This is the suggestion – nay insistence – from an American academic. This being rather worrying as it gives us an insight into the economic understanding of the American academy – not much.
The background is that there is indeed a racial wealth gap in the United States. It’s also true that the major part of household wealth, at least in that lower end of the population we’re talking about, is housing equity. The racial wealth gap is indeed largely driven by the inequity, used here to mean unequal not unfairly unequal, in housing equity across races.
So far so good. Then we get to a suggestion from this gentleman:
Adam J. Levitin is a professor at Georgetown University Law Center. He is the co-author, with Susan M. Wachter, of ‘The Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future’ (Harvard University Press, 2020).
So, academic, check, American, check, even someone we might expect to have a modicum of knowledge of the subject under discussion, houses, equity, financing, mortgages and so on.
This is what is being complained about:
There’s much more of that there but essentially it’s a list of the higher interest rates you’re going to pay on your mortgage if you’re a riskier borrower. If your credit rating is lower you’ll pay more. If you put less equity in, borrow a greater portion of the price, higher interest. And so on – the more likely it is you’ll default then the higher the interest rate you’ll pay.
This seems logical. Even, essential. For what did happen in 2004 and following? Anyone who could walk into a broker’s office could gain a mortgage. Actually, large numbers of those who couldn’t. Underwriting standards were lax that is. And how do we alter that? We change the prices at which people can access credit of course.
What is the suggestion being made by our academic?
LLPAs are fees that vary based on the borrower’s credit score, the mortgage type, and the down payment. These fees are substantial, as much as an additional 3.75 percent on a mortgage interest rate. Lenders completely pass through the LLPAs to borrowers in the form of higher mortgage interest rates, but because LLPAs are not separately broken out on lenders’ rate sheets, they are invisible to borrowers.
He’s got the basics right at least. Largely right – they’re a fee, a one time payment, not an annual addition to the interest rate but still. Less creditworthy borrowers pay higher interest rates. And the complaint is, with the solution?
Today, LLPAs are a solution to a problem that no longer exists.
It’s easy to ignore LLPAs as a wonky, technical detail in an obscure secondary market. The harm they do is not as visceral as that done by a police baton. Yet it is precisely this sort of functionally discriminatory pricing policy that forms the molecular structure of economic discrimination in America.
A key step toward racial equality is fixing the housing market. An impactful, concrete step that the federal government could take today to increase minority homeownership and decrease the racial wealth gap is to reform the LLPAs.
I think we can guess what reform means here. Abolish. So, the solution to the racial wealth gap is that we should go back to not discriminating among people on the basis of their creditworthiness. You know, the thing that caused the housing bubble then crash?
If this is the quality of thought among those who teach in American academia what in heck is it like among those who are on the other side of the lecture podium?