Time to Reboot the Housing Market

Family members sit in front of their refurbished home in Camden, New Jersey, February 23, 2015.

For three consecutive years, Home Mortgage Disclosure Act, or HMDA, data have confirmed the same reality: The housing market remains in a state of lethargy and, with overly rigid underwriting standards, unnecessarily excludes first-time buyers, young adults, and people of color from the opportunity of homeownership. The only meaningful fluctuations from year to year have been in the numbers of refinance loans, which swing dramatically in response to changes in interest rates. Although some progress has been achieved in increasing the share of home purchase loans going to people of color, stark disparities remain between this segment of the market and non-Hispanic white homebuyers. Policymakers must seriously consider these disparities as they design programs that can place people of color into an equitable position in the home mortgage market.

The latest HMDA data released last week show that while African American and Latino borrowers’ share of home purchase loans increased modestly from 2013 to 2014, these borrower groups remain a long way from recovering the homeownership losses experienced during the recent foreclosure crisis. Even when income is taken into account, black and Latino applicants experience higher denial rates for home purchase loans relative to non-Hispanic white applicants. Furthermore, the loans for which they are approved tend to be higher cost relative to those received by non-Hispanic white mortgage seekers. Finally, black and Latino borrowers remain more likely to purchase homes in communities with disproportionately high concentrations of people of color.

Here are some key takeaways from the Center for American Progress’ analysis* of the new data.

Black and Latino applicants for home mortgages have disproportionately lower incomes

CAP’s calculations show that black and Latino applicants continue to be overrepresented in the low and moderate brackets of the income distribution. Forty-two percent of black applicants and 40 percent of Latino applicants have incomes below 80 percent of the local area median family income, compared with 27 percent of non-Hispanic white applicants. Among those applicants who were approved for a mortgage loan, the median incomes of black and Latino borrowers were $62,000 and $58,000, respectively, compared with $76,000 among non-Hispanic white borrowers.

Black and Latino applicants still experience higher denial rates

Regardless of income, people of color are more likely to be denied loans than non-Hispanic white applicants, continuing a historic trend of unequal access in housing finance. For black applicants, overall denial rates for home purchase loans are double those of non-Hispanic white applicants—23 percent vs. 11 percent; the denial rate for Latino applicants is 18 percent. In general, denial rates are higher for conventional loans than for nonconventional ones, especially in the case of black applicants, 25 percent of whom are denied for conventional loans. After controlling for income, the gap in those rates closes but remains high: 19 percent of high-income black applicants and 15 percent of high-income Latino applicants are denied loans.

Black and Latino borrowers continue to purchase homes in neighborhoods of color

A higher proportion of black and Latino borrowers purchase homes in higher-income neighborhoods than in low- and moderate-income areas. Yet both black and Latino borrowers tend to be approved for loans for the purchase of homes located in neighborhoods where, on average, more than 50 percent of the population consists of people of color. Only 22 percent of non-Hispanic white borrowers, by contrast, are approved for loans in similar neighborhoods.

Black and Latino borrowers incur higher costs

More than 25 percent of black borrowers and 29 percent of Latino borrowers receive high-cost loans, compared with 9 percent of non-Hispanic white borrowers. CAP’s calculations reveal that even in very-high-income neighborhoods, high-cost loans are more common for people of color. While only 6 percent of non-Hispanic white borrowers receive high-cost loans for the purchase of homes located in high-income neighborhoods, this percentage jumps by a factor of three—to 18 percent—for both black and Latino borrowers who purchase homes in these neighborhoods. After controlling for type of loan—conventional or nonconventional—applicant income and loan-to-income ratio, and neighborhood income level, black borrowers have a 60 percent higher probability than non-Hispanic white borrowers of receiving a high-cost loan. Similarly, Latino borrowers’ probability of receiving high-cost loans is 80 percent higher than that of similarly situated non-Hispanic white borrowers.

With home prices into their fifth year of relatively consistent increases, the tight credit environment and stagnating wages combine to further limit the access of blacks and Latinos to safe and affordable mortgage credit. Conventional loans are still out of reach for many borrowers of color. The vast majority of black and Latino borrowers still have to rely on non-conventional loans, particularly Federal Housing Administration loans, which continue to serve as a critical source of credit for borrowers of color despite the high premiums that make them costlier than conventional loans.

Conclusion

Despite very modest gains, the housing market continues to underperform relative to its potential to support wealth growth for American families. This is especially true among borrowers of color, who are still locked out of the mortgage market and whose access to safe and affordable homeownership still lags far behind that of non-Hispanic whites. Equitably serving people of color in the home mortgage market is critical for the long-term health of the mortgage market and for building an inclusive economy. People of color represent a growing segment of the housing market. It is time for our policymakers to stop ignoring racial disparities in home mortgages by addressing the barriers that still prevent many borrowers of color from accessing home ownership and accumulating wealth. Eliminating racial disparities in access to homeownership is a key step in reducing the racial wealth gap.

* Author’s note: CAP performed this analysis using information that came from 2014 HMDA data. The analysis focuses on home purchase first-lien loans for one- to four-family, owner-occupied homes. Data are for the United States, excluding Puerto Rico. Following the Federal Reserve‘s practice, applications are placed in one category for race and ethnicity. Applications are designated as “joint” if one applicant is reported as non-Hispanic white and the other is reported as one or more minority races on the same form or if the application is designated as white with one Hispanic applicant and one non-Hispanic applicant. If there are two applicants and if each reports a different minority race, the application is designated as “two or more minority races.” If an applicant reports two races and one is white, that applicant is categorized under the minority race. Otherwise, the applicant is categorized under the first race reported. “Missing” refers to applications in which the race of the applicant(s) has not been reported or is not applicable or in which the application is categorized as white but ethnicity has not been reported.

Denial rates are calculated as the number of denied loan applications divided by the total number of applications, excluding withdrawn applications and application files closed for incompleteness. High-cost loans are defined as those for which a rate spread of 1.5 or higher is reported in HMDA data. Lenders must report the spread, or difference, between the annual percentage rate on a loan and the rate on U.S. Treasury securities of comparable maturity—but only for loans with spreads above designated thresholds. 

Michela Zonta is a Senior Policy Analyst for the Housing Finance and Policy team at the Center for American Progress.