Race Economics And Mortgage Lending
“Buying a home is easier if you’re white” reported CNN yesterday based on the findings of a research report put together by Zillow with a forward by the National Urban League. The report, which was much more measured in its conclusions than some of the news headlines it generated, makes these headline grabbing assertions in its executive summary:
–Fewer minorities apply for conventional mortgages. Although Hispanics and Blacks make up 17 percent and 12 percent of the U.S. population, respectively, they represented only 5 percent and 3 percent of the conventional Mortgage application pool.
-Blacks experience the highest loan application denial rates. 1 in 4 blacks willbe denied their conventional loan application, as opposed to 1 in 10 whites.
-Wide disparities in homeownership rates among ethnic groups persist.73.9 percent of whites own a home, whereas 60.9 percent of Asians, 50.9percent of Hispanics and 46.5 percent of blacks own.
-The rise and subsequent fall of home values in the U.S. housing bubble disproportionately affected black and Hispanic homeowners, measured by indexed home values between the peak of the market and the bottom, or“trough.”
Look beyond the bullet points and a more nuanced picture emerges. Economics not race is what really determines how difficult it is to buy a home For instance, while not precluding the possibility that stark differences in homeownership may be a reflection of racial bias the report notes that on average White Americans, earn $62,000 thousand per household. In comparison, black American households earn $39.000 thousand and Hispanics $43,000. As the report notes “lower incomes mean a greater share of earnings goes towards living expenses and less towards savings. It is then unsurprising that blacks and Hispanics are less likely to have the savings needed to apply for a mortgage to make a home purchase,”
The report notes that racial disparities are less pronounce among applicants for FHA loans since these applicants tend to have fewer savings irrespective of race.
What troubles me so much about the headlines reports such as these generate is that they lend themselves to quick conclusions and simple solutions to complicated problems If you want to believe that lenders are a cabal of racists conspiring to deny homeownership to people based on how they look than you can get on with your day; these statistics speak for themselves.
But the truth behind these numbers is much more complicated. To suggest that racial animus is at the core of our housing disparity is to overlook the legal, moral and operational changes that lending has undergone in the last 50 years. Intentional housing discrimination is illegal and lawsuits are rightly brought when discrimination is uncovered; socially we live in a much more tolerant society than we used to. Technologically the vast majority of lending decisions are made by computers based on mathematical formulas where race can’t be used as a factor.
None of this is to suggest that we live in a colorblind world free of racism: We never have and unfortunately never will. What I’m suggesting is the problems with lending disparities underscored by this report reflect societal complexities that go well beyond underwriting practices and standards. In the last 50 years a lot has been done to reform lending for the better. It is time to acknowledge these improvements and grapple with the complicated economic and social issues that will make this country even better 50 years from now.
I have complained in this blog that the Government subsidized secondary housing market sets up a seller beware system. Under this system the terms that banks and credit unions must abide by strict underwriting terms when they sell a mortgage to a GSE or get it insured by the FHA and have been forced to buyback mortgages that may have performed just fine for years before the Great Recession. Once a mortgage goes into foreclosure a GSE can scrub a loan file and force a lender to repurchase a loan based on small mistakes in the underwriting process that bear no relationship to why a mortgage went into foreclosure. The lender has to put a loan back on its books. Is there any wonder why financial institutions are gun-shy about selling their mortgages?
I have good news this morning. The WSJ is reporting that the FHA is considering loosening its own standards so that “banks continue to be liable for high damages on significant underwriting errors but not for smaller mistakes that wouldn’t have affected the decision to extend the loans.” Here is a link to the article: