Sunday, October 19, 2008

Equal Opportunities = Equal Outcomes?

In this discussion of Fannie/Freddie and why standards for loans were lowered there is this monster in the closet called racism. This is racism. However can we expect equal outcomes when people are given equal opportunities (EO=EO)? That seems to be the bedrock of post-modern thought. Male/female ratios must be 50/50 in all endeavors, black representation must be proportional (or even greater) than their fraction of the population (about 11%). However, what happens when numbers describing behavior defy the EO=EO principle? The cry of racism rings, subtle white male power structure is at work (implying the improbable proposition that men don't compete but hand out goodies to each other) , the test is unfair and is based on cultural biases, ....

So what happens when the 3 major races in America are compared on equal terms, in this case FICO scores? Here's a Freddie Mac publication on that. In the following figure we see that for the same FICO score the black/Hispanic rate is about twice as high as the white rate.

Is this racism? This is EO without the EO. The Fannie/Freddie GSE's obssesed about this. Besides the lack of EO=EO on the FICO scores. More blacks have low FICO scores:
June 20, 2008 Louisiana Weekly
Fannie Mae moves to exclude: Bad credit scores could forever deny borrowers home loans
...Adams says that on the VantageScore credit scoring system, which runs from 501 to 990, 84 percent of African Americans had credit scores at the lower half of the spectrum, below 745, according to a report by the Federal Reserve Board. Such scores would require home-buyers to pay 40 percent of a home’s purchase price as the down payment....
The conversion of VantageScore to FICO (*0.86) has the 745 as 641 FICO. That puts the average black score of 641 FICO is in the 15th percentile and a probability of loan default between 15-30%. The average FICO score is 723 and most lenders won't consider a score below 700. Above FICO 700 puts the probability of default at about 2%. This means that blacks default at a rate that is about 10 times greater than the population as a whole. Zillow Blog has more data.

Why do blacks and Hispanics default at greater rates on loans? Perhaps the savings rates give a clue. From a column from the October 21, 2007 WaPo:
This year's Ariel-Schwab Black Investor Survey found that blacks had median investments of $48,000, compared with $100,000 for whites. The survey looks at blacks and whites who earn more than $50,000 annually.
Now does racism play a part in all of this? Consider that the USA savings rate as a whole is far below other nations. Who's discriminating against us?

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