Mortgages Scarce for Minorities, Report Finds

Reuters, April 28, 2011

Funds for refinancing home mortgages were much more available in predominantly white sections of major U.S. cities than in minority areas after the recent housing crash, a study showed on Thursday.

The study’s authors called for more investment by lenders in poor communities and for improved disclosure requirements for mortgage lenders to protect unwary borrowers.

“Paying More for the American Dream V,” found that in the seven metropolitan areas included in the study–Boston, Charlotte, Chicago, Cleveland, Los Angeles, New York City and Rochester, N.Y.–conventional mortgage refinancing in minority communities decreased by an average of 17 percent in 2009 compared with the previous year.

But in predominantly white neighborhoods, mortgage refinancing loans jumped by an average of 129 percent.

{snip}

The study also found lenders “were more than twice as likely” to deny refinancing applications by borrowers in minority communities than in majority white neighborhoods.

Previous reports by the coalition showed that during the recent property boom minority borrowers were more likely to obtain high-risk subprime loans than white Americans, even if their credit was good.

“These findings build on our past reports, which have documented ongoing racial disparities in mortgage lending,” Adam Rust, Director of Research at the Community Reinvestment Association of North Carolina, said in a statement. “Lenders are loosening up credit in predominantly white neighborhoods, while continuing to deprive communities of color of vital refinancing needed to aid in their economic recovery.”

Subprime loans–offered to borrowers with poor credit–and risky products like “stated income,” or “liar loans” where banks did not check borrower’s income, exploded during the housing boom. Irresponsible lending contributed to a housing market crash in 2007 that triggered America’s worst downturn since the Great Depression.

{snip}

A separate study published in the American Sociological Review in October found that predatory lending aimed at predominantly minority neighborhoods led to mass foreclosures and directly contributed to the crash.

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  • Question Diversity

    Previous reports by the coalition showed that during the recent property boom minority borrowers were more likely to obtain high-risk subprime loans than white Americans, even if their credit was good.

    “Even if their credit was good.” Define “good.” Bankers don’t look at general feel-good phrases like “good credit” when deciding to grant a mortgage application, they look at specific credit scores. An 800 is good, and so is a 700. But 800 is more likely to get the loan than a 700. Too, there are factors other than credit scores, that mortgage bankers take into account. Sure, a furniture store might not take a multiplicity of factors into account, but a bank loaning six figures of money for a very long time period for what could be a very risky asset at lower interest rates than what the furniture store charges should do far more due diligence with lending decisions than a furniture store selling you a $1,000 couch for a 2-3 year term at 15% interest.

  • John Engelman

    Discrimination is only illegitimate if it is on the basis of race alone. If it is on the basis of what often correlates with race, it is appropriate.

  • E Pluribus Pluribus

    “…minority borrowers were more likely to obtain high-risk subprime loans than white Americans, even if their credit was good.”

    The key study in generating the lending discrimination myth was be The Boston Fed in 1992. The Boston Fed Study has been debunked by four separate research teams. Timeline:

    1992 – July – A Federal Reserve Bank of Boston study indicates that “even after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area are roughly 60 percent more likely to be turned down than whites.” The study suggests racism is behind the higher loan denial rate.

    1993 – Forbes Magazine queries Boston Fed Senior Vice President and Research Director Alicia H. Munnell on the default rates of black and white mortgage holders in the Boston Fed’s 1992 study purporting to show that racism is behind the higher loan denial rate for blacks. The reporters learn that default rates on loans of whites and minorities are equal. This indicates no discrimination, they point out to Munnell. “[That] is a sophisticated point,” she replies. “You need that [lower default rates for blacks] as a confirming piece of evidence. And we don’t have it.”

    Forbes: Did you ever ask the question that if defaults appear to be more or less the same among blacks and whites, that points to mortgage lenders making rational decisions?

    Munnell: No . . . I do believe that discrimination occurs.

    Forbes: You have no evidence?

    Munnell: I do not have evidence . . . No one has evidence. (1)

    1996 – A study by the Federal Reserve System and academic specialists finds — like the 1993 Forbes investigation — no evidence “of substantial levels of bias in mortgage lending.” Quoting from the abstract of the study:

    “Results of the analysis fail to find evidence of better performance on loans granted to minority borrowers. Indeed, black borrowers are found, all else being equal, to exhibit a higher likelihood of mortgage default than other borrowers. These findings argue against allegations of substantial levels of bias in mortgage lending.”

    1998 – October – Economists Stan L. Liebowitz and Theodore Day investigate the 1992 Boston Fed study suggesting racism in the mortgage market. They are “shocked at the poor quality” of the the data:

    ‘“When we attempted to conduct a statistical analysis removing the impact of . . . obvious data errors, we found that the evidence of discrimination vanished. Without discrimination there would be no reason to try to ‘fix’ the mortgage market. Nevertheless, our work largely evaporated down the memory hole as government regulators got busy putting the results of the Boston Fed study to use in creating policy. That policy, simply put, was to weaken underwriting standards.”

