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The Racial Mortgage Gap

Nearly 16% of Black Americans who apply for mortgages are rejected nationwide, compared with just 7% of white Americans, according to a Redfin analysis of Home Mortgage Disclosure Act data from the Consumer Financial Protection Bureau (CFPB).

The gap is widest in Milwaukee, San Francisco, Detroit, Chicago and St. Louis, where denial rates for Black homebuyers are more than 10 percentage points higher than they are for white homebuyers. In Milwaukee and San Francisco, specifically, Black loan seekers are more than three times as likely to be denied a mortgage.

"Getting denied a loan serves a huge blow to a person's self esteem - especially for people of color, who often feel like the world is already falling on them," said Brittani Walker, a Redfin agent in Chicago. "My mother has been a renter since she moved out of her parents' house. I tried to get her pre-approved for a mortgage a couple of years ago, but she was rejected because she had some blemishes on her credit. She broke down in tears and hasn't tried again since. When people of color are stuck in this cycle of renting; their children often meet the same fate, missing out on thousands of dollars worth of home equity. If your parents never owned a home, where do you learn the value of homeownership?"

Overall, Americans today are half as likely to be denied a mortgage loan as they were in the wake of the 2008 financial crisis. The share of total applicants who faced rejection dropped to 8.9% in 2019 from 18% in 2008, according to the latest annual figures just released by the CFPB. Still, Black loan-seekers are more frequently denied due to debt and low credit scores. These two factors are more likely to be roadblocks for Black mortgage applicants due to decades of wealth inequality, as well as bias among lenders.

While the racial mortgage gap has been narrowing over the years, Black Americans are still denied home loans at a higher rate than white Americans in every one of the 50 most populous U.S. metro areas.

The Largest And Smallest Gaps

In Milwaukee, 19.5% of Black mortgage applicants are rejected, compared with just 4.8% of white applicants. In other words, Black applicants are four times more likely to face rejection. Milwaukee's 14.7 percentage-point gap represents the biggest disparity among the top 50 metro areas.

San Francisco has the second largest gap (19.2% vs 5.9%; 13.3 percentage points), followed by Detroit (20.3% vs 7.2%; 13.1 percentage points), Chicago (18.5% vs 5.7%; 12.8 percentage points) and St. Louis (18.1% vs 5.6%; 12.5 percentage points).

Milwaukee is the most segregated metro in the nation - with almost 90% of African Americans living in the inner city - while Chicago, Detroit and St. Louis are the third, fourth and sixth most segregated.

Milwaukee also has the second-lowest Black homeownership rate of any metro area in the U.S. Just 27% of Black families there own their homes, compared with 70% of white families - 13 percentage points wider than the national gap.

"The residue of redlining is still very tangible in Milwaukee and Chicago," said Arnell Brady, a Redfin Mortgage adviser who represents both cities. "Segregation continues to perpetuate the uneven playing field for Black communities, which are severely underserved when it comes to financial education and access to credit. Buying a home isn't like walking into a bank and getting a credit card. Everyone wants a piece of the American Dream, but that's hard to achieve when you don't have access to the right tools and information."

Meanwhile, the metro area with the smallest gap is San Diego, where 10.8% of Black mortgage applicants are rejected, compared with 7.3% of white applicants, making for a difference of just 3.5 percentage points.

In second place is Seattle (10% vs 5.2%; 4.8 percentage points), followed by Sacramento (11.2% vs 6.2%; 5 percentage points), Anaheim (13.2% vs 8.1%; 5.1 percentage points) and Las Vegas (13.7% vs 8.1%; 5.6 percentage points).

Reasons For Denial

While debt is the number one explanation lenders provide when denying applicants across races, Black homebuyers are more frequently turned down for this reason, according to the CFPB. Of Black mortgage applicants who are refused home loans, 32.5% are turned away because of their debt-to-income ratios, versus 27.9% of white applicants.

In a Redfin survey from February 2020, 45% of the 232 Black respondents said that student debt, specifically, stopped them from trying to buy a home sooner. That compared with 31% of white respondents.

The discrepancy is even more stark when it comes to credit, with a quarter of Black applicants being shown the door due to their credit histories, versus just 18.5% of white applicants. Research has shown that the algorithms many lenders now use in credit scoring, which are meant to be unbiased, may actually systematically deny credit access to specific groups.

Lender Discretion

While banks often cite debt or a low credit score as the reason for denying mortgages to Black Americans, biases held by lenders also play a part.

"Banks still have a lot of power when it comes to determining who gets a loan," Brady said. "Black applicants are more likely to be asked to provide additional documents despite very clear guidelines from federal agencies on what's required. I'm a mortgage adviser who knows the rules backward and forward, and I've encountered this as a loan applicant myself. Why are you asking me for two years of tax returns when the requirement is one?"

One way to curtail this discrimination would be to hide applicant names and races/ethnicities from underwriters when they are determining risk, according to Elizabeth Korver-Glenn, an assistant professor at the University of New Mexico whose work focuses on the dynamics of housing markets.

Another problem is the lack of incentive to help clients with low credit scores, Brady said. Loan officers are more likely to offer advice to a borrower who already has a high FICO score and just wants to secure a better interest rate than to help someone who needs to increase their score to the 620 minimum just so they qualify for a loan, he said.

Opportunities For Change

Beyond providing bias training and incentivizing mortgage brokers to lend money to people of color and low-income Americans, there are countless ways to even the playing field. For example, offering more homebuyer classes and financial education in minority communities could help more people of color realize homeownership is within their means.

"Many people aren't aware that you don't need a 20% down payment or a 750 credit score to buy a house," Walker said. "There are down payment assistance programs that buyers can take advantage of, but they have higher interest rates. Luckily, you can refinance out of those higher rates, but in order to do that, you need to understand refinancing."

Diversifying hiring within the mortgage and real estate industries is another way to help ensure that underserved communities have advocates to educate and guide them through the loan application and homebuying process. Just 26.4% of workers in the housing industry identify as a racial or ethnic minority, according to Fannie Mae.

Alternative credit-scoring models could also help combat the racial mortgage gap. For instance, credit agencies could value on-time rent payments the same way they value on-time mortgage payments, helping more renters prove their creditworthiness. They could also place more emphasis on job stability, said Jason Bateman, head of Redfin Mortgage.

"If you've worked for the post office for 20 years, that should be scored higher than working for a start-up out of someone's garage for two months," he said. "The post office is going to be here 10 years from now, but the start-up in the garage might not be."

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See also, from WBEZ: Where Banks Don't Lend.

"In Chicago, lenders have invested more in a single white neighborhood than all the black neighborhoods combined. Call it modern-day redlining."

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Comments welcome.



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Posted on July 8, 2020


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