Justin Fox on study that spurred minority lending under Clinton

As director of research at the Federal Reserve Bank of Boston, [Boston College management professor Alicia] Munnell co-authored a bombshell 1992 study that concluded that mortgage lenders systematically discriminated against blacks and Hispanics--even when one adjusted for income and creditworthiness.

Munnell's work propelled her into a big job in the Clinton Administration and led to new legislation and regulations aimed at pressuring banks to increase their presence in poor and minority neighborhoods. These new laws had the desired effect: home ownership among minorities, and Americans in general, began to rise steadily--the first such sustained increase since the 1950s. In 1998, 57% of black mortgage applicants were turned down; by 2004 the figure had dropped to 26.8%. For low-income applicants, mortgage denials went from 44.3% in 1998 to a low of 19.8% in 2003.

That was one remarkable result of the surge in subprime mortgage loans to borrowers with iffy credit records. The other remarkable result is that it is ending really badly--in a wave of foreclosures that could, at worst, cost billions, throw millions of people out of their homes and cause a recession.

Federal regulators stood by while this went on, but don't blame Munnell's study or the desire to encourage lending to minorities. "The point of that study was never to say, 'Let's go out and lend to people who aren't going to be able to carry the debt,'" Munnell argues. Sure enough, federally supervised banks and S&Ls and mortgage buyers Fannie Mae and Freddie Mac seem to have avoided big hits.

~ Justin Fox, "Subprime's Silver Lining," Time, April 2, 2007