Little progress on lending discrimination
Historical patterns bode ill for some applicants
Getting a fair shot at becoming a homeowner depends on your race. If you’re white or Asian, you have a fair shot. For every other race, “mortgage fairness” is already low and could be sinking further. That’s according to an analysis of 350 million mortgage applications from 1990 to 2021. “We’re in the middle of a mortgage fairness crisis today,” FairPlay CEO/founder Kareem Saleh says.
You have a fair shot at getting a mortgage – if you’re white or Asian. For every other race, “mortgage fairness,” which is already at low levels, could be sinking further.
That’s according to an analysis of 350 million mortgage applications from 1990 to 2021 through the Home Mortgage Disclosure Act. The data shows that fairness for Black and Native American mortgage applicants may plunge to “almost housing crisis levels,” if historical patterns mirror what happened when interest rates surge, according to an analysis by fintech company FairPlay AI, shared exclusively with USA TODAY.
Another reason it’s about to get worse: The stimulus money and forbearance programs that boosted creditworthiness – and a fairer shot at approval – for Black homebuyers in 2021, have dried up.
Long considered the economic
“We’re in the middle of a mortgage fairness crisis today. It’s not going to show up for another several months until these lenders are forced to report this data sometime in 2023. But the unfairness is happening now.”
Kareem Saleh
FairPlay CEO/founder and report co-author
stepping stone to the middle class and generational wealth, Black Americans, Native Americans and Hispanics risk losing that avenue to wealth.
“We’re in the middle of a mortgage fairness crisis today,” FairPlay CEO/ founder and report co-author Kareem Saleh told USA TODAY. “It’s not going to show up for another several months until these lenders are forced to report this data sometime in 2023. But the unfairness is happening now.”
More than half a century after the Fair Housing Act was signed into law in 1968, not only is the homeownership gap between white and Black Americans wider than it was in 1960, the homeownership rate of Black Americans is expected to be lower (40%) in 2040 than it was in 2020 (41%), according to a study by the Urban Institute, a Washington-based research organization focused on upward mobility and equity.
What is mortgage fairness?
To measure fairness, FairPlay used the industry standard metric adverse impact ratio, which compares the rate of approval for a protected status applicant compared to a control group (typically White male applicants). For example, if protected class applicants had a 60% approval rate, while the control group had a 90% approval rate, the adverse impact ratio would be 60/ 90 or 67%.
An adverse impact ratio of less than 80% is considered to show disparate impact while a 90% ratio is seen as fair.
As interest rates climb to 6%, FairPlay’s historical analysis shows adverse impact ratios for Black and Native American home buyers drop to about 65%; for Hispanic borrowers, it drops to about 77%.
“We’re still working within the confines and the limitations of those biased structures.”
Lisa Rice
President and CEO of the
National Fair Housing Alliance
Does race matter on mortgage applications?
Mortgage lending is inherently biased, said Lisa Rice, president and CEO of the National Fair Housing Alliance.
“Our technologies, our credit scoring systems, our automated underwriting systems, our risk-based pricing systems, our appraisal valuation system are all systems that are inequitable by design,” said Rice, who said she was not surprised by the study findings. “And those systems haven’t been changed. So we’re still working within the confines and the limitations of those biased structures to try and to give people access to credit.”
A little over a year ago, 29% of Black renters, or roughly 2.5 million, could afford a median-priced home in their market assuming an interest rate of 3.2%. Today, only 5% of Black renters, or roughly 447,779, can afford a median-priced home in their market considering the increases in home prices and assuming an interest rate of 7.1%, according to Rice.
Hispanic mortgage applicants
Hispanic mortgage applicants experienced a steady upswing in mortgage fairness.
In contrast to Black mortgage applicants, Hispanic mortgage applicants also tend to see an increase in the fairness of mortgage approvals as their proportion of a community’s population increases, according to the report.
Mortgage approvals for Hispanic borrowers rose from 77.7% at the height of the Great Recession to 88.7% in 2021.
Home Mortgage Disclosure Act data on Hispanics only dates back to 2008, so there is an incomplete picture of fairness trends for this population.
“We think it’s possible that more of the mortgage origination companies in those areas are themselves owned by Hispanics and it’s possible that owners of those mortgage companies are more attuned to underwriting Hispanic populations,” says Saleh. “It’s also possible that Hispanic applicants are more likely to shop around than Black applicants.”
Is it harder for Black borrowers to get a mortgage?
FairPlay’s analysis showed that mortgage fairness for Black Americans is essentially no better today than it was thirty years ago, and for Native Americans, mortgage fairness had declined from 94.8% to 81.9%. In 1990, the adverse impact ratio for Black borrowers was 78.5%, the same as in 2019.
One alarming trend from the report shows how fairness for Black mortgage applicants doesn’t apply evenly across geographies. In fact, it appears to get worse in regions where Black homebuyers have the highest percentage of the local population, according to the analysis.
The low-trend adverse impact ratio states average a 69% adverse impact ratio, well below the 80% figure commonly seen as a threshold for disparate impact.
The five states with low adverse impact ratio for Black mortgage applicants – Louisiana, Mississippi, South Carolina, Arkansas, and Alabama – yield persistently poor loan application outcomes no matter the macro environment. Even in boom times, with rock bottom unemployment, the adverse impact ratio in these states lags for Black mortgage applicants, according to the report.
Preapproved and waiting
After years of working to improve her credit scores, Daniyel Baker was finally preapproved for a home loan of $260,000 in September 2021.
The 46-year-old single mother from Aurora, Illinois, says her dream of owning a home finally felt within reach. But it turned out to be a short-lived feeling.
Baker, who works two jobs – one as a clerk at a financial institution and another at an Amazon factory – made offers on six single-family homes last year. She lost out on all of them to investors making all-cash offers or buyers who could offer far above the asking price.
This year has been worse. With interest rates more than doubling from below 3% last September to close to 7% by October, her lender told her she would not be able to finance a home for more than $215,000.
“To get to this point and still not be able to purchase because I don’t have a big enough down payment … it is very discouraging.”
The 2021 fairness bump, Saleh believes, was due to support programs put in place over the course of the pandemic that could be credited with improving fairness, at least temporarily.
“There was lots of stimulus money plus reduced opportunities to spend money. There were a bunch of forbearance programs designed to keep people in their homes,” he says. “So you had basically an artificial enhancement, in the credit worthiness of a lot of individuals, and now that is now starting to run out.”
Here are some findings from FairPlay’s State of Mortgage Fairness Report:
⬤ Native American mortgage applicants: In 1990, Native American homebuyers had an adverse impact ratio of 94.8%. By 2021, adverse impact ratio for Native American mortgage application approvals dropped to 81.9%.
⬤ Mortgage fairness for rural Black populations (adverse impact ratio of 74% in 2021) consistently lags the fairness of urban populations (adverse impact ratio of 83% in 2021).
On a positive note, mortgage application fairness for Black women improved from 69.8% in 1990 to 86.3% in 2021.
⬤ Female mortgage applicants: The most positive trend seen in the Home Mortgage Disclosure Act data relates to mortgage fairness for women. Between 1990 and 2021, the adverse impact ratio for mortgage applications filed by women rose from 91.8% to 99.2%, which is nearly on par with the control group (White men).
⬤ Asian mortgage applicants: For Asian homebuyers, the fairness story continues to remain positive. Asian Americans had fairness parity with White mortgage applicants in 1990, and have consistently maintained comparable levels of mortgage approvals to White applicants.