The sixth annual report in the Paying More for the American Dream series was recently released, and the data show signs of inequities in mortgage lending, with minorities receiving government-backed Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans significantly more often than their white counterparts.
The report, which includes data from seven metropolitan areas (Boston, Charlotte, Chicago, Cleveland, Los Angeles, New York City, and Rochester), shows disparities in the provision of conventional, prime mortgages to African American and Latino borrowers and communities of color, indicating that banks and other mortgage lenders continue to engage in redlining.
Some key findings include the following:
- In the seven cities combined, FHA and VA loans accounted for 74.5% of all home purchase loans made to African Americans, 66.3% of loans made to Latino borrowers, and 35.9% of loans made to white borrowers.
- FHA and VA loans accounted for three out of every four home loans made to black borrowers, and two out of every three loans made to Latino borrowers, compared to one out of every three made to white borrowers.
- Two out of every three home loans made in neighborhoods of color were FHA or VA loans.
As we have previously reported, America’s racial wealth gap has continued to increase, and the recession has only made matters worse. In less than a generation (from 1984 to 2007), the racial wealth gap has more than quadrupled, mostly as a result of rising white wealth. In terms of household net worth, for every dollar owned by a white household, Latinos own twelve cents and African American families own only ten cents. In fact, the median net wealth of white households is 20 times that of black households and 18 times that of Hispanic households. These lopsided wealth ratios are the largest since the government began publishing this data a quarter century ago and roughly twice the size of the ratios that prevailed among these groups prior to the Great Recession.
As a recent Pew research study explained, decreasing home values were the main cause for the decline of household wealth among minorities, hitting Hispanic and black families the hardest. The Pew study also showed that, due to the foreclosure crisis, homeownership rates are highest for whites and lowest for blacks; in between are Hispanics, who experienced the greatest decline in the homeownership rate, from 51% to 2005 to 47% in 2009.
During the housing boom, there seemed to be loans for anyone who wanted them, but for some these loans came at a high cost. Since the recession, the availability of loans, especially conventional loans, seems to have waned. FHA and VA loans have helped to fill the void. Yet, while FHA and VA loans are valuable resources since they require smaller down payments and borrowers can qualify with lower credit, they are typically more expensive than conventional loans, can take longer to get approved, and take longer to pay off. Thus, it is essential that conventional loans also be available to those who qualify, and regulators must require lenders to affirmatively market and make available such mortgages in minority neighborhoods. Without such obligations it is likely that this two-tiered lending market will continue.
In order to restore fairness in the mortgage lending markets and prevent discrimination, changes need to be made and stricter protections need to be set in place and enforced. Financial Institutions need to step up and make more loans available to people of color. The Community Reinvestment Act (CRA) gives credit to banks that invest and provide services in low- and moderate-income communities. The CRA is long overdue for reform. Among the reforms that should be implemented is a requirement that financial institutions must document not only the incomes of loan applicants, but also their race and ethnicity and that of the neighborhoods as well.
As the country struggles with financial stability and sustaining economic growth, the financial well being of its citizens is key. Helping families reclaim their lost housing equity and continuing to provide access to affordable lending to finance the American Dream of homeownership are important to the nation’s financial recovery.
This blog post was coauthored by Alison Terkel.