    The two economists warn: Bad loans today will mean dispossessed minorities tomorrow:

    “After the warm and fuzzy glow of ‘flexible underwriting standards’ has worn off, we may discover that they are nothing more than standards that led to bad loans . . . If this is the case, current policy will not have helped its intended beneficiaries if in future years they are dispossessed from their homes due to an inability to make their mortgage payments.” (2)

    1999 – Finance professors at the University of Illinois and at Wichita State University disclose findings on the creditworthiness of minorities consistent with the 1993 Forbes report, the 1996 Federal Reserve study cited earlier, and the 1998 findings of Liebowitz and Day:

    “[E]verything else being the same, minority applicants are probably less creditworthy, on average, than whites. Therefore, in the absence of fair lending laws, it is likely that minorities would be denied loans more frequently than whites and would pay higher interest rates and fees on approved loans . . . [F]air-lending laws have the perverse effect of forcing lenders to cross-subsidize minority borrowers from the higher profits they earn on white borrowers. Such cross-subsidization is inherently ‘unfair’ because it works as a tax on one group that is used as a subsidy for another.”

    NOTES:

    1) “The Hidden Clue,” By Peter Brimelow and Leslie Spencer, VDARE.com, first published in Forbes, Jan 4, 1993.

    2) “Mortgage Lending to Minorities: Where’s the Bias?” by Theodore Day and Stan J. Liebowitz. Economic Inquiry, January 1998): 1–27.

  • Anonymous

    Maybe 6, 8 years ago I was watching a documentary about mortgage defaults. This is before the default crisis really hit home.

    They showed a Black lady in her thirties who got a $180,000 mortgage on an older home. (That’s a problem right there. Older homes require more maintenance.) This lady worked as an office assistant in a smaller city somewhere in Pennsylvania.

    So, I’m thinking, how much could she be making, $25,000? Let’s be generous and say she was making $30,000 which is a stretch. To make a long story short, she lasted 8 months in the home.

    When my husband and I first got married we were approved for a VA loan of $140,000. At the time we were only making combined about $35,000 a year. We had sense enough to buy a home for $90,000 and 20 years later we’re still in it.

    You can’t fix stupid.

  • WR the elder

    #3 said it all.

    The study’s authors called for more investment by lenders in poor communities and for improved disclosure requirements for mortgage lenders to protect unwary borrowers.

    Here we go again. Lower lending standards to fight “racism” and create another giant batch of delinquent mortgages. Did the left learn anything in 2008? Apparently they didn’t. They’d have you believe that the mortgage crisis was entirely the fault of bankers, and that deadbeats who took out loans they should have known they couldn’t afford had nothing to do with it.

  • Tactless Old Pedo

    Banks in this country are in deep manure, in case anyone hasn’t noticed — so they are only going to lend money to people who will pay them back. Yes, banks are part of the cause of the USA’s financial debacle — and they aren’t about to go back to the practice of making stupid loans to people who can’t afford them.

  • Anonymous

    Mortgages may be scarce for minorities but bankruptcies and foreclosures are through the roof. Do you think their might be a connection? If you say “yes” then you might be a raaaaaacist. haha

  • Sardonicus

    What do they mean by minorities? Asians get loans at a higher rate than whites. My late father was a former banker in South Carolina. All bankers care about is making money on their loans. You can be a Martian for all they care–if you have a good credit rating, you get the loan.

  • sbuffalonative

    First they complained about redlining. Then they complained about predatory loans. Now they’re back to complaining about redlining.

    When it comes to blacks, you can’t win or break even. It’s always a lose-lose proposition.

  • Anonymous

    Perhaps minorities had good credit, but didn’t have the down payment. Down payments have increased dramatically in the last few years.

  • Seek

    When it comes to race, bearers of good news often provide an utterly wrong interpretation. I don’t like the researchers, but their information cheers me up notwithstanding. The message: Banks, once again if belatedly, are adhering to sensible standards of risk assessment in mortgage underwriting.

  • WASP

    google

    “In fact, the study showed a higher percentage of African Americans with incomes of $65,000 to $75,000 had bad credit than white Americans with incomes of below $25,000.”

  • Anonymous

    Note the date on this:

    :Critics Attack Study That Looked at Credit of Blacks vs. Whites

    Finance:

    They say the Freddie Mac data paint an unfair picture of minorities. Authors defend their work.

    October 06, 1999 | D’VERA COHN | WASHINGTON POST Freddie Mac study concluding that far more black people have bad credit than white people, even when both have the same incomes, has come under attack in Congress, and some experts have questioned whether it oversimplifies a complex issue.

    The study’s authors defended their conclusions but said they probably should have chosen language other than “bad credit” or “good credit” because they were trying to say whether people had trouble paying their bills.”

    Our public officials were more interested in proving how PC and cosmopolitan they were by loaning money to blacks, than sticking to formulas that make sense. That is the root cause of the sub-prime bust.

  • Morton

    the banks don’t really need the money they make on loans anymore.

    There New Game is fees

    Fees for this Fees for that.

    How is it legal to charge $35.00 when the bank advanced you 1.00 on a 500.00 check where your balance was 1.00 short?

    Isn’t that 3400% INTEREST?

    This $35.00 wouldn’t be charged just once but rather Every Month, isn’t that 4800 % annual interest?

    ($420.00 Interest for a $1.00 advance/loan)

  • Anonymous

    There are a lot of new foreclosed homes out there going for a fraction of what they used to cost. I saw some very nice looking 3 bedroom homes going for only $50,000 and their market value is probably 3 or 4 times that. There were a lot of these listings in Nampa Idaho. I got very interested in them until I checked the demographics for the area and found out they are in heavily hispanic neighborhoods.