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Post a Comment On: Steve Sailer: iSteve

"The Guns of Singapore (Cont.)"

9 Comments -

1 – 9 of 9
Anonymous Anonymous said...

What all this default data suggests is the opposite of the conventional wisdom: that colorblind systems of assessing creditworthiness tend to overestimate the creditworthiness of blacks and Hispanics.
You can't say that. It's racist!

4/19/09, 4:39 PM

Anonymous Van Cleef said...

iSteve, you need to brace yourself for a lot more batsh*t USGov sponsored mortgage lending going forward, and no 'lessons' will have been learned.

For Obama, and the rest of the left, the grievous injury to the economy [via 'social justice' lending practices gone shady] is not a concern. Leftists want the economy to tank permanently, and they want to discredit capitalism. 'Give the bankers enough rope to hang themselves' is their motto.

Every other day, underneath his suit & tie, Barack Obama [seventeen years in a Black Liberation Theology church] wears a 'What's Not To Like?' t-shirt. On the other days he switches to a 'It's All Good' t-shirt. And on special days, like when he fired the CEO of GM, Obama wears a 'Suckas!' t-shirt.

Because that's the way he rolls.

4/19/09, 5:54 PM

Anonymous Anonymous said...

Has anybody other than me noticed (since it is April 15) that we do not check a box on our tax returns indicating our race / ethnicity? While the liberals taunt conservatives as "tea-baggers" and call them racist nobody is bothering to ask why there are only whites protesting.

4/19/09, 7:15 PM

Anonymous eh said...

"...although the size of these effects are quite small."I think this should be is quite small, because size is the subject of this clause, not effects, and size is singular.

iSteve, you need to brace yourself for a lot more batsh*t USGov sponsored mortgage lending going forward, and no 'lessons' will have been learned.Maybe. But private investors will be skittish about mortgage paper for some time. So if it happens it'll be some sort of arrangement like big financial firms get now -- they can issue debt guaranteed by the FDIC, which means low interest rates and willing buyers. Still allowing (lasting) lower mortgage rates to non-whites in the name of raising home ownership among them would be hard to defend politically, and probably also in court.

By now I think it's clear that when all the needed data is available, if it ever is, it will show that non-whites benefited from and defaulted on subprime loans disproportionately -- it's only a matter of to what degree.

4/19/09, 10:15 PM

Anonymous lån said...

blog is presented in a nice way!!

4/19/09, 11:54 PM

Blogger Frank said...

Perhaps I'm misusing the supplied data from this blog but the total amount of dollars lost on the subprime crisis seems modest. If we extrapolate the MA foreclosure for the the entire US and use the data in post on 17 April:

http://isteve.blogspot.com/2009/04/subprime-bubble-in-living-color.html

we're talking about 15 billion lost in 2005 (5 billion on whites, 5.9 billion on Hispanics and 4.1 billion on blacks). Granted that was one year but it doesn't seem to add up the trillions lost. Is this is a domino effect where foreclosures force down real estate values, tax revenues, etc?

4/20/09, 8:36 AM

Anonymous Anonymous said...

Brilliant article.

4/20/09, 11:12 AM

Anonymous Hatshepsut said...

As La Griffe du Lion once explained very clearly: when the mean score for any group is lower than your merit threshold, you really have to set the "passing score" for members of that group higher (on any given test) in order to select the truly qualified. Why? Because each candidate's "measured" score is really just an approximation to her "true" score. To be sure of selecting only the truly qualified, you have to give yourself a cushion. Otherwise, if you set the passing score precisely at your minimum threshold you will often select unqualified candidates; those having true scores lower than their measured scores.

Making things worse, the farther away (in SD units) the measured score of any candidate from her group's mean score may be, the more likely her measured score is a fluke (and the more likely that her true score is some value closer to her group's mean). So if you want to reliably select people over a threshold when the mean for their group is below it, you have to make your cushion even larger than the cushion for members of groups whose mean scores are above or at least closer to your threshold.

What does this all mean with respect to loan applications and default rates?

It explains why NAM's with "similar qualifications" have higher default rates!

Suppose you are a lender. Think of the loan application as a test. Based on experience with loans to millions of applicants, you figure out what threshold score (on the credit application) predicts the (final) default rate you want (the default rate won't be zero, that's impossible. It'll be, say, 1%). (And yes, changed circumstances like, say, a recession will invalidate your ex-ante estimate.)

Whenever an applicant's true score is above that threshold you should go ahead and make him/her a loan. However, you can't be sure of an applicant's true score from one credit application (test)-- confusion, recent but undocumented changes in the applicant's circumstances (a bonus or raise, a theft loss or impending divorce), unmeasured personal qualities, etc-- may cause the applicant's "measured score" to deviate from her "true score."

So you will set a "passing score" a bit above your calculated threshold score. How far above? Well, that depends. Most likely your threshold is close to the mean score for whites and east asians. For white/east-asian applicants you only need a modest cushion between your threshold and the passing score, since it is not improbable a white/east-asian applicant will score above the threshold.

But what happens when an NAM applies for a loan? The mean score for her group is well below the mean score for whites and east asians, and even farther below the passing score for white/asian-applicants (which is slightly above the merit threshold, since you need a bit of a cushion to maintain quality). Fewer NAM's will turn in high scores, and when one does, her score is more likely to be a fluke (and her true score is probably lower rather than higher).

Mathematically you know that the passing score for NAM's should be set higher than the passing score for whites and east-asians. Again, only NAM candidates with scores well above the mean for their group exceed your threshold. And the farther away from her group's mean any candidate's score is, the more likely it's wrong (or in your particular business, a fraud). Mathematically, you need a bigger cushion between your merit threshold and passing score for NAM's to maintain quality.

This is no idle theory--it is validated by experience. If you look at just experience with loans to millions of NAM's to (re-)calculate the credit-application threshold score which predicts the desired default rate, you will discover that the threshold for NAM's is higher than for all-borrowers-together (or whites and east-asians separately). The difference will match the extra cushion you ought to set between the NAM passing score and your original threshold number.

Nevertheless, if you set a passing score for NAM's higher than that for whites and east asians, the government will call that "invidious discrimination" and punish you severely. Innumerate (and innumerable!) government and "public interest" lawyers won't care that both theory and experience show that NAM's have higher default rates for any given credit-score level. They will yawn when you call your experts in statistics, in quality control, in loan performance. They will only get excited when they declaim to the court, or to the newspapers "those crooks lend to whites with lower scores than the blacks they turn away!"

So you grit your teeth and obey the reigning taboos. You calculate the desired-default-rate credit-score threshold for all borrowers. You set the passing (credit) score to make sure whites and east asians have true scores over that threshold. You know full well that NAM's with scores near the passing score frequently have true scores below the threshold. You make loans to them anyway, on which they default with depressing regularity. You charge white and asian borrowers higher interest rates to make up for the losses on loans to NAM's.

The USA staggers on, enfeebled by a thousand little bleeding wounds, of which forced loans to unqualified NAM's is just one.

4/20/09, 12:17 PM

Blogger Glaivester said...

A quick point here - the statement that equal default rates amongst whites and blacks should occur in a fair system is not strictly true, unless the goal of the banks is to make as many loans as possible without making a negative profit rather than making loans until the next loan makes no profit.

Put another way, if we assume that on average, a default costs $95,000 and the profit of a successful loan is $5000, banks are not going to (at least as a goal) make loans until they have a 5% default rate (no profit). Rather, they will make loans until they have a 5% marginal default rate (that is, the next loan would have a 5% chance of default). Once they start losing money on the next loan, the bank will try not to make more loans; it isnt goingto keep losing money on loans until it reduces its profit to exactly zero.

To further complicate things, the cost of default varies, the profit from a successful loan varies, and these variations are presumably not random, so the model becomes even more complicated than the one I presented (which assumes that the average cost of default is the same at all levels of creditworthiness).

In any case, while similar default rates for minorities and whites might suggest that they are getting fair terms, it does not necessarily prove it; to prove it you would need a model that would predict that the next marginal white and black buyer would give the same expected return to the banker when taking into account the risk of default (at different points on amortization), the amount of profit the loan would generate if successful, and the probabilities of all of the various outcomes.

The only way that default rates would prove the fairness of treatment would be if the default rate vs marginal profit graphs were the same (or at least the marginal profit hit zero at the same default rate for both).

4/21/09, 6:43 PM

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