Persistent racial and ethnic inequality in the mortgage market is not a coincidence. Nearly 50 years after the adoption of the Fair Housing Act, newly released federal data indicate that people of color continued to lose ground in the homeownership market in 2013. In particular, black and Hispanic households continued to represent a shrinking fraction of the mortgage market and received higher-cost loans compared with white borrowers. Tragically, many prospective black and Hispanic homeowners never reach the loan-decision stage of the home buying process. People of color are still being treated unequally in the home mortgage market, even when they demonstrate an ability to repay their loans.
Blacks and Hispanics are more than twice as likely to be denied a mortgage as non-Hispanic whites with comparable incomes and risk profiles. However, the disparate treatment received by people of color is not confined solely to the loan approval stage of the mortgage lending process and does not necessarily take the form of a loan denial. Discrimination based on race or ethnicity can take several forms during any stage of the process. During the pre-application stage, for example, lenders may discourage borrowers of color from continuing with the loan application process even though they may qualify for a loan. Lenders also may not provide the same information to applicants of color that they provide to white applicants. Further, pair testing studies—in which two individuals pose as equally qualified borrowers in every respect except their race or ethnicity and inquire about the availability and terms of home mortgage loans—demonstrate that people of color are consistently treated differently than equally qualified whites.
When people of color do end up at the lending table, they are much more likely to receive costly subprime loans and loans with features that are associated with higher foreclosures than their white counterparts. A Wall Street Journal study found that most borrowers who received predatory loans in 2006 would have qualified for better, more sustainable loans. More recently, the Center for Responsible Lending demonstrated that racial disparities are evident even when comparing borrowers within the same credit score ranges, and especially for borrowers with higher credit scores. For example, among borrowers with good credit—a FICO score of more than 660—African Americans and Latinos received a high interest rate loan more than three times as often as white borrowers.
Blaming people of color for low FICO scores and insufficient funding for a down payment represents a myopic perspective of unequal access to homeownership in the United States. Instead, a number of other factors contribute to inequality in the mortgage market. First, people of color’s inability to pay higher down payments is due in large part to decades, if not centuries, of discrimination that have created exceptional wealth gaps between communities of color and white populations. Second, credit scoring is not the best measure of risk and often has a discriminatory effect on communities of color, as a National Fair Housing Alliance study shows.
Third, racial segregation—created and perpetuated by both institutionalized public and private discriminatory practices—has historically precluded communities of color from accessing safe and affordable home purchase financing. It has also limited their opportunities and conditions for wealth accumulation. As Jacob Rugh and Douglas Massey explain, residential segregation and the ongoing lack of access to mortgage credit in black and Hispanic neighborhoods have combined to create the ideal conditions for predatory lending in those communities.
People of color—who will account for three-quarters of household growth over the coming decade—represent the future of the housing market and the economy as a whole. Housing represents the foundation of the nation’s opportunity structure since it determines one’s access to education and job opportunities, as well as the related ability to accumulate wealth. Yet, people of color still lag behind whites in the housing market. Contrary to what some argue, the housing industry and Congress should indeed pay more attention to the massive disparities that persist in the housing market and the economy based on the color of one’s skin. If policymakers do not recognize and address racial and ethnic disparities in access to housing and the opportunities attached to it, the nation will not be able to reduce inequality, improve the economy, or strengthen the middle class.
Michela Zonta is a Senior Policy Analyst for the Housing Finance and Policy team at the Center for American Progress.
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Senior Policy Analyst, Housing Policy