A new report shows a dramatic decrease in home loans to African Americans and Latinos before and after the housing market collapse, raising fresh questions about the extent to which minorities may be suffering from loan discrimination.
The report is entitled “The Foreclosure Crisis and Racial Disparities in Access to Mortgage Credit 2004-2009” and was issued by ComplianceTech, an Arlington, Va. research firm that analyzes fair lending practices.
The study concludes that from 2004 to 2009 home loans made to African-Americans — for either purchases or refinances — tumbled by 60 percent to $49 million from $122 million.
For Latinos, the decline was even worse: From 2004 to 2009, lending to Hispanic borrowers plummeted by 63 percent to $78 million from $214 million.
By comparison, during the same period, whites experienced only a 15 percent decrease in lending from banks, with mortgage volume dipping to $1.1 billion from $1.3 billion. Loans made to Asians were virtually unchanged at roughly $128 million.
The study’s chief architect, Maurice Jourdain-Earl, founder of ComplianceTech, said this huge lending disparity is having enormous financial consequences for blacks and Latinos since homeownership is a chief way to build wealth in America.
“Right now, there’s a big sucking sound where the wealth is just flowing out of communities of color, and access to wealth creation is flowing out,” he said.
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He also noted that a “dual system” has emerged in the mortgage market, in which even when blacks and Latinos could secure home loans, they paid more for that credit and wound up in riskier loans.
“We looked at prime, subprime and FHA loans,” Jourdain-Earl said, noting that these three categories make up the majority of home loans in America.
The study from ComplianceTech revealed that blacks and Latinos were two to four times more likely than whites to receive subprime loans; and subprime mortgages are far more likely to go into default or foreclosure. Meanwhile, Whites were about twice as likely than blacks to be approved for prime loans, which carry the lowest interest rates and more favorable terms.
So what’s driving the data?
Even though the ComplianceTech study didn’t control for factors like income or credit scores, Jourdain-Earl says he’s convinced that race does play an important role in lending outcomes.
“I wasn’t trying to answer the ‘why’ question,” he says. “But based on the work that we do, I know that discrimination is alive and well.”
Naysayers and critics may challenge the root cause of this huge lending disparity. But no one can challenge the numbers themselves.
ComplianceTech’s report was based on an exhaustive analysis of hoards of data provided directly from banks and other lenders to the federal government. To complete the 60-page report, Jourdain-Earl analyzed some 150 million loan files aggregated from nearly 8,800 lenders. Those lenders supplied their loan data in accordance with the requirements of the Home Mortgage Disclosure Act.
Is the ComplianceTech report indicative of racial discrimination? Frankly, I wouldn’t doubt that some level of discrimination helps explain this big lending disparity, especially in light of a previous Federal Reserve Bank study that found that during the housing boom African Americans — especially black women — were two to three times more likely to be steered into higher-cost, subprime loans, even when they had great credit and loan qualifications.
But in addition to issues of racial discrimination (at a personal, institutional or policy level), I suspect that other factors are also at play, such as:
– Little Equity or No Equity
Blacks and Latinos homeowners may be more highly concentrated in areas disproportionately impacted by the housing crash (think: Atlanta, Cleveland, and Detroit, along with Miami, various parts of Arizona and Southern California). Homeowners in these places where prices have tanked don’t have sufficient equity in their homes. The problem of being “under water” – or owing more on their homes than the houses are worth – is one deterrent to completing mortgages refinancings.
– Joblessness
While unemployment has been a major issue for all Americans in recent years, minority communities have been especially hard hit. Right now, for example, the national jobless rate is 9.0 percent. But it’s a whopping 15.7 percent for African-Americans. Needless to say, a lack of a job — or an inability to fully document income — would be a major hurdle to getting home loans.
– Lack of Savings and/or Down Payment
Ever since 2007, banks have been demanding bigger down payments for those who want to purchase homes. It may be that many blacks and Latinos lack sufficient savings and therefore are getting turned down more often. (Granted, policy issues play a direct role here, since FHA loans have grown tremendously popular and these government-backed loans currently require at least a 3.5 percent down payment).
– Credit Problems
Banks previously gave loans to almost anyone who applied. Now, lenders have become extremely risk averse and are demanding higher credit scores than ever before. This could be negatively impacting minority applicants.
For his part, Jourdain-Earl acknowledges that any or all of these factors can impact lending. But he also says that “cultural affinity” factors can creep into the process, leading mortgage industry professionals to consciously or subconsciously behave in ways that favor certain customers — and marginalize others.
For example, underwriting exceptions (a loosening of certain loan requirements) might get made for one person, but not for a different, equally-qualified applicant, Jourdain-Earl said.
Another example: If a loan officer takes a face-to-face application from someone of the same race, religion or ethnic background, that loan officer might “provide extra help in putting the loan application together” according to Jourdain-Earl. With another client, however, no such extra assistance is offered. “One person gets approved and the other one doesn’t,” Jourdain-Earl says, adding that the loan officer is “often unaware that they’re discriminating.”
Regardless of “why” lending is down 62 percent collectively to blacks and Latinos, the fact is: this is an enormous problem. Not just for these two groups but for the entire country. People who can’t refinance unaffordable loans often wind up in foreclosure.
According to RealtyTrac, there were 3.7 million foreclosure filings in 2010, and 2011 is expected to top 4.5 million foreclosure filings. Widespread foreclosures drive down everyone’s home values and makes it harder for the housing market to recover.
What’s more, falling homeownership rates spell bad news for entire communities: abandoned, empty homes tend to lead to blight, crime, less civic engagement and neighborhood decline.
And then, of course, there is the issue of access to credit and wealth-building opportunities, such as homeownership.
This study, therefore, is sure to add further fuel to the debate over alleged discrimination in the mortgage market.
Recently, the Obama administration announced it would be looking into charges that nearly two dozen lenders allegedly unfairly denied U.S. government-backed mortgages to qualified loan applicants.
Those allegations came from the National Community Reinvestment Coalition (NCRC), which filed a fair housing complaint with the Housing and Urban Development Department.
Regardless of the outcome of that federal investigation, consumers currently do have rights under the Equal Credit Opportunity Act and the Fair Housing Act.
The Federal Trade Commission offers information on understanding your rights and tips on what to do if you suspect you are a victim of mortgage discrimination.