As if Fannie Mae didn't have enough trouble already, with Wall Street worried about the company's interest rate woes, now comes the first of what is sure to be a slew of lawsuits targeting the firm for racial discrimination. The charges of racism are bogus, but Fannie Mae has asked for it, and deserves it-by its recent and enthusiastic support for those who insist that skin-deep diversity is more important than what's underneath.
Safiyyah Rahmaan, a black resident of Wilson, N.C., has filed a complaint in the U.S. District Court for the District of Columbia, alleging that her denial of a home mortgage loan was because of Fannie Mae's racially imbalanced credit scoring software. According to the complaint, Fannie Mae's electronic loan underwriting system, Desktop Underwriter, has an illegal "disparate impact" on blacks.
The problem, says the complaint, is that Fannie Mae "focuses overwhelmingly on a prospective home buyer's credit score." But it seems hardly unreasonable for a lender to weigh rather carefully whether the lendee has a record of not paying back loans, and a Fannie Mae spokesperson dismissed the racial bias allegation by reminding the public that Desktop Underwriter is a completely automated system-containing no information about a borrower's race or ethnicity.
This is not the first time Fannie Mae has had to defend itself from charges of racial bias. Franklin Raines, Fannie Mae's current Chairman and CEO and former Clinton administration budget chief, has been constantly battling racial bias underwriting allegations for years. Thus far, none of the punches has really landed.
Nor should they. Corporations, especially public lenders like Fannie Mae, are entirely justified in using systems that objectively evaluate an applicant's default probabilities before approving a loan. All Fannie Mae has done is to correctly follow the basic arithmetic of successful lending: objectively add an applicant's creditworthiness to his financial ability to service the loan. This formula usually predicts whether the lender will be repaid in a timely manner.
But Fannie Mae's defense of its own thoroughly objective and colorblind underwriting process has been undermined by a contradictory position it has taken in a pair of unrelated lawsuits challenging the use of race and ethnicity in university admissions.
In these cases-which challenged the University of Michigan's university and law-school admission policies, respectively-better qualified whites and Asians were denied admission even though their Grade Point Averages (GPAs) and standardized test scores, for instance, were consistently superior to those of the blacks and Latinos admitted. In the undergraduate case, in fact, the university proudly admits it adds twenty points to all black applicants' scores simply because they are black. (To put this in perspective, the difference between a perfect and a perfectly bad Scholastic Aptitude Test [SAT] is only twelve points.)
The university's use of race to tip the scales in favor of one racial group over another somehow didn't deter Fannie Mae and a number of other blue-chip corporations from announcing February 18th that they would be submitting a "friend of the court" brief this month defending these racial admissions policies.
Blue-chip corporations apparently consider this sort of public relations ploy a cheap form of insurance against racial extortionists. But if it's all right for the University of Michigan to achieve a politically correct racial and ethnic balance by ignoring who's the best qualified, then why shouldn't Fannie Mae be required to do the same thing?
Safiyyah Rahmaan claims in her lawsuit that blacks and Latinos have far higher "bad" credit records than do whites, a fact verified by a 1999 study of 12,000 applicant files by mortgage lender Freddie Mac. The report demonstrated that 27% of whites had "bad" credit records, while 48% of blacks did (Latinos fell in between, and Asians had the fewest bad credit records of all).
Rahmaan believes these credit standards adversely affect African Americans when they apply for loans. She wants Fannie Mae's selection criteria to be jiggled to give more demographically balanced numbers-just as the University of Michigan is jiggling its criteria to serve the same end-but Fannie Mae is saying, no way.
Fannie Mae, in other words, is a hypocrite.
On the one hand, it argues that racial disparities in lending outcomes are not the result of an inherent bias in their underwriting software. Instead it submits that the disparities that exist in credit histories among racial groups show, in their own words, "the need for better credit education in minority communities."
Yet, on the other hand, Fannie Mae advocates racial preferences in the college admissions process in order to have a "diverse" student body. Why don't they argue instead for better academic preparation in African American and Latino communities?
To be blunt: When Fannie Mae's bottom line is at stake, the system needs to be colorblind and merit-based. But when somebody else's ox is being gored, the system needs to be race-conscious and the merits ignored.
Fannie Mae understands that not only is there nothing wrong with being colorblind in their underwriting procedures, but that anything else is discrimination. If the company jiggles the criteria to reach a particular racial and ethnic mix, then they are not making decisions on the merits. That, in turn, leads to higher defaults and lower profits, to say nothing about those who really will be discriminated against because of race and ethnicity.
Let's face it, there are only a finite number of loans that Fannie Mae can buy, and if they jiggle the criteria to create more black winners, then they are also going to be creating some white and Asian losers-people who will now lose out even though they are better qualified.
In the University of Michigan cases, the U.S. Supreme Court will rule on the permissibility of racial preferences in college admissions. It would be wise for Fannie Mae to rethink the pro-race-conscious position it has taken in these cases-both as a matter of principle and because the next ox to be gored by the bean-counters may be its own.
