Lisa Kartek was able to buy a new home in Annandale, Minn., under the federal Rural Development no-down-payment loan program, aimed at helping often-struggling rural communities by assisting home buyers who might otherwise move away.
Congress is in the midst of investigating why Alan Greenspan and the Federal Reserve did not prevent the subprime fiasco, and now the SEC is suing Goldman Sachs for fraud. But neither the investigation nor the suit addresses the most repugnant aspect of subprime lending, which is the fact that poor people are charged higher interest rates than rich people when they purchase homes, and that this is perfectly legal.
The justification that economists give for this is that the poor have a higher risk of default and must therefore pay a premium for presenting this higher risk. But it is not the borrower who is in default who pays this premium; it is the other borrowers—the ones who do not default—who pay the premium and thus cover the losses caused by the ones who do. Why should a poor borrower be held more responsible than a rich borrower for the default of another poor borrower?
This discrimination against homebuyers based on income is produced by market competition. A rich family is less likely to default, so in order to attract such families lenders offer them a lower interest rate. But someone has to pay to cover the losses from bad loans, and if rich families are given a way not to pay for these losses, then poor families end up getting stuck with the bill. While the motivation for this discrimination may be totally innocent, the result is that it frees rich families from what should be a shared responsibility, shifting it all to the poor.
Although income discrimination is similar in some ways to racial discrimination, the remedies must be radically different. Under anti-racial-discrimination laws, a lender is not guilty of discrimination if her decision not to lend to a particular individual is motivated by economic considerations. But while it’s legitimate to use the level of a borrower’s income to determine whether that borrower is creditworthy, it should not determine the level of the interest rate she is charged.
If income discrimination is to end, a law that requires banks to offer the same interest rate to all homebuyers, regardless of income, will not suffice. Under such a law, some banks would announce a low interest rate that would be offered to all, but their loan qualification criteria would exclude the poor. Other banks would probably offer a high interest rate to all, but because of the high rate their only customers would be the poor. Each bank would not discriminate, but all the banks collectively would. To solve the problem, the government should establish the criterion for borrowers’ qualifications, requiring that banks offer the same interest rate to any borrower who meets this criterion.
Of course, some would complain that such regulation would be an unwarranted expansion of government in the marketplace. But as the bailout of the banks and other financial institutions clearly showed, the loan market does not consist only of private arrangements; individual loan failures and the way they are covered have social consequences that affect all of us. When homebuyers pay back their own loans, they also pay for the losses caused by other homebuyers who are not paying back theirs. Unless the rules change, it will continue to be only the poor who pay. And that’s not fair.
Moshe Adler teaches economics at Columbia University and at the Harry Van Arsdale Center for Labor Studies at Empire State College. He is the author of the book “Economics for the Rest of Us: Debunking the Science That Makes Life Dismal,” recently published by The New Press.
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Freedom, to me, is not having some elitist academic or politician “managing” my life through the application of their socialist/progressive theories and legislation. This may come as a shock to them, but I am not their subject, to be studied, manipulated, or led by the nose.
I am an individual, accountable to God, and not defined by any group. If I am black, I am black; and if I am white, I am white; my spirit doesn’t care, because it knows neither. Nor does it seem to discern rich mans food from poor mans food. Nor does it make much distinction between left and right.
Freedom is a spiritual concept; it is not defined by money, possesions, skin color, etc. By focusing on the material, the elite polarize the people for the purposes of controlling them as subjects for their latest social experimentation and do-gooder causes.
I think I have finally evolved beyond worrying about the material, and it has enlightened and empowered me to see a glimpse of true freedom. It seems that the more I separate myself from concern of the material, the more freedom I enjoy.
Does that mean that we all do not need a nutritious meal and a warm shower & bed and some clean clothes to put on? Absolutely not. But count the cost of those things and be as amazed as I have become.
I am sorry that so many of you are groveling around comparing your tribulations and fighting each other about who should get what. It is a pathetic way to live. I refuse to grovel for the sake of a few possesions. Poorness is its own kind of freedom.
The formula for truth and freedom has not changed. Progressivism is a lie. It only delivers division and strife. Focus on God and not your neighbor. Work hard at your job and developing good character.
If you don’t have a job, go ask someone if you can work for free. Do charity work, if you have to. Whatever you choose to do, do it with all your might. Be proud, hold your head high. Do not let them judge you by anthing but the light of your spirit. Pie in the sky? Maybe, but it is what works.
Black, white, brown, red, yellow, whatever. The spirit knows no difference. Live in the spirit and then you know what real freedom is. I guarantee it. And these are all the things my momma told me, and she was a wise, wise woman.
Dave: Are you serious? Let the “elites” solve our problems for the stupid, unwashed masses? We got rid of thise “elites” back in the late 1700’s, the last thing we need are more of them now.
