Editor’s note: The opinions expressed here are those of the authors. View more opinion on ScoonTV.
In the wake of Bank of America introducing the “Community Affordable Loan Solution,” many people will have to reevaluate their opinion of the mortgage industry… or will they?
The mortgage lending industry discriminates against minorities. Major metro area neighborhoods are still segregated due to redlining discrimination. These are just some of the many mainstream media descriptors for the housing situation facing black and Hispanic Americans. Every year, notable news agencies produce articles recounting the racist practices of the credit industry. A cursory open-source search reveals that countless agencies have regurgitated similar buzzwordy articles over the years. Here are a few headlines: CNBC, “A troubling tale of a Black man trying to refinance his mortgage”; FiveThirtyEight, “The Lasting Legacy of Redlining”; and ABC News, “After a half-century of federal oversight, segregated neighborhoods are still pervasive.”
Most retell the history of redlining, the practice carried out from the 1930s to 1968 that denied federally backed mortgages to blacks. That limited their ability to move into predominantly white neighborhoods and limited whites’ ability to plan housing developments near black neighborhoods. Some articles include the phrase “structural racism.” I think its cousin is the omnipresent “systemic racism.”
Most researchers broadly define structural racism as permeating systems of education, housing, employment, health care, and criminal justice that negatively impact resource distribution and access to opportunity. So, it functions just like how Obi-wan Kenobi explained the Force to Luke Skywalker: “It’s an energy field created by all living things. It surrounds us and penetrates us. It binds the galaxy together.” You can’t stop systemic (interchangeable with systematic) racism; you can only hope to contain it.
The Fair Housing Act of 1968 hoped to end the discriminatory practices and lessen the dramatic impact that redlining had on black homeownership. Has redlining had lingering effects? Yes. Does that mean the current housing industry is somehow filled with discrimination? That answer requires further examination.
From what I have been able to decipher, most if not all the articles failed to address the factors that contribute to home loan approval or how to navigate the waters to home ownership. In the dozens of articles keeping black Americans in a state of cognitive despair as it relates to mortgage approval, many successful stories go untold. Why is that? (I’m not talking about the millionaire athlete or rapper; I’m referring to the everyday American – yes, black Americans who have completed the daunting process of finding a house, getting loan approval, making an offer, and closing the deal.) Easy. It’s simpler to feed people the narrative of a mortgage bogeyman than to explain the difficult process of getting a mortgage loan approved.
Let’s examine a few points typically uncovered by media sources when it comes to credit approval and mortgage discrimination. I’ll add a caveat to the proceeding commentary by stating that most of the articles detailing the plight of black Americans in the lending market are isolated or anecdotal examples and represent a person’s perception of lending racism.
Let’s establish a baseline regarding factors that affect credit scores and mortgage loans. This information was gathered mostly from Investopedia and Quicken Loans, one of the top mortgage companies in America. Things that factor into your credit score include, most importantly, your payment history, as well as the amount owed, the length of your credit history, the number of recently opened credit accounts, and, lastly, the diversity of your credit portfolio.
The factors that don’t affect your credit score, as legislated by the 1974 Equal Credit Opportunity Act (ECOA), are race, color, religion, and national origin. Other non-factors include receipt of government assistance, age, location, and marital status. The underwriting industry encompasses a review of the credit score and includes additional risk evaluation, such as debt-to-income ratio, loan to value, employment status, unusual bank activity, the property itself, mortgage payment history, and home appraisal value.
One of the interesting facts about FICO scores is that, although age doesn’t affect the score, average scores tend to increase with age. For example, the average 25-year-old has a score in the 660s while a 55-year-old has a score in the 700s.
Further arousing my curiosity was the average credit scores of homebuyers by race. According to data provided by the Consumer Financial Protection Bureau, the median credit score for black buyers in 2021 was 691. The score increased to 716 for Hispanics, 750 for whites, and 764 for Asians. Median loan amounts for home purchases were relative: $221K for black borrowers, $243K for Hispanic borrowers, $232K for white borrowers, and $355K for Asian borrowers.
