Color of Money Live With Michelle Singletary|
JOSHUA B. SILVER
Vice President of Research and Policy
National Community Reinvestment Coalition
Monday, September 27, 1999 at 1 p.m.
When Microsoft Chairman Bill Gates announced that he would give $1
billion in scholarships to needy blacks and other minorities, his gift wasn't
linked with a study that said blacks were dumber than whites.
But when Freddie Mac decided to announce its consumer credit education
initiative in partnership with five historically black colleges, the organization
found it necessary to also report that many black Americans are
Freddie Mac, one of the country's biggest purchasers of home loans,
released a study last week reporting that minority borrowers are more
likely than white borrowers to have "bad" credit, even when they earn the
According to the study, 47 percent of African American borrowers have "bad" credit records, compared with 27 percent of white borrowers.
Community housing expert Joshua Silver joins us today to talk about the Freddie Mac survey and what it means for black borrowers. Submit questions now.
Please note: We cannot offer specific personal financial advice or answer detailed questions about individual situations.
Also read my column and browse an archive of my past columns and live discussions.
Welcome to today's discussion about a new study from Freddie Mac about the credit habits of minorities. The study basically concluded that nearly half of black borrowers have bad credit. I think the study was not detailed enough and left more questions than it answered. What do you think?
What does Mr. Silver think of Freddie Mac's study? Why, as you seem to say in Sunday's column, would it be unfair to blacks?
Joshua Silver: Good afternoon. Freddie Mac should have published the entire study first before announcing results to the public. There are some serious questions about their methodology. For example, their criteria for determining who has "bad" credit does not seem to be consistent with standard underwriting criteria. A perception is being created that minorities are twice as likely to have bad credit than whites. This has not been rigorously tested, not even by Freddie Mac.
So, Josh do you think I was too harsh in criticizing Freddie Mac for releasing a study that did nothing more than really label nearly half of the black population as deadbeats?
Joshua Silver: Michelle, I do not think you were too harsh in criticizing Freddie Mac. Freddie Mac is a powerful institution that has tremendous influence regarding what the public thinks, what lenders think, and what policy-makers think. They published a study with a major, major finding that was not well documented. Michelle, you pointed, out several holes in the study which have not been answered by Freddie Mac. One could argue that Freddie has not acted responsibly here. Maybe, they are trying to avoid more demanding affordable housing goals set by HUD, by saying we are now already stretching to reach all creditworthy minorities. I can expand upon that last remark in response to another question. Let's say, that this study smacks of politics.
I'm wondering if you could place Freddie Mac's survey findings in the context of the company's desire to become more involved in the subprime market. It seems to me that finding that African Americans tend to have "bad" credit implicitly justifies the activities of so-called predatory lenders.
Joshua Silver: This is a good question. Freddie is now purchasing subprime loans - so-called "B" and "C" loans while Fannie is not. It is a convenient "out" to say that minorities are twice as likely not to qualify for regular interest, "A" loans. This is a convenient finding, especially when Freddie does not substantiate its research.
Does the CRA apply to credit unions ? If so, how can a CU take advantage of it?
Joshua Silver: No, the Community Reinvestment Act does not currently apply to credit unions. CRA for credit unions passed as part of a larger bill in the House about a year ago. The CRA portion was then stripped from the Senate bill by opponents of CRA - we lost by only three or four votes in the Senate. Currently, the regulatory agency for credit unions is considering a proposal to require credit unions to document how they intend to serve low-income people. The National Community Reinvestment Coalition supports this because credit unions were originally set up to serve those of modest means.
Josh, what could be the long-term implications of concluding 47 percent of black borrowers have bad credit? And, in the interest of being fair I did ask Freddie Mac to provide someone for today's discussion. The organization said no one was available to today to discuss this major study in which they have already spent a few millions as part of an initiative to help black borrowers.
Joshua Silver: The danger of Freddie Mac's survey is that people can conclude that lenders have done their best to reach minorities -- that all creditworthy minorities are being reached. It's too bad the denial rate for minorities is twice as high as the denial rate for whites. We cannot do anything about that.
