Posted by: bkivey | 19 August 2015

Here We Go Again

The Great Recession was brought about in large part by the implosion of financial markets, which in turn had become unstable from the high percentage of unsustainable residential mortgages. Financial institutions were forced by Congress to make those types of loans because the previous eligibility standards were seen as discriminatory to racial minorities. And in truth, there were, and in some places still are, regulations that are designed to exclude people of color from home ownership.

After economic reality reasserted itself, loan regulations were changed to prevent so-called ‘sub-prime’ lending. The idea was to ensure that those applying for and receiving mortgages could, in fact, pay for them. But there’s no solution that can’t be seen as oppression by the aggrieved.

In a Kevin G. Hall article published 9 August, he attempts to make the case that cultural differences between Hispanics and, well, he doesn’t say, but let’s assume Whites, increase the difficulty of Hispanics getting mortgages. Mr. Hall asserts that because Hispanics tend to pay cash and not use credit, they don’t establish credit histories. The article goes on to say that regular and timely payment of short-term obligations like rent and phone bills should be used as metrics rather than the ability to pay off long-term loans like cars and credit cards. President-elect of the National Association of Hispanic Real Estate Professionals Joe Nery is quoted as saying “You don’t have the opportunity to establish your credit.”

Um, why not? If you want to buy property, you know you have to establish credit. There are any number of ways to do that, and even more information on how to do it. The argument that cultural differences come into play is a non-starter. Years ago I had a friend state “the rules make the game”. If you live in a society with certain rules for obtaining what you want, then it’s up to you to conform to those rules to achieve your goals.

One of the main points in the article is that payment of short-term bills should factor in to credit-worthiness. This argument misses an important point: there is a qualitative difference between paying a long-term loan and making regular payments on short-term bills. If a financial institution fronts you tens of thousands for a car, or hundreds of thousands for a house, that’s a much larger commitment on both sides than a few hundred for a phone or a couple thousand for rent. Then there’s the fact that short-term bills are usually paid in advance. The property owner or service provider gets money up front to provide a place to live or a utility. Mortgage lenders and car dealerships assume much greater risk. The current lending rules place greater emphasis long-term payments for precisely that reason.

We’ve seen this movie before. There will be agitation to change the rules to accommodate some group, The system won’t work as intended because the root philosophy is flawed, there will be upheavals, then reforms, then we’ll do it again.

What’s in a headline?

The newspaper article originally published under the headline “Tighter lending standards keeping some Hispanics out of housing market”. That’s a fair way to describe the main thrust of the article. The local bird cage liner use d the headline “Lending rules keep Latinos from homeownership”, implying that current regulations are preventing 17% of the population from owning a home, when in fact Latino home ownership is about 45%. Nope, no bias here.

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