Thursday, September 21, 2006

Kane Watch: Taking a Risk

It's not Eugene taking the risk, it's me. Tell you why in a moment.

Today the Journal-Sentinel published a story outlining the lending gap between minorities and whites in Milwaukee, one of the widest in the country.

Of course a story like this was bound to grab the attention of Eugene Kane, who, in a blog post states:

Read the story and you'll see the main reason the rate of blacks being
denied for mortgage loans is relatively so high in this area is that the rate of
white folks who get turned down is so darn low.

That suggests many whites in our area get approved simply because they're
white, not because they all have excellent credit ratings.

Because as most reasonable people can agree, black folks aren't the only
people with bad credit.

BUZZ! Wrong!


First, let me interject here why I consider making this post a "risk." Very rarely do I discuss work around here. But it just so happens that the subject of this story is something I'm incredibly familiar with because of what I do for a living. Coincidentally, just last week I wrapped up a lengthy project in which nearly one million home loan applications were analyzed to determine the reasons behind discrepancies in approvals between minorities and whites.

So let's just say, for once, I know what I'm talking about.

Kane derives from the story that whites receive preferential lending treatment simply because they're white. While he's certainly correct in stating that white people have bad credit too, his conclusion that whites should therefore experience equal reject rates is laughable. The fact is that a far greater proportion on non-white borrowers skew toward lower credit ratings. Furthermore, not only the credit score is used in making a lending decision. Both the debt-to-income and loan-to-value ratios play a large role in whether or not a borrower is approved. As with credit ratings, DTIs and LTVs disproportionately skew toward riskier levels when it comes to minorities. Time after time, no matter how the numbers were crunched, it was clear that a layering of risk among minority borrowers resulted in their inability to secure a loan.

Another thing Kane, and anyone else ready to use this story as an indication of racism among lenders, should be aware of is that the loan approval process is highly automated. Automated underwriting systems are designed to look at a variety of factors, none of which are race, to arrive at a decision on the loan. For the most part, mortgage brokers and lenders dealing directly with the borrower are far removed from even the manual processes involved in approving a loan. When they are involved, it's usually them bending over backwards to get a borrower into a loan because they are motivated by sales. Quite frequently, they find themselves up against quantifiable data regarding the transaction that simply doesn't support approving the loan.

So, is Kane right when he says it's easier to get a loan if you're white? Yes...and the numbers support it.

Is he right in implying it's easier to get the loan because you're white? Absolutely not...and the numbers support that as well.


At 4:38 PM, September 21, 2006, Blogger Billiam said...

Great post, Casper. To those predisposed to see descrimination everywhere, the facts won't matter. Again, well done.


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