JAN 31, 2013 11:56am ET

Harvard Study: Don’t Blame Low-Income and Minorities

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We’ve heard many times that the true cause of the mortgage crisis was government meddling in the market to ensure lending to low-income and minority applicants who couldn’t pay it back. Is this true?

A recent report by the Joint Center for Housing Studies at Harvard University concludes this isn’t true, and that discrimination and income inequality had a big part to play.

Now, you’d think a report like this would be in favor of even more such government meddling. Especially as the author of the report is a former federal housing commissioner. But, you’d be wrong. The report comes out quite clearly for an increased role of private capital in the market.

William Apgar’s study “Getting On the Right Track” draws attention to what he said was a “dual system” of mortgage lending prior to the bust: “these borrowers were targeted by different types of lenders and steered to a different mix of products than commonly found in higher-income markets.” And this resulted in loans that “had higher interest rates and less favorable terms.”

The clear inference here is that the blame falls on the lenders, rather than the borrowers. If borrowers were targeted correctly, the implication is, the disaster would never have happened.

Is there any data that might support this? In fact, there was a previous period, between 1993 and 2001, writes Apgar, where lending to minorities zoomed. Home purchase lending to Hispanics increased by 159% and to African-Americans by 93%. All we need to do is to compare the two busts. Except, there was no bust that time.

How does Apgar see the future of the business, besides being in favor of the perpetual banishment of the dual system that proved so ruinous? He is willing and even eager to give the private sector another chance. His formula for mortgage success? “Reducing the government’s outsized role and encouraging the return of private mortgage capital.”

Apgar is worried that a housing recovery won’t be overly kind to the underserved markets. That’s as may be. But it seems clear a level playing field is the first thing we need. And an end to the shibboleths about lending to these kinds of people. Lenders are certainly losing out on people in the underserved cadres that are ready and able to repay right now. Even more could be made ready with a year or two’s remedial work.

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