Racial bias in mortgages?

By Eric Crampton 26/06/2015

Simon Collins at the Herald asked me for comment on a paper alleging racial bias in mortgage lending; his story’s now up.

The paper is available here. It shows, using ordered logit regression, that people who self-identify as being more easily identified as Maori are less likely to own their own home, correcting for income and a few other variables. The paper’s empirics say absolutely nothing about mortgages or banks. But the study nevertheless concludes:

“To sum it up in one sentence: results from a large national probability sample of Māori indicate that the more Māori you look, the less ‘mortgage worthy’ you are.”

Here are a few alternative hypotheses:

  • The empirics correct for current employment and current income but not past employment and past income. If Māori employment histories are more varied than non-Māori, and if this also follows the “is identified as Māori ” indicator, Māori will have less accumulated wealth at any given level of income, and this is not controlled in the study.
  • If those who look more Māori are given preference in state housing, then home ownership would also be attenuated.
  • If parental resources are negatively correlated with looking more Māori , then that also affects ability to put together a deposit on a house. Note too the potential influence of holding household wealth under Māori land tenure.
I also think they’ve an error in how they described the magnitude of the effect. Remember that this is an ordered logit regression. So you can’t just take the point estimate and multiply it by the number of interval steps to get an accumulated effect; you have to ask your stats package to give you a predicted value at the different values of the category. At page 11, it really looks like they linearised from the point estimate:

Some readers may be wondering how large this effect is in practical terms. One way to think about it is like this: when statistically adjusting for numerous other demographics, such as differences in income, region of residence, and education, a Māori person with a score of 5.55 on our Perceived Appearance measure of Māori identity would be twice as likely to not own their home relative to someone with a score of 1 in Perceived Appearance. This is a statistically significant association, which in our view represents a large and extremely important difference in the rate of home ownership based solely on merely appearing more Māori.

They have an odds ratio of 0.82, which ought to mean that a step change increase in perceived appearance score from the mean score reduces likelihood of owning a home by 18%. I don’t think that means that if you go 5.55 steps in the other direction (1/0.18) from the mean score doubles your likelihood of home ownership, except under some pretty strong assumptions. But it’s been a little while since I’ve played around in ordered logit.

Here’s the bit where Collins quoted me – entirely fairly:

However Dr Eric Crampton of the NZ Initiative think-tank said there could be many other explanations for this besides racial bias. For example, people who looked more Maori might have parents who did not have freehold properties to use as collateral for loans, a factor that was not surveyed.
“Banks would be throwing money away if they decided to not lend to somebody simply based on looks,” he said.
Mortgage brokers Bruce Patten in Auckland and Karen Essex-Mooney in Blenheim both said they had never seen a mortgage application turned down because the borrowers were Maori. They said many borrowers now applied online and never actually met the lenders.
New Zealand Bankers’ Association chief executive Kirk Hope said racial stereotyping was not in the banks’ or their customers interests especially within such a competitive part of the banking sector.

0 Responses to “Racial bias in mortgages?”

  • Although I agree that it’s a leap to attribute lower rates of home ownership amongst those who look most Maori to being due to institutional racism in the mortgage sector, this opinion is a classic example of “whitesplaining”. Racism is real.

    • So, because racism is real, and I’m white, I can’t talk about an empirical study? Interesting perspective on how science works.

  • In response to your comment about an empirical study I wanted to say that science may aim (purport) to be objective, unbiased, empirical, peer-reviewed, etcetera, etcetera, but is a human endeavour, and therefore, still fraught with human biases. Scientists espouse science as being the ideal way of understanding some universal truth. Sure, it has given us great technological advancements and understandings. But, it is also used by powerful members of society (most typically white), who hold positions in science, and will find arguments (“evidence”) to support their beliefs (hypotheses), consciously or otherwise to oppress, and justify that oppression. In the context that is science being used to argue about Māori disadvantage, I hardly think you would be surprised that we (Māori) would insist that – even if some of the technicalities of the study may seem less than perfect in your eyes – your argument comes across as being another denial of the Māori reality. And that reality is that, statistically, we don’t have the same access to home loans. Of course, this may well be due to employment, state housing and parental resources (and Māori land tenure). However, this actually seems to me to support the notion that there are multiple compounding (multi-generational) factors in modern society that disadvantage Māori.
    That said, interestingly, your acknowledgement (in your response to Lisa, as I read it), that racism does exist helped me to consider your arguments as being perhaps more considered and logical (i.e. not coming from a place of denying or defending racism) whereas, had you not done so, I would probably have continued to think that it was yet another attempt to defend the systemic racism that is a reality in NZ.
    I think the greater point is that to be human is to be driven, firstly, by our beliefs (Are Māori treated differently? Should Māori be treated differently?) Science is merely the tool we use to validate them. Daniel Kahneman (on heuristics and bises, etc.) has certainly reinforced this thinking…
    Sorry if I have taken the discussion off on what seems to be a tangent, but I think it’s the conversation we should really be having.

    • Thanks, Heeni. The (to my mind) too simplistic standard take on this stuff is to blame the banks. But if the banks are lending money out in ways that make sense (like making assessments of creditworthiness that depend on assets, past incomes, employment history and the like) and that that assessment winds up meaning that Maori have less access to credit, that’s not a bank problem, that’s a more fundamental underlying problem.

      Nothing in this says that compounding problems aren’t real – that would be fodder for a different study entirely. What I am saying is that where compounding problems of that sort are eminently possible and poorly controlled for, it makes a lot more sense to look to those issues rather than to assume that banks are throwing money away by treating good credit risks badly just because of their skin colour.