.”

One Occam’s Butterknife to rule them all.

Matthew Yglesias recalls how, even last October, it was still ridiculously easy in terms of documentation for him to get a mortgage. A reader named Matt R. comments:

I understand your thinking, but what I don’t think you realize is that the type of judgments and research which you think might make sense for mortgage underwriting have been severely inhibited by the financial regulators. ECOA (equal credit opportunity act) and concerns about so called red-lining have made the regulators virtually eliminate all credit criteria that can’t be coded into a machine. The main push behind this effort has been due to regulators worry that non-algorithmic decision making is just a mask for rejecting minority and underprivileged applicants. This is especially applicable to any policy which attempts to be forward thinking. For instance, if an underwriter were to put in a policy discouraging loans to folks in the struggling construction industry, the general counsel would immediately reply “show me the precise data that says that there is a historical statistical correlation between construction employment and loan default rates, or else we are going to be accused of implementing a policy of ‘disparately impacting’ Hispanics.” One of the consequences of nervousness regarding “disparate impact” has been the increased use of statistical score models in consumer underwriting. In terms of how business is done, this reduces reliance on a semi-skilled workforce that leverages relationship, intuition, and local environmental factors and opens up new opportunities for technical folks good at mining data, recognizing data relationships, and creating logistic regression models and so forth. And yes, this does encourage centralization of consumer banking and the development of a highly paid and (maybe) skilled technical manager set in underwriting.

(more…)

(more…)

Daniel Seligman, who died last week at age 84, was my role model as a quantitative journalist. From the 1970s into the 1990s, he wrote a blog-like column of multiple short items in Fortune, distinguished by his quantitative bent. Like me and unlike most journalists, he loved to count things. (By the way, it’s probably not a coincidence that my favorite Sesame Street character is The Count.)

Here’s a particularly relevant selection from Seligman’s Keeping Up columns:

December 4, 1989
MORTGAGE MUMBO JUMBO

Based on a reference to him in the Almanac of American Politics, we had always assumed that U.S. Senator Alan Dixon was relatively harmless. (”Among the least known of all Senators” was how the Almanac referred to the Illinois Democrat.) Based on his conduct in the current hearings on mortgage discrimination, we must rate him at least average as a menace.

[By the way, Dixon's successors in that Senate seat have been Carol Mosley Brown, Peter Fitzgerald, Barack Obama, and Roland Burris.]

The hearings, chaired by Dixon in his role as head of the Senate banking subcommittee on consumer affairs, have been something of a scream. The purpose of the hearings has been quite straightforward: to enable club members to garner headlines by posturing as antidiscrimination stalwarts and yelling at the various federal agencies that monitor all those laws banning bias in mortgage lending. So the agencies — the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Office of Thrift Supervision — were roundly reproved for not detecting the avalanche of mortgage-based bias postulated to be discernible by anybody walking around the block.

Is mortgage bias really a problem? A curious feature of the federal regulatory scene is that long after Congress passed the Equal Credit Opportunity Act and the Community Reinvestment Act (which bars redlining of urban minority population centers), the federal government seems not to generate many complaints of such bias. The regulators’ reports indicate that they receive few complaints. And while the U.S. Justice Department has launched hundreds of housing-related antidiscrimination suits during the past 20 years, only a small fraction of them have involved lending practices.

Dixon and the other solons nevertheless took it for granted that bankers have to be prodded on minority mortgage lending. Joining the long line of politicians who claim to know better than businessmen what’s good for business, Dixon returned repeatedly to the thought that such prodding always results in higher profits. “It’s good business,” he burbled at the end of one session. “Everybody makes money.”

It is true that federal data show black loan applicants being rejected roughly twice as often as white applicants. But this does not mean blacks are subject to a tougher standard. The higher rate of black rejections might mean that weak black applicants are responding to bank “outreach” programs (as the Office of Thrift Supervision noted). It might mean that black applicants’ buildings are on average less attractive as security — a thought no witness was foolish enough to mention aloud.

A Fed governor did bravely mention a fact of possible relevance: that market forces work against discrimination. John LaWare argued that bankers are in business to make loans and that “the institutional commitment to doing business where it makes economic sense will win out over prejudice.” Dixon did not pick up on this thought, plainly not what he came to hear.

But he did get his picture in the Washington Post. Fame beckons.

A reader makes an optimistic suggestion:

An idea:

Roughly put, one could say that the country went thru a huge crime crisis when we decided to overhaul the old oppressive criminal system, with its loitering laws, paucity of protections for the indigent, and broad latitude for the police to bust heads and search n seize those whom they pleased, in the name of Racial Justice. Certainly the old order had caused untold injustices and oppressions, and so we determined we were better than that. But the old order also incorporated a deep truth, that blacks and or the poor were much more criminal than whites and or the middle class, and that you really can often tell a bad guy by looking at him. And so the old system worked, as defined by containing crime.

But when we dismantled to old order, and questioned all its premises, and made Miranda rights and experimented with the mindless optimism of giving convicted murderers weekend furloughs, etc etc, we experienced a huge flowering of crime. We eventually crawled part way back, while retaining our moral disdain for the old system, and retaining a demureness about admitting out loud that blacks are more criminal per capita. But we quietly instituted race neutral tough on crime policies that were partly as effective as the old race conscious police tactics, and got over our embarrassment about the resulting prison population disparities. Not all the way back mind you, not even half way, but better than the worst of it, movies no longer predict a Manhattan solely fit for a penal colony.

(more…)