Homeownership has historically been affected by racial, ethnic, and other biases. Even in areas where improvements have been made, recent studies have found that the reduction in racial inequities in housing has generally been “slow, uneven, and fragile.” Some areas have seen little or no improvement. Events such as the 2008 Great Recession and the COVID-19 pandemic have led to declines in homeownership rates for minorities, particularly in Latino and Black communities. Other studies suggest that LGBTQ+ communities also face challenges when it comes to financing.
Despite the existence of laws banning discrimination in the housing market, research shows that racial bias, particularly in the mortgage approval process, continues to perpetuate racial segregation and contribute to racial wealth disparities. In this article, we explore some of the biases that exist in the mortgage lending industry.
Key Takeaways
Homeownership represents approximately 30% of American household wealth, making mortgage lending a very important business. Mortgage approval refers to the actions associated with securing a mortgage. Although active lending discrimination tactics have decreased or ceased, racial bias in the lending process still entrenches segregation and impacts racial wealth disparities. Since the enactment of the Fair Housing Act of 1968, the housing gap between minority and white families has continued to widen, primarily due to the effects of the Great Recession of 2008. Algorithmic lenders do not completely eliminate unacceptable bias as permitted by American law.
Forms of discrimination
For many families, their home is their largest asset and can make up a significant portion of their overall wealth. This is especially true for non-white and Hispanic families, whose homes can account for up to 40% of their overall wealth.
Black families: $57,694, 41.2% of total assets Hispanic families: $69,055, 37.9% of total assets Asian or other families: $218,937, 30.7% of total assets White, non-Hispanic families: $205,145, 22.8% of total assets
Most people cannot afford to buy a home outright, so they must be approved for a loan. This approval process involves a series of steps to obtain a mortgage. The lending industry is key to homeownership and is an industry that is expected to grow. According to Freddie Mac, demand for housing is expected to increase even with the impact of the COVID-19 pandemic. In fact, the agency predicts that home sales will reach 6.9 million in 2022 and 7 million in 2023, while mortgage principal will increase from $2.1 trillion in 2022 to $2.2 trillion the following year.
A comprehensive review of the evidence published by the Urban Institute in 1999 found that minority homeowners in the United States face two main forms of discrimination from mortgage lending institutions.
Disparate treatment: This occurs when qualified minority homeowners are discouraged from taking out a loan, denied a loan, or offered less favorable loan terms because of their race or ethnicity. Disproportionate impact: This form of discrimination occurs when minority loan applicants are disqualified at a higher rate than white loan applicants and cannot be justified as a business necessity, even when it is not immediately clear why the difference exists.
Direct denial of housing is the most blatant form of discrimination in mortgage lending. The prevalence of direct denial is decreasing. Housing disparities between racial groups have also decreased, but they still exist and are an indication of discrimination.
Mortgage Discrimination and Homeownership
The Fair Housing Act prohibits housing discrimination of any kind. This law was enacted in 1968 and prohibited housing discrimination based on race, religion, sex, familial status, disability, and ethnicity. Its purpose was to ensure that everyone has access to housing, whether they are buying or renting.
Despite the law, homeownership rates for Black Americans remain disproportionate compared to white Americans, suggesting that discrimination may be ongoing and impacting minority homeownership rates. According to Alanna McCargo, former vice president of housing finance policy at the Urban Institute, racial and ethnic homeownership disparities are large and continue to grow. “We haven't just failed to make progress, we've gone backwards. And we can't continue to go backwards.”
As of the fourth quarter of 2021, more than 74% of non-Hispanic white Americans own their home, compared with 43.1% of Black Americans and 57.6% of all other races, including Asian Americans, Native Hawaiians and Pacific Islanders, according to the St. Louis Fed.
Black and Hispanic consumers bought homes at the peak of the housing bubble and were more likely than white and Asian Americans to be offered subprime loans even if they qualified for prime loans, McCargo said, and they also recovered at a slower rate than white Americans.
McCargo gave testimony in 2019 in which he said racial and homeownership disparities in the United States are “worse than the disparities that existed when private race-based discrimination was legal.”
Unequal Rejection Rates and Quarantine
A 2020 meta-study from Northwestern University reported that racial discrimination in mortgage lending persists. While most forms of discrimination in the housing market have decreased or ceased (including the most extreme forms, such as lying about the availability of advertised housing units), the study authors said that Black and Hispanic borrowers still face disproportionately high levels of denials.