In the tale of the tape from the National Association of Realtors (NAR), Asians are hands-down winning the application competition. Asians have higher median incomes, lower rates of mortgage loan application rejections, and greater rates of married couple household compositions. They’re also typically younger when seeking a home.
Now that the baseline has been established, let’s examine why some groups have greater loan application rejection rates. When it comes to developing a pathway to homeownership, financial decision-making is key. Missing payments on credit cards or car loans, being late on rent, and carrying huge student loan debt are some of the most common financial denominators for horrid credit scores. The black and Hispanic credit score disparity compared to whites is described as implicit bias rather than life and money mismanagement.
The U.S. Department of Housing and Urban Development identified barriers to homeownership for minorities: lack of capital for the down payment and closing costs; poor credit history and lack of access to credit; lack of understanding and information about the homebuying process, including a language barrier; regulatory burdens imposed on the production of housing; and continued housing discrimination. I was hesitant to include the final barrier, continued housing discrimination, because it is the least quantifiable of all barriers. Luckily, the National Fair Housing Alliance, a Washington, D.C.-based non-profit, came to the rescue.
In 2020, 28,712 fair housing complaints were reported to various private, non-profit, and government agencies. The reporting numbers are approximate to those of the previous decade. Surprisingly, of the 28,712 discrimination complaints, only 3.43% (985) were related to home sales and lending. Although a disproportionate percentage involved alleged rental discrimination (72.65%), it’s hard to believe that such a small percentage represented the lending and homeowner discrimination, given the expansive news coverage on the subject.
Regardless of the limited reporting on discrimination, financial barriers persist. Bank of America (BoA) has extended an olive branch with a minority loan program. In late August, the Charlotte, NC-headquartered bank released a zero-down payment and zero-closing cost (funds needed to close a real estate purchase) mortgage solution for first-time homebuyers. It will be available in black or Hispanic neighborhoods located in Charlotte, NC, Dallas, TX, Detroit, MI, Los Angeles, CA, and Miami, FL.
BoA’s program isn’t an independent idea. In February 2022, eight federal or federally backed agencies outlined a special purpose credit program under the ECOA. Thanks to the feds, lenders are allowed to ignore credit scores and take into consideration the timeliness of payments made toward day-to-day life expenses (utilities, phone, rent, etc.) and extend credit to underserved communities in the form of affordable loans.
In March, TD Bank piloted a similar program with the goal of increasing homeownership opportunities in majority-minority communities. In 2021, JP Morgan Chase announced an expansion of its closing cost grant, designed to close the homeownership gap. At first glance, these programs seem to be a boon for minority first-time homebuyers, but this seems eerily reminiscent of the 2008 subprime mortgage fiasco.
In a nutshell, the 2008 housing crisis was caused by predatory private mortgage lenders that targeted poor people, then sold adjustable-rate mortgages, inflated fees, and high-interest rates for real estate that didn’t appreciate fast enough to be refinanced. Ultimately, buyers incurred late fees, missed payments, and eventually faced foreclosure.
The housing crisis has also been attributed to the widening wealth gap. In the words of P.T. Barnum (or at least these words have been ascribed to him), “There’s a sucker born every minute.” Unfortunately, mortgage lenders believe it. The banking industry’s sole purpose for being is to create profit for the investors. Black, brown, or white sucker, every member of the uneducated masses is susceptible and that’s what happened in 2008.
The question is, will the cycle continue under the guise of the special purpose credit program? Financial institutions have disclosed little about the 30-year fixed-rate annual percentage rate (hovering around 6.5%) monthly payments. What if the buyer wants to move, or the home goes into foreclosure? Given the program’s design, the result may be fertile ground for individuals being house poor, too broke to afford house payments and life necessities.
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