Racial Discrimination in Mortgage Lending Has Declined Sharply in America

“Atlanta’s black neighbourhoods are under attack.” So wrote the editors of the Atlanta Journal-Constitution in May of 1988 upon the release of “The Colour of Money”, a series of articles documenting racial disparities in mortgage lending in Georgia’s most populous city. {snip}

Much has changed in the 35 years since “The Colour of Money”, and yet racial disparities in mortgage lending remain. Data reported under the Home Mortgage Disclosure Act (hmda) show that 15% of black applicants were denied conventional mortgage loans in 2021, compared with just 6% of white applicants, a ratio of more than two-to-one. Black homeowners seeking to refinance their existing loans were rejected 24% of the time, compared with 12% of the time for whites. Some lenders have been singled out. {snip}

To many Americans, such wide discrepancies in lending are proof of discrimination. A survey conducted in 2020 by the Pew Research Centre, a think-tank, found that 49% of American adults—and 86% of African-Americans—believe that black people are treated less fairly than white people when applying for a mortgage. But bankers have long argued that imbalances in mortgage approval rates reflect underlying differences in creditworthiness, not racial bias. Indeed African-Americans fare significantly worse than whites on several key lending criteria. Credit scores of black borrowers, for example, are about 8% lower than those of white borrowers. Their debt-to-income levels, meanwhile, are about 10% higher. Black borrowers have much higher loan delinquency rates, too.

For decades the conventional wisdom was that both economic factors and discrimination played a role in lending patterns. {snip}

But new research by economists at the Federal Reserve Board suggests that such discrimination is less widespread than it was 30 years ago.* Using a dataset of nearly 9m loan applications submitted in 2018 and 2019, the authors found that 17% of black applicants were turned down, compared with 8% of white applicants. But after controlling for the results of automated underwriting systems, which reflect the underwriting guidelines of government-sponsored entities like Fannie Mae and Freddie Mac, and cannot take race into account, this gap was cut in half. After other relevant risk characteristics such as credit scores were controlled for, this figure fell to less than two points—a result that the authors describe as “significant progress”.

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