By Kenneth J. Cooper
WASHINGTON, DC -Since the housing market collapsed, mortgage lending to African-Americans and Hispanics has plunged precipitously—by more than 60 percent, according to a new study of loan information that banks submit to the federal government.
Together, African-Americans and Hispanics were able to borrow 62 percent less to buy or refinance homes in 2009 than in 2004, before the market crashed, the computerized analysis finds. With lenders imposing tighter credit standards, mortgage dollars going to non-Hispanic white borrowers also declined, though by considerably less, 17 percent. Asians fared best, obtaining nearly an equal amount in mortgages.
The study, to be released this week, was conducted by Maurice Jourdain-Earl, founder and managing director of ComplianceTech in Arlington, Va., which advises financial institutions on fair lending practices. The study also found wide racial-ethnic disparities in how often financial institutions approved mortgage applications and made mortgage loans during the six-year period.
Whites were about twice as likely as African-Americans and Hispanics to be approved for prime mortgages with the lowest interest rates, while members of the two largest minority groups were two to four times more likely to receive subprime loans, which have higher rates. By contrast, the disparities were much narrower for loans insured by the government’s Federal Housing Administration, which has attracted a growing number of borrowers during the credit crunch.
The study concluded that a “dual mortgage market” has emerged, with white and Asian borrowers having better access to lower-cost mortgages than African-Americans and Hispanics, who on average pay more to own or refinance a home—if they can obtain a mortgage.
“The higher cost for mortgage credit translates into less money for basic necessities,” Jourdain-Earl writes. “The higher cost for mortgage credit also translates into African Americans and Latinos having lower homeownership rates and lower opportunities to build wealth, lower educational achievement and higher unemployment.”
Reasons for the lending disparities are not directly reflected in the national data, which do not include credit scores of borrowers or ratios of loan amounts to values of homes. Nor does the Federal Reserve Bank collect information on foreclosures by race and ethnicity.
Jourdain-Earl blames a cycle of higher cost loans being made to minorities for leading to higher levels of defaults and foreclosures, ultimately causing “greater disparities in access to credit.” He raises the possibility of an unknown degree of discrimination, noting an “erroneous notion” that minorities caused the housing market’s collapse, despite the relatively low amount in mortgages they received, compared with those for white borrowers.
The Mortgage Bankers Association declined to comment on the report because, spokeswoman Melissa Key says in an e-mail, “The author does not control for any of the factors that could lead to rate or approval differences across borrowers.”
Barry Zigas, director of housing policy for the Consumer Federation of American, agrees with Jourdain-Earl that a dual market exists. Zigas says it is unclear whether the causes have to do with lower credit scores of African-Americans and Latinos, private investors being reluctant to buy mortgages made in minority communities or the disproportionate subprime loans representing an “unsustainable volume” of borrowing.
“Since the meltdown, there is no question that credit has constricted across the board,” Zigas says. “It’s even more difficult for minorities and low-income people.”
The report, entitled “The Foreclosure Crisis and Racial Disparities in Access to Mortgage Credit 2004-2009,” illustrates disparities by race and ethnicity. The study uses data banks submitted to the Federal Reserve under the Home Mortgage Disclosure Act and analyzes racial-ethnic patterns in prime, subprime and FHA loans, which together constitute the vast majority of the market.
Mortgages made to Hispanics have decreased the most, by 63 percent, to $78 million in 2009 from $214 million in 2004. Lending to African Americans has dropped to $49 million from $122 million, or 60 percent.
Whites have been affected much less and Asians barely. New mortgages to white borrowers declined to $1.1 billion from $1.3 billion, or 17 percent. Lending to Asians stayed almost the same at about $128 million, with the difference being equivalent to one modest mortgage.
“Analyzing the issue of access to mortgage credit by race is significant because of the central role homeownership plays in building personal wealth,” Rep. Maxine Waters (Calif.), ranking Democrat on the House subcommittee on capital markets and government sponsored enterprises, says of the report in an e-mail. “As a 2010 study from Brandeis University illustrates, for example, the wealth gap between African-Americans and whites is only growing larger, having quadrupled over the course of the last 23 years.”
The financial stresses that accompanied the recession meant many Americans from all racial-ethnic groups did not apply for mortgages. When they did, applications by African-Americans and Hispanics for the best loans were approved or, in bankers’ language, “originated” much less often. On average, whites were twice as likely as blacks to obtain prime loans, and one-and-a-half times more likely as Hispanics. Almost no disparity existed between whites and Asians.
The disparities extended even to subprime loans which, despite concentrations in minority neighborhoods, went mostly to white borrowers. During the six-year period, whites received more than 60 percent of these high-cost loans, which are most likely to lead to defaults and foreclosures.
But disproportionate numbers of subprime loans did go to minorities. African-Americans were three-and-a-half times more likely to have one as whites, and Hispanics about twice as likely. By 2009, even the subprime market had dried up for the two minority groups, with lending to African-Americans since 2004 down by 95 percent and to Hispanics by 92 percent, compared with 87 percent for Asians and 81 percent for whites.
Jourdain-Earl concedes that the big drops in subprime loans to the largest minorities could be interpreted as a positive development, but he adds in an interview: “At this point, African-Americans and Latinos are not even able to get high-cost subprime loans.”
The lending field was more level for mortgage loans backed by the Federal Housing Administration, which spokesman Brian Sullivan says has seen its share of the mortgage market jump from 3 percent to 30 percent since 2006. Compared with those for whites, loan approval rates were 19 percent lower for African-Americans, 13 percent for Hispanics and 9 percent for Asians.
On the other hand, the report found that the rapid growth has changed the racial composition of FHA-backed borrowers, with the higher percentages going to whites and Asians, and lower percentages to African-Americans and Hispanics. Jourdain-Earl questions whether FHA was acting in accord with its affordable housing goals.
Sullivan says the shifting racial balance of FHA borrowers merely reflected that whites predominate in the mortgage market and have turned to the agency in increasing numbers.
“That’s not because of any application of unfair lending practices, he says, speaking generally. “It was a consequence of what was happening in the marketplace.”
Sullivan notes, though, that the U.S. Department of Housing and Urban Development is investigating 22 lenders to determine whether their imposition of higher credit standards than FHA’s minimums has had a discriminatory impact on African-Americans and Hispanics.
Chris Herbert, research director of the Joint Center for Housing Studies at Harvard University, says the report has limitations in explaining why minorities fare less well in the housing market, a trend he acknowledges.
For instance, he says focusing only on first mortgages and comparing borrowers in the same income levels would provide a sharper picture of home-buying trends in particular, since African-Americans and Hispanics, on average, earn less than whites.
Academics at Harvard’s housing center and elsewhere are examining whether current credit standards are unduly restrictive and not justified by the economic situation.
In response to criticism from Herbert and the Mortgage Bankers Association, Jourdain-Earl says his focus was the flow of credit to different racial-ethnic groups, not the reasons behind the disparities.
“I wasn’t trying to ascertain the why but to shine a bright light on the outcome and the effects on wealth and homeownership rates,” he says.
In the study, Jourdain-Earl urges the FHA to study “the potential of adverse effects” from its credit standards and proposed that federal laws should require lenders to report on foreclosures, defaults, short sales and loan modifications, including the race and other demographics of those borrowers.
He also calls for implementing financial reform legislation enacted last year “in a way that promotes sustainable diverse lending.”