The people who think they are “elite” are the assholes who got us into this mess in the first place.
Christ, you’re a tool.
By Dave, April 23, 2010 at 9:12 am Link to this comment
(Unregistered commenter)
I found the article cogent and thought provoking. The comments on the other
hand are startling in their ignorance and cynicism. It appears that both left and
right in this country have come to the conclusion that all of our societies
difficult problems are insurmountable. The response seems to be either, life is
inherently unfair so there is no point trying to fix anything, or the system is so
rigged and corrupt that there is no point in trying to fix anything. I blame the
internet. In times past difficult problems were debated by intelligent and
experienced people that brought differing points of view to an issue and
solutions or at least parts of solutions were hashed out amongst the intelligent
and informed. Now every simpleton with a broadband connections gets to have
an opinion on the most complex issues facing our society. They aren’t
equipped emotionally or intellectually to participate in a reasoned debate, so
the exchange devolves into the kind of stupidity we witness here. With a
begrudging nod to the constitution fetishists on the right I have to give credit
to the founders for one brilliant stroke, keeping the concept of democracy out
of the constitution. Unfortunately the gift of a representative government that
the founders gave us is being undermined by the internet. It is time to put the
people back in the barn where they belong and let the “elites” fix some of our
problems without the meddling of the unwashed masses.
Because the poor have almost no recourse to their exploitation. Except crime.
The wealthy and the middle class usually have more choice over where their money comes from, they also have access to the law, and to their political representatives.
And sometimes they even have friends on the inside who give them sweatheart deals, like members of congress and the senate recently got from Country Wide.
By joker, April 21, 2010 at 11:01 am Link to this comment
(Unregistered commenter)
You almost get to the problem. After the millions of words published about this economic collapse, no one has called out the FICO juggernaut. This black box of deception should be transparent.
In the ‘70’s antipoverty groups used to bus inner city residents to grocery
stores in the suburbs because the poor were charged higher prices for their
food. The “logic” of higher prices in the ghetto was the same; there was more
theft in the inner city markets so the grocery chain had to charge higher prices
in those stores. It was the same transparent collective guilt. The honest ghetto
shoppers were no more responsible for theft than the honest suburban
shoppers, but it was they who had to make up the grocery chain’s losses. Last
year my “Discover” card upped my interest rate because THEY had given cards
to… well, anyone. We’ve all heard the stories of the promiscuous dissemination
of cards to pets, newborns, college and high school students. They admitted
(after a rash of lies I refuted one-by-one) that those losses were their fault…
but, still, I had to pay for them, not Discover. Simple truth; there is no “free
market”, the game is rigged and the financial industry always wins. Solution?
State banks, democratic control of money!
When a system is stacked against working people, working people must avoid, as much as possible, participating in the system, and create an alternative system at the grass roots level that meets their needs. That requires greater cooperation, not competition. The Wall Street Kings are, by their own blind extremism, forcing the creation of more socialism. Would a Master of the Universe undercut himself? Yes!!!
I love the way Adler starts his piece. He trots out some useful villains as red meat for the lefty crazies to get their attention, then says, “But I’m going to talk about something else.”
As for the article, most of what he says is probably true, but pointless. If poor people indeed pay higher home borrowing rates, they still default at higher rates than rich people. So, individually, some poor people probably subsidize a rich person’s default. But usually it’s the other way around and the entire “community” of borrowers probably shares the pain equally.
The way I am reading the article.. the author is saying that if a potential borrower does not meet some minimum standards of credit worthiness then they should be refused the loan.
Raising the interest rate or piling on other fees or requirements for a loan doesn’t make the loan more likely to go to term and be paid out..those steps may in fact further the chance of default. Failure of the riskiest loans is likely in one form or another and the bank is not the one to lose.. the borrower and other (mostly) lower income customers pay.
The banks are perhaps cynically entering into some of these agreements expecting the deals to collapse and knowing they will not lose money.. it’s all just business and the ‘business of doing business’ is the main profit center for banks and all types of concerns, large and small.. as opposed to say, producing something, making something, investing time and work and resources into Some Thing.. and selling it.
Where does it leave the honest and sincere person who nonetheless can’t meet a minimum of standards for a loan? That’s a good question.. and I think therein comes the justification for government backed home loans.. yet those programs were allowed to outgrow their purposes and be abused.
As the one commenter added earlier.. all these shenanigans are not funny to the honest hard-working person who manages to make his commitments despite their situation… And all the talk about special funds to bail out lenders or borrowers both huge and insignificant… are infuriating. Offering not even a thank you to working people who live within their means and pay their own debts.
And all the while Wall street hails continued low interest rates.. a working man’s savings are watered away by those low interest rates.. and we are told to play craps with our money in the markets if we want a return!
