Mortgage lending continues to lock out many consumers of color. Troubling lending patterns across the country raise concerns for African-American and Latino borrowers, in particular. These patterns call into question the future of the housing market and the nation's ability to turn the tide of rising wealth inequality and continued residential segregation.
The communities that currently lack access to mortgages are the very same ones that were disproportionately targeted for predatory loans leading up to the foreclosure crisis. Consequently, these consumers lost the most wealth.
A recent analysis of California mortgages by the Center for Responsible Lending revealed a lack of access for many Latinos and African-American consumers. Focusing on first-lien owner-occupied home purchase mortgages from 2012-2014, CRL found a distinct lack of access to conventional mortgage loans.
The dearth of conventional loans made to communities of color result in disproportionate usage of higher-cost and government-insured mortgages, such as those from the Veterans Administration and Federal Housing Administration. Most of these purchased homes are also located in minority census tracts. This pattern occurred even though most of these consumers were higher-income borrowers. Among African-Americans receiving mortgages, 79% had middle or high incomes relative to other households in their areas. Of Latino borrowers, 66% had similar income levels.
African-Americans received just 3% of the loans analyzed in the report and Hispanic borrowers received 22%. In addition, few conventional mortgages were made to either group of minority consumers.
Conventional mortgages are more affordable than FHA or VA loans in part because loans in these programs require insurance premiums to be paid for the life of the loan. This can result in a borrower paying far more than they would have on a conventional loan, with private mortgage insurance, which typically expires when a certain loan-to-value has been reached. Only about one-third of the loans made to African-American and Latino borrowers were conventional, compared to nearly 70% made to white borrowers.
While it would be simple to assume that borrowers to whom FHA and VA loans were offered over conventional simply did not qualify, most conventional loans being delivered are at "the top of the credit box." In other words, there are loans that would qualify under the underwriting standards, but that are not being made. This is puzzling and could be due to steering, or other lender overlays that add underwriting restrictions or costs which constrain the availability of conventional loans.
This trend is all the more distressing because mortgages closed today are much safer than those of the risky past. The Dodd-Frank Wall Street Reform Act includes an Ability-to-Repay requirement for new mortgages that ensures that lenders confirm that a potential borrower can afford the loan. However, restricted access to credit post-crisis has resulted in the very same families and communities which have historically been financially disadvantaged, continuing to experience difficulty finding access today's qualified mortgages.
Earlier research found that borrowers of color have been financially responsible and built wealth through homeownership — when given sustainable loans. An analysis of loans made through the Community Advantage Program, also known as CAP, reveals this truth.
CAP loans — made to borrowers who were largely nonwhite, low-income and had lower-than-average credit scores — had much lower delinquency and default than subprime loans made at the same time. The key differences were underwriting and a safe loan structure with steady payment amounts. All loans were fully underwritten for 30-year fixed-rate interest and devoid of risky features. As a result, borrowers built wealth, despite the housing crisis and had higher net worth as a whole than similarly situated families who remained renters.
Over the coming decade, people of color are expected to represent three-quarters of all household growth, and are the fastest growing segment of potential homebuyers. It is in the best interest of our nation, and our economy, for consumers of color to fully participate in all that our country has to offer.
When done correctly, responsible mortgages help families of all colors build wealth and achieve the American dream.
Sarah Wolff is a senior researcher with the Center for Responsible Lending.