These are some of the erroneous conclusions that can be drawn from a study which has many holes in it.
I am African-American male who recently was laid-off. I may have trouble paying all of my bills on time. Should I contact my collectors? I don't want to ruin my credit.
Joshua Silver: Dear Friend,
We all hope that you find a good paying job quickly. One thing you can do in the meantime is to negotiate a payment schedule with your credit card company so that missed payments don't start showing up on your credit history. Partial payments are better than no payments.
Hello Mr. Silver-Ms. Singletary:
I read the Freddie Mac article last week. Please provide an overview of what it means.
Joshua Silver: Michelle, why don't you take this one. I thought your article did an excellent job describing the study and its implications.
I read the article and it seemed very clear what the standard was for "bad credit" I'm not understanding what the issue is when the same standards are being compared across race lines. What exactly do you feel is unsubstantiated in the findings?
Joshua Silver: Two major problems with Freddie Mac's survey as it has been presented to us so far:
1) Freddie's Web page and press release does not explain to us how the definition of "bad" credit used in the study compares to standard underwriting criteria used by banks and even Freddie and Fannie. We cannot conclude that a person has bad credit based on a lack of documentation.
2) As Michelle points out, the characteristics of the survey respondents were not controlled for. To separate out the effects of race, you need to separate out the effects of employment status, and other characteristics of the respondents. This has not been done as of yet.
Why is it bad for Freddie Mac to have said blacks have bad credit, especially if it's true? Wouldn't it help them in the end to face the truth?
Joshua Silver: Welcome, Bowie, MD. The problem with Freddie's findings is that they are not substantiated. So, without knowing more, we cannot say that Blacks are twice as likely to have bad credit. Please look at previous responses.
In my column on Sunday I wasn't trying to debate whether the numbers on the surface were wrong. Maybe they are right. But maybe they aren't? We don't know because Freddie Mac hasn't finished looking at all the results the hard numbers and the information from focus groups for any of us to conclude whether blacks tend to be worse at paying their bills than whites. Freddie Mac announced that they were going to work with five historically black historically black colleges to help blacks obtain and maintain good credit. However, perhaps, in an effort to beef up that initiative the organization also announced that nearly 47 percent of blacks have bad credit, a rate nearly twice as high as white borrowers. My problem with this conclusion is it comes with little context. It's important to know why this is as much as the fact that it might be true. For example, community housing advocates and consumer groups has longed complained about the credit reporting agencies and errors in credit reports. They, back up by some recent studies, say black families tend to have to stretch their incomes further to help more relatives more often than white families. So the question becomes are we really comparing the apples to apples. I say we are not.
Falls Church, VA:
Wow Michelle! You couldn't have put Freddie Mac in any harsher light than you did. At least they are beginning a credit initiative with five HBCUs for further research.
How many banks-lenders do you think have drawn these same conclusions, yet been unwilling to do anything about it?
Joshua Silver: Freddie is to be commended with working with Historically Black Colleges. However, Freddie does need to be held accountable. They may have a political motive here in releasing a study that is not substantiated.
As I alluded to earlier, HUD regulates Fannie and Freddie, and requires them to purchase a certain percentage of mortgages made to minorities and low/mod income people. HUD wants to raise the percentages. Freddie may be using this study to say it is not possible to raise the percentages...when it may be possible.
This is not a question but a comment:
The press release stated that 50% of black consumers have bad credit. However, the Executive Summary of the actual report states that these percentages are survey respondents' -perceptions- of their credit, not their actual credit ratings. The report justifies using respondents' perceptions of their credit as reality by stating: "The -survey] shows that, in general, people have a reasonably accurate sense of their credit records," and provides examples of this fact.
In the next paragraph, however, the report states that "22 percent of African-American respondents with 'good' credit self-assess their own records as either 'bad' or 'very bad.'" This fact is not taken into account anywhere else in the report. If it had been, the percentages of African-Americans with bad credit would be more in line with white borrowers.
Joshua Silver: Hey Michelle,
I'll leave this one for you. Good comment here from Raleigh.
This is exactly the problem I have with the release of this study. We don't really know much about the methodology and how the data was handled. The executive summary Freddie Mac provided to me in fact doesn't indicate if any real "credit report" files were checked and matched with the responses given on surveys. In my reporting, however, a researcher for Freddie Mac said they did in fact use real credit reports to determine who had good and bad credit. But again, we don't have the full study to really know, do we?
Please talk a little about the difference between Freddie Mac's definition of "bad" credit and what you refer to as the usual standards-practices in lending. Thanks.
Joshua Silver: Hey Bethesda, MD:
Missed payments are one aspect of standard underwriting. Banks also look at mortgage to income ratio, and total debt to income ratio. They look at your total credit history including the number of credit cards you have, and your payment history on each card. Bad factors on one criterion can be compensated by others. Freddie is sophisticated...it is strange indeed that they defined "bad" credit in such simple terms.
I am concerned about Freddie's findings because it does not discuss the role discrimination plays in creating the disparity in credit ratings. For example, many subprime lenders do not report the GOOD ON TIME PAYMENT HISTORIES OF THEIR BORROWERS and a disproportionate number of these borrowers are black. Also, data in North Carolina shows that blacks tend to apply to subprime lenders first regardless of their credit histories because of they believe they will not get a loan from a bank.
Joshua Silver: Good point Durham! The Comptroller of the Currency, John Hawke, has recently taken to the stump in condemning the "seamy" practices of subprime lenders, credit card lenders, and others who withhold information on the payment histories of their borrowers. This prevents borrowers from establishing good credit histories, and then applying for lower-interest refinance loans. And yes, minorities, particularly Blacks, are much more likely to apply for subprime loans. The statistics from the last year or two show that 29 percent of all Black applications are made to subprime lenders as opposed to 14 percent of all white applications.
Didn't Fannie Mae come to a similar conclusion in its Annual Mortgage Market survey, released earlier this year? I agree that Freddie Mac probably is guilty of rushing its results, but isn't there some truth in the fact that borrowers -minority or not- could benefit from programs aimed at raising the level of awareness about credit?
Joshua Silver: Good question, Bethesda, MD. I will have to look at Fannie's survey, but it is clear that we cannot make a policy conclusion with such magnitude by just looking at the current information we have about Freddie's study. And yes, there is a great need for financial literacy programs. For example, subprime lenders are doing quite a PR business with famous athletes on late night TV. There must be an equal effort to educate people about how to shop for the best deal and handle complicated matters of credit.
There have been plenty of studies and institutions that have concluded that many blacks are having credit problems. Are there sorry blacks that don't pay their bills? Of course. Are there whites, Hispanics, Asians and others in that same boat? Yes. Just look at the national savings rate and the high number of bankruptcies. But I don't believe that blacks are anymore prone to be deadbeats than any others and that is how many of these type of studies are played by the organizations that release these studies and how the media reports them.
There was mention previously about Freddie Mac's securitization of subprime loans. My question is:
1. Can you explain the role of Freddie Mac and what kind of government oversight-regulation it has? Does it have a responsibility to disclose the lenders it securitizes loans from?
2. Should Freddie Mac be held responsible for the loans it securitizes? If some of these subprime loans are predatory, whose responsibility should it be to rectify the situation for the borrowers?
Joshua Silver: Hey Raliegh,
Currently, the Home Mortgage Disclosure Act (HMDA) requires lenders to disclose if they sold their loans, and who they sold their loans to (Fannie, Freddie, or some other secondary market player). So if a subprime lender is a HMDA reporter (many are), we can get this info.
I would say that Freddie does have a responsibility to refrain purchasing loans from predatory lenders who have high foreclosure rates. HUD is making some moves to kick these lenders out of their FHA program.
Also, as I said previously, HUD is revising its affordable housing goals. HUD's requests for comment on their proposed changes should be coming out in November. One thing that can be said to HUD is that they should not count purchases of predatory loans as loans reaching minorities and low/mod communities.