All men are not created equal in terms of credit-
worthiness. Years ago, buying my first house, I had
to agree to two conditions. First to pay PMI because
I did not have 20% as a down payment. Secondly, I
had to pay an above-prevailing interest rate because
my credit score was lousy. I agreed to both
conditions because I thought then, as I do now, that
those conditions were reasonable. If that bank had
based my qualifications on my credit rating alone, I
would have been stuck. They would not have loaned me
anything. The higher credit rate was a compromise,
to get me into a house and to gradually improve my
finances and credit rating. I was and am grateful
that they gave me the opportunity. If Mr. Adler were
in the busy of loaning money I am curious as to how
he would deal with poor people who might have a
record of late payment or nonpayment.
Truthdigger of the Week: Sen. Angus King
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By Freedom Fighter, April 25, 2010 at 2:10 am Link to this comment
The elites are the problem, not the solution.
Freedom, to me, is not having some elitist academic or politician “managing” my life through the application of their socialist/progressive theories and legislation. This may come as a shock to them, but I am not their subject, to be studied, manipulated, or led by the nose.
I am an individual, accountable to God, and not defined by any group. If I am black, I am black; and if I am white, I am white; my spirit doesn’t care, because it knows neither. Nor does it seem to discern rich mans food from poor mans food. Nor does it make much distinction between left and right.
Freedom is a spiritual concept; it is not defined by money, possesions, skin color, etc. By focusing on the material, the elite polarize the people for the purposes of controlling them as subjects for their latest social experimentation and do-gooder causes.
I think I have finally evolved beyond worrying about the material, and it has enlightened and empowered me to see a glimpse of true freedom. It seems that the more I separate myself from concern of the material, the more freedom I enjoy.
Does that mean that we all do not need a nutritious meal and a warm shower & bed and some clean clothes to put on? Absolutely not. But count the cost of those things and be as amazed as I have become.
I am sorry that so many of you are groveling around comparing your tribulations and fighting each other about who should get what. It is a pathetic way to live. I refuse to grovel for the sake of a few possesions. Poorness is its own kind of freedom.
The formula for truth and freedom has not changed. Progressivism is a lie. It only delivers division and strife. Focus on God and not your neighbor. Work hard at your job and developing good character.
If you don’t have a job, go ask someone if you can work for free. Do charity work, if you have to. Whatever you choose to do, do it with all your might. Be proud, hold your head high. Do not let them judge you by anthing but the light of your spirit. Pie in the sky? Maybe, but it is what works.
Black, white, brown, red, yellow, whatever. The spirit knows no difference. Live in the spirit and then you know what real freedom is. I guarantee it. And these are all the things my momma told me, and she was a wise, wise woman.
Report thisBy mike112769, April 24, 2010 at 6:05 pm Link to this comment
Dave: Are you serious? Let the “elites” solve our problems for the stupid, unwashed masses? We got rid of thise “elites” back in the late 1700’s, the last thing we need are more of them now.
Report thisThe people who think they are “elite” are the assholes who got us into this mess in the first place.
Christ, you’re a tool.
By Dave, April 23, 2010 at 9:12 am Link to this comment
(Unregistered commenter)
I found the article cogent and thought provoking. The comments on the other
Report thishand are startling in their ignorance and cynicism. It appears that both left and
right in this country have come to the conclusion that all of our societies
difficult problems are insurmountable. The response seems to be either, life is
inherently unfair so there is no point trying to fix anything, or the system is so
rigged and corrupt that there is no point in trying to fix anything. I blame the
internet. In times past difficult problems were debated by intelligent and
experienced people that brought differing points of view to an issue and
solutions or at least parts of solutions were hashed out amongst the intelligent
and informed. Now every simpleton with a broadband connections gets to have
an opinion on the most complex issues facing our society. They aren’t
equipped emotionally or intellectually to participate in a reasoned debate, so
the exchange devolves into the kind of stupidity we witness here. With a
begrudging nod to the constitution fetishists on the right I have to give credit
to the founders for one brilliant stroke, keeping the concept of democracy out
of the constitution. Unfortunately the gift of a representative government that
the founders gave us is being undermined by the internet. It is time to put the
people back in the barn where they belong and let the “elites” fix some of our
problems without the meddling of the unwashed masses.
By Garbage collector, April 22, 2010 at 4:36 pm Link to this comment
(Unregistered commenter)
Complete rubbish.
Life isn’t fair. Get over it.
Report thisBy rothmanp, April 22, 2010 at 12:05 am Link to this comment
Prof. Adler: Why is the term ‘credit score’ absent from your article?
Report thisBy G.Anderson, April 21, 2010 at 10:59 pm Link to this comment
Because the poor have almost no recourse to their exploitation. Except crime.
