Pipeline: Fed Economist: Bias Data Useful Despite Flaws

Most economists have concluded that they "still don't have a definitive answer about the presence of widespread and systematic discrimination in the home mortgage market."

That's the word from Stanley D. Longhofer, an economist with the Federal Reserve Bank of Cleveland, writing in a summer issue of the bank's Economic Commentary.

Mr. Longhofer points out that four years have passed since the release of the "groundbreaking" study on residential lending patterns in the Boston area by the Boston Fed. That study concluded that disparities in rejection rates by area lenders stemmed from racial bias.

"In the intervening years, much effort has gone into dissecting the Boston researchers' analysis, both to replicate their results and to explain how such discrimination could persist in a market so many view as being highly competitive," he writes.

Though the Boston Fed study appeared to provide hard evidence of systematic discrimination, the results have not been universally accepted, Mr. Longhofer says. The main reasons:

*The questionable quality of much of the data.

*Doubts about whether the statistical techniques used to determine the impact of race are applicable to mortgage lending.

*Regulators have been unsuccessful in detecting rampant discrimination.

*Evidence on default rates seems to contradict charges of discrimination.

Mr. Longhofer writes that regulators who favor studying pairs of loan files - one for a white and one for a minority with the same characteristics - have been ineffective in finding bias and rarely detect any but the most egregious cases. He adds that using pairs of testers to apply for loans has shown some race-based differential treatment, but objectivity is hard to ensure with the costly practice.

Where does that leave regulators and the mortgage industry?

Says Mr. Longhofer: "Despite the controversy, we have made progress in understanding the role of race in the mortgage market.

First of all, despite their problems, denial-rate studies can provide valuable insights into the possibility of illegal discrimination, especially at individual institutions."

He points out that data made available under the Home Mortgage Disclosure Act may trigger further review by examiners.If a follow-up is unable to explain the disparities, then the institution is referred to the Justice Department for further investigation.

He also says research has shown that default rates cannot provide insight into whether discrimination exists at an institution or in the market as a whole, because different types of discrimination can have opposite effects on the default rate.

Other studies have shown that redlining - discrimination against entire neighborhoods - is not as prevalent as previously thought.

But Mr. Longhofer writes that racial disparities in mortgage lending "are an important social problem regardless of whether they result from discrimination, differences in average creditworthiness across races, or some other market failure."

He says determining whether racial discrimination is at the source of the disparities is the first step in addressing the fundamental social problem.

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