What is your opinion to helping blacks to understand
the process of having a strong credit since most of the black community do not understand this process
Joshua Silver: There is a much greater need for financial literacy programs for everyone, but especially populations not familiar with banking and homeownership. If your parents don't have bank accounts or own homes, then you are much less likely to understand the importance of good credit history.
How do you square Freddie Mac's CEO's statement that expanding the pool of minority borrowers is "good for business" with your contention that Freddie may be trying to get around their minority-low-mod lending goals, established by HUD?
Joshua Silver: Freddie is sophisticated and clever. They are good at spin. And unless they quickly come forward with documenting their survey findings, they burden is on them to say that their study is not political. When I have disagreed with studies in the past, the authors of these studies have at least had the courtesy of explaining their methodology as part of their reports.
I don't see how why someone has bad credit is relevant in determining if they have bad credit. When you say you're comparing apples to oranges that somehow implies that there aren't any white people that have good reasons for having bad credit. The point of having a credit rating is to determine the likelihood of paying back a debt based on your credit history regardless of why the debt was never repaid or not paid on time. How is Freddie Mac to resolve a problem if they deny that one exists?
Joshua Silver: hey Rockville,
One important issue is that we cannot take Freddie's study as a reliable indicator as to who has bad credit because Freddie has not explained sufficiently how their definition in their survey compares with industry standards.
What I think is what bothers me most about the Freddie Mac study and all the media attention is that here again, we have an example of race being the defining factor, when it actually is class. People in the lower-working classes -- whether they are black, white, Native American, Asian -- tend to have the same financial problems, yet only in the U.S. do you find things divided so much by race and discussed in terms of race. That's not to say that society should not pay attention to racial issues, but it should not see it as the only issue. What do you think?
Joshua Silver: Good point Arlington. One problem with Freddie's study is that they did not separate out the impacts of race and income. Blacks that were surveyed were more likely to have a experienced a spell of unemployment. You cannot conclude from Freddie's study that all Blacks are twice as likely to have bad credit. At least compare Blacks and whites with the same experiences in the labor market for the last year or two.
Is NCRC a PAC, and if so, how do readers know we are getting an unbiased opinion?
Joshua Silver: The National Community Reinvestment Coalition is not a PAC. We are the nation's CRA trade association of 700 community organizations and local public agencies dedicated to increasing access to capital and credit, and revitalizing inner city and rural communities. Yes, we are biased. We want to revitalize communities. Feel free to agree or disagree with our mission.
Rockville is right is saying it's important to have good credit. The fact is everyone, blacks included, have to do what they can to become better educated about finances and how the lending process works. But it's also important to work on another front to even things for everybody. If the lending process isn't fair we have to work and push the lenders to make it fair.
i suspect freddie mac is sorry now they even raised the issue. are they taking the heat for saying out loud what others in the industry secretly assume to be true - that even middle class blacks are more of a credit risk than working class whites?
Joshua Silver: I bet you that Freddie Mac is watching this chat. And I really hope that this chat inspires them come forward with a serious explanation of their survey, and real soon.
If these percentages are true shouldn't we try to educate those with bad credit to try to help them in the future instead of looking for loops in the survey. Also the fact that a black family member may stretch to help out another member may be noble the lending of money is a business and excuses do not help the credit situation.
Joshua Silver: Dear Falls Church,
We do not know that these percentages are true. We need a more complete explanation from Freddie about what these percentages really are.
Questioning Freddie's survey, however, does not imply that one is not for more financial literacy efforts. There are at least 12 million people without bank accounts that are getting ripped off from check cashers, pawn shops, and pay day lenders. More accurate studies go hand in hand with more financial literacy efforts.
Thanks to everyone who submitted questions today. This was a good
debate about a very important issue. As a final point I want to say that if it was Freddie Mac's intention is to help minority borrowers obtain good credit that is to be commended. It's also worth saying I hope that their relationship with the black colleges will do some good. But we all must be careful, as some of you have written today, about continuing to compare blacks to whites to Hispanics to Asians, especially if the comparisons aren't really equal. Thanks to Josh for being my guest today. Please join me again in two weeks to talk again about money.