The wealthy and the middle class usually have more choice over where their money comes from, they also have access to the law, and to their political representatives.
And sometimes they even have friends on the inside who give them sweatheart deals, like members of congress and the senate recently got from Country Wide.
Report thisBy are you kidding, April 21, 2010 at 12:18 pm Link to this comment
(Unregistered commenter)
stupid article. take an economics class and shut up
Report thisBy joker, April 21, 2010 at 11:01 am Link to this comment
(Unregistered commenter)
You almost get to the problem. After the millions of words published about this economic collapse, no one has called out the FICO juggernaut. This black box of deception should be transparent.
Report thisBy rudyspeaks1, April 21, 2010 at 7:34 am Link to this comment
In the ‘70’s antipoverty groups used to bus inner city residents to grocery
Report thisstores in the suburbs because the poor were charged higher prices for their
food. The “logic” of higher prices in the ghetto was the same; there was more
theft in the inner city markets so the grocery chain had to charge higher prices
in those stores. It was the same transparent collective guilt. The honest ghetto
shoppers were no more responsible for theft than the honest suburban
shoppers, but it was they who had to make up the grocery chain’s losses. Last
year my “Discover” card upped my interest rate because THEY had given cards
to… well, anyone. We’ve all heard the stories of the promiscuous dissemination
of cards to pets, newborns, college and high school students. They admitted
(after a rash of lies I refuted one-by-one) that those losses were their fault…
but, still, I had to pay for them, not Discover. Simple truth; there is no “free
market”, the game is rigged and the financial industry always wins. Solution?
State banks, democratic control of money!
By Shift, April 21, 2010 at 6:45 am Link to this comment
When a system is stacked against working people, working people must avoid, as much as possible, participating in the system, and create an alternative system at the grass roots level that meets their needs. That requires greater cooperation, not competition. The Wall Street Kings are, by their own blind extremism, forcing the creation of more socialism. Would a Master of the Universe undercut himself? Yes!!!
Report thisBy rico, suave, April 21, 2010 at 5:24 am Link to this comment
I love the way Adler starts his piece. He trots out some useful villains as red meat for the lefty crazies to get their attention, then says, “But I’m going to talk about something else.”
As for the article, most of what he says is probably true, but pointless. If poor people indeed pay higher home borrowing rates, they still default at higher rates than rich people. So, individually, some poor people probably subsidize a rich person’s default. But usually it’s the other way around and the entire “community” of borrowers probably shares the pain equally.
Report thisBy SoTexGuy, April 21, 2010 at 5:07 am Link to this comment
The way I am reading the article.. the author is saying that if a potential borrower does not meet some minimum standards of credit worthiness then they should be refused the loan.
Raising the interest rate or piling on other fees or requirements for a loan doesn’t make the loan more likely to go to term and be paid out..those steps may in fact further the chance of default. Failure of the riskiest loans is likely in one form or another and the bank is not the one to lose.. the borrower and other (mostly) lower income customers pay.
The banks are perhaps cynically entering into some of these agreements expecting the deals to collapse and knowing they will not lose money.. it’s all just business and the ‘business of doing business’ is the main profit center for banks and all types of concerns, large and small.. as opposed to say, producing something, making something, investing time and work and resources into Some Thing.. and selling it.
Where does it leave the honest and sincere person who nonetheless can’t meet a minimum of standards for a loan? That’s a good question.. and I think therein comes the justification for government backed home loans.. yet those programs were allowed to outgrow their purposes and be abused.
As the one commenter added earlier.. all these shenanigans are not funny to the honest hard-working person who manages to make his commitments despite their situation… And all the talk about special funds to bail out lenders or borrowers both huge and insignificant… are infuriating. Offering not even a thank you to working people who live within their means and pay their own debts.
And all the while Wall street hails continued low interest rates.. a working man’s savings are watered away by those low interest rates.. and we are told to play craps with our money in the markets if we want a return!
Nuts!
Report thisBy miller, April 21, 2010 at 4:05 am Link to this comment
All men are not created equal in terms of credit-
Report thisworthiness. Years ago, buying my first house, I had
to agree to two conditions. First to pay PMI because
I did not have 20% as a down payment. Secondly, I
had to pay an above-prevailing interest rate because
my credit score was lousy. I agreed to both
conditions because I thought then, as I do now, that
those conditions were reasonable. If that bank had
based my qualifications on my credit rating alone, I
would have been stuck. They would not have loaned me
anything. The higher credit rate was a compromise,
to get me into a house and to gradually improve my
finances and credit rating. I was and am grateful
that they gave me the opportunity. If Mr. Adler were
in the busy of loaning money I am curious as to how
he would deal with poor people who might have a
record of late payment or nonpayment.