Research shows that while racial disparities in loan denials have declined slightly between the 1970s and 2020, disparities in mortgage costs for Black, Hispanic, and Asian Americans remain. This discrimination perpetuates racial segregation by relegating less favorable people to neighborhoods made up of residents of similar racial backgrounds. This only makes it harder for Black people to actually build wealth, exacerbating the racial wealth gap.
Other studies support this finding, with a 2019 LendingTree report showing racial disparities in loan denial rates, with Black borrowers having the highest denial rate at 17.4% and non-Hispanic white borrowers having the lowest denial rate at 7.9%, according to the report.
LGBTQ+ couples also face discrimination in the mortgage industry: They are 73% more likely to be denied loans than heterosexual couples making similar applications, and they are also more likely to face higher fees and interest rates.
Historical discrimination and the law
Historically, the mortgage approval process in the United States has been shaped by discrimination, and some experts believe housing disparities are a lingering legacy of historical inequalities.
The Federal Housing Administration encouraged homeownership for the white middle class in the 20th century, but practices such as redlining and restrictive covenants denied minority groups access to federally subsidized housing and mortgage insurance.
As mentioned above, the Fair Housing Act made housing discrimination based on race, ethnicity, and other factors illegal. The Fair Housing Act, which followed the Civil Rights Act of 1964, was signed shortly after the assassination of Martin Luther King Jr., who had joined the fight for fair housing at the Open Housing Demonstration in Chicago in 1966. According to some, the main purpose of the Fair Housing Act was to “curb discrimination in the housing sector.”
The Equal Credit Opportunity Act of 1974 expanded protections to include interactions with places that regularly grant credit, including banks and other institutions that provide mortgage loans. It makes it illegal to discriminate because of race, color, religion, national origin, sex, marital status, age, or access to public assistance.
Housing discrimination is illegal. If you believe you have been discriminated against on the basis of race, religion, sex, marital status, access to public assistance, national origin, disability, or age, there are steps you can take. One of these is to file a report with the Consumer Financial Protection Bureau or the Department of Housing and Urban Development.
Housing Discrimination in the Digital Age
The rise of digital applications has swept across the financial industry, increasing consumer demand for access to financial services and changing the way financial institutions do business. Digital mortgage platforms have made it easier to apply for and be approved for a mortgage, but discrimination can remain.
A study from the University of California, Berkeley found that financial technology does not completely eliminate bias. Studies have shown that many algorithmic lenders are non-discriminatory in their loan denial rates. However, while they reduce disparities in denial rates, they do not eliminate “unacceptable discrimination,” because they may profile consumers for their poor purchasing behavior or for operating in less competitive environments. They charged comparable Latino and Black borrowers $765 million more per year in mortgage refinancing.
A study conducted by The Markup highlighted that in 2019, lenders were increasingly turning down mortgage applications from people of color compared to white applicants with the same financial background. Overall, minority borrowers were 40% to 80% more likely to be denied a mortgage compared to white consumers, even when algorithms were at work. The report also highlighted that costs associated with mortgage applications, which are often non-refundable, are another blow to those who are not approved.
Which law prohibited discrimination in housing?
The Fair Housing Act was passed in 1968 and makes it illegal to discriminate against people looking for housing on the basis of race, religion, national origin, sex, ability, or family status. FHA regulations include discrimination in the buying, selling, renting, and financing of housing, regardless of the type of housing.
What are the warning signs that a lender may have discriminated against me?
You may have been discriminated against if you were denied a mortgage despite qualifying for it, or if a lender tried to discourage you from applying or gave you a loan on unfavorable terms. You may also have been discriminated against if a lender closed your account without a valid reason.
How do I file a discrimination complaint against a mortgage lender?
If you believe you have been discriminated against in any way by a mortgage lender, you can file a complaint with the Consumer Financial Protection Bureau. You can file a complaint online or by calling the bureau directly at 1-855-411-CFPB (2372). Some state governments also protect their residents from other forms of discrimination, so be sure to check the appropriate websites for more information.
Conclusion
Homeownership accounts for 40% of the typical American household's wealth, meaning the mortgage approval process can be a major hurdle on the path to wealth and stability.
McCargo's testimony highlighted several changes he said would improve the situation. His proposals included promoting a fair housing finance system that takes into account the fact that members of minority groups are more likely to lack credit history, expanding access to credit, updating the credit scoring system, and modernizing the FHA. McCargo also suggested improving down payment assistance programs, creating a “robust small mortgage market,” and providing outreach and counseling to renters and millennials who are ready to buy a home. © Dotdash Media. All rights reserved. Used with permission.