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The Cure

Sometimes, the cure is worse than the disease, as we have seen in the wake of the corona-virus lockdowns. Many times, a wrong cure is prescribed because the disease has been misdiagnosed.

In the early 1990’s, HUD saw that white people had a higher home ownership rate than Black and Hispanic people. Fannie Mae, the Federal National Mortgage Association, concluded disparate results between the races was a sign of institutional racism within the mortgage industry.

The mortgage industry denied this charge, explaining that they only use empirical data, such as, Credit Score, Job History, Down Payment, Debt to Income Ratio, Mortgage to Income ratio when qualifying applicants for loans. In short, they use an analytic approach to determine whether a loan is approved or not. Fannie Mae then concluded that the analytical approach was itself racist, designed by the mortgage industry for the express purpose of excluding minorities from home ownership.

In response, Fannie Mae drastically changed the time tested highly predictive rules of lending. The empirical numbers which are strong indicators of the borrower’s ability to repay the loan, were not weighted in the loan approval process. So, many loans that previously would have be denied were approved, and also given an A rating.

So, during the time when Billy Beane was revolutionizing baseball by implementing the use of analytics, the federal government was deeming analytics as racist, forcing Mortgage Companies to stop relying on them in the approval process. And this was all done to produce a “non-racist” result.

What were the results? The mortgage industry became a free for all. Loans were given out like water. Basically, if you had a pulse, you were approved of an A-rated loan. The real estate industry took off. Home values went through the roof. Real estate development was popping up everywhere, creating a government induced real estate bubble. And when tied to mortgage backed securities, our financial industries were a tinder box waiting to ignite.

We all know what happened. When the high-risk borrowers who were given A-rated loans defaulted on their loans in droves, the mortgage industry collapsed which brought the real estate industry and the financial industry with it. And we experienced one of the greatest economic collapses in our history.

The cure was indeed worse than the disease. Many of the unqualified borrowers who were given loans, defaulted, lost their house, lost every cent they put into the house, and their financial situation turned out much worse than if they had been denied the loan in the first place.

Life outcomes between the races are different, but these differences of outcomes do not prove racism, and do not necessarily require a solution. But those who created the “solution” denied their culpability and pointed their finger back at the mortgage industry. The mortgage industry was once again called racist, but this time for giving the unqualified minorities loans when previously they were accused of racism for not giving unqualified minorities loans. That would be like the NFL legalizing the Chop Block and then criticizing teams for using the Chop Block.

Systemic or institutional racism has been charged repeatedly recently. The call for systematic change is demanded. When asked to point to the systemic racism, the response is usually listing the disparate life results between the races. But as we saw with the mortgage industry, disparate outcomes between the races does not mean implicit bias or are not necessarily proof of institutional racism. Changes to the system to produce certain results as we saw in the mortgage industry usually creates many more problems than solves.

This is what happens when we view the racist actions of a few rogue cops as representative of the 700,000 police officers, and make the accusation of systemic racism in policing. Just as Fannie Mae did away with the rules of lending which created chaos and destruction; defunding, dissolving or emasculating policing will create chaos and destruction.

It is extremely important for our society to clearly identify where racism exists so we can eradicate it, and it is equally important not to make charges of racism in places where none exists because in those cases, the cure is much worse than the perceived disease.

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