Bias in the mortgage approval process
The mortgage approval process refers to the steps involved in obtaining a mortgage. Estimates indicate that nearly two-thirds of a typical American household’s wealth comes from homeownership, which makes it crucial for prosperity. Credit is at the heart of homeownership in the United States, and the market is expected to grow. Fannie Mae, the government-sponsored entity that guarantees mortgages in a secondary mortgage market, estimates that home sales and purchase mortgage origination will increase by 6.2% and 14.5% respectively in 2021.
Historically, homeownership has been influenced by racial, ethnic and other prejudices. Even in areas where it has improved, recent studies have called reducing racial inequalities in housing “slow, uneven and fragile.” In some places, however, there has been little to no improvement. Recent phenomena such as the Great Recession of 2008 and the COVID-19 epidemic have also lowered homeownership rates for minorities, especially for Latinx and Black communities. Other studies have suggested that LGBTQ + communities also face marked inequalities in access to housing finance.
Key points to remember
- The mortgage loan approval process refers to the actions involved in obtaining a mortgage.
- Recent studies have suggested that although the most aggressive forms of housing approval discrimination have diminished or ceased, racial biases, especially in the mortgage approval process, continue to anchor racial segregation. and influence the racial wealth gap.
- Since the passage of the Fair Housing Act of 1968, the housing gap between minorities and white families has actually widened, mainly as a result of the Great Recession of 2008.
- A study of consumer lending in the traditional and financial technology markets found that algorithmic lenders did not fully eliminate “objectionable” biases as considered by US law.
Over the past four decades, the most blatant forms of discrimination, such as “direct denials” of housing availability, have diminished. Housing inequalities between whites, blacks and Hispanics have also declined, but the continued existence of inequalities indicates discrimination, the researchers said.
Notably, despite the existence of laws prohibiting discrimination in the housing market, recent studies have suggested that racial prejudice, especially in the mortgage approval process, continues to entrench racial segregation and influence the racial wealth gap.
Forms of discrimination
A comprehensive review of the evidence released by the Urban Institute in 1999 found that minority homeowners in the United States had experienced discrimination from mortgage lending institutions, which took two main forms. The first is ‘differential treatment’, which occurs when qualified minority homeowners are discouraged from taking out a loan, are denied a loan, or are offered unfavorable loan terms because of their race or ethnicity. . The second is “the disparate impact,” which is present when minority loan seekers are disqualified at a higher rate than whites in a way that cannot be justified as a business necessity, even when the reasons why this difference exists is not immediately evident.
Mortgage discrimination and home ownership
Since the passage of the Fair Housing Act of 1968, which prohibits discrimination in housing based on race or ethnicity, the difference in homeownership rates between whites and blacks has grown. increased fact.
A 2019 report by Alanna McCargo, then vice president of housing finance policy at the Urban Institute, put it bluntly. “A significant racial and ethnic ownership gap persists in our country,” McCargo said. “These gaps are significant in every way, and they are worse than the gaps that existed when private race discrimination was legal. We haven’t just failed to make progress; we are losing ground. And we cannot continue to back down.
Former vice president of housing finance policy at the Urban Institute, Alanna McCargo, published a testimonial in 2019 that described the racial and property gaps in the United States as “worse than the gaps that existed when the private discrimination based on race was legal ”.
In 2017, U.S. Census data revealed gaps in homeownership among the racial and ethnic categories tracked. While Whites had a 72% homeownership rate, Blacks were only 42%, Hispanics at 47%, and Asian Americans and Pacific Islanders combined had about 57. %.
Black and Hispanic communities in particular had bought homes during the height of the bubble and were more likely to be offered subprime loans than whites and Asian Americans, even when they qualified for the best. according to McCargo. Their recovery rates had also been slower than those of whites, she reported.
Disparate rejection rates and segregation
A 2020 Northwestern University meta-study reported that racial discrimination persisted in mortgages. While most forms of discrimination in the housing market have diminished or ceased, including the more extreme forms, such as lying about the availability of advertised housing, the study authors said that black borrowers and Hispanics still face disproportionate levels of rejection.
From the 1970s to the 2020s, the Northwestern study noted, the data showed that racial differences in loan refusals declined only slightly, while racial differences in the cost of mortgages did not fall at all. decreased for blacks, Hispanics and Asians. Lincoln Quillian, the sociology professor who led the study, commented that these forms of discrimination reinforce racial segregation by pushing those with low preferences to neighborhoods where their own race predominates, which feeds the wealth gap. racial by making it more difficult for blacks to build wealth. .
Other studies seemed to corroborate and extend this finding. A 2019 LendingTree report, for example, also indicated racial differences in loan denial rates. According to this report, black borrowers have the highest refusal rates, at 17.4%, and non-Hispanic whites have the lowest, at 7.9%.
LGBTQ + rejection rate
A 2019 study found that LGTBQ + couples faced 73% higher loan refusal rates than heterosexual couples with similar requests. They were also more likely to be charged fees and higher interest rates.
Historical discrimination and laws
In the history of the United States, discrimination has shaped the mortgage approval process. Some have called current housing inequalities the lingering hangover of historic inequalities.
In the 20th century, the Federal Housing Authority (FHA) encouraged the home ownership of the white middle class. However, the practices he used, including redlining and restrictive covenants, denied minorities access to federally subsidized housing and mortgage insurance.
In 1968, during Lyndon B. Johnson’s presidency, the United States enacted the Fair Housing Act, which makes it illegal to discriminate in housing based on race or ethnicity. Following the Civil Rights Act of 1964, the Fair Housing Act was signed in the days immediately following the assassination of Martin Luther King Jr., who had joined the fight for fair housing during the open marches for the 1966 accommodation in Chicago. According to some summaries, the main objective of the Fair Housing Act was to “reduce discrimination in the housing sector”.
The Equal Credit Opportunity Act of 1974 extended protections to interactions with institutions that regularly extend credit, including banks and other institutions that offer home loans. It makes it illegal to discriminate on the basis of race, color, religion, national origin, sex, marital status, age or public support.
The emergence of digital mortgage platforms, which automate the loan approval application process, has also raised the question, in the New York Times and elsewhere in the popular press, whether they reduce discrimination.
A recent study by the University of California at Berkeley on consumer lending in traditional and financial technology markets found that fintech does not completely eliminate bias. While algorithmic lenders reduce disparities in rates and many do not discriminate in loan refusal rates, they have not eliminated “ineligible discrimination” because they can profile consumers for poor buying behavior. and operate in weaker competitive environments. They charged Latinx and otherwise equivalent black borrowers an additional $ 765 million per year for mortgage refinancing, the study found.
The bottom line
In the United States, homeownership accounts for up to two-thirds of a typical household’s wealth. The mortgage approval process is therefore a major potential stumbling block on the road to wealth and stability.
McCargo’s testimony highlighted several changes that she said would improve the situation. Its recommendations included promoting an equitable housing finance system that is sensitive to the fact that minorities are more likely to have no credit history, as well as expanding access to credit, upgrading updated credit scoring systems and modernization of the FHA. McCargo also suggested improving down payment assistance programs, creating a “robust low dollar mortgage market,” as well as educating and counseling tenants and ready-made millennials, among others. proposals.