A racial divide continues to perpetuate among those seeking a mortgage loan, according to a new study. The report alleges that mortgage lenders have steered more black and Latino borrowers towards government-backed home loans by limiting their access to more conventional financing.
An analysis of mortgage lending in seven cities found that loans guaranteed by the Federal Housing Administration and the U.S. Department of Veterans Affairs were made to both minority borrowers and those residing in predominantly non-white neighborhoods at a much higher rate than white customers.
According to Spencer Cowan, a vice president at the Woodstock Institute, which was responsible for the report, lenders should offer more options to borrowers whose credit may fall just short of the minimum conventional loan requirements, but are well above the eligibility requirements for FHA or VA financing.
“Banks and lenders are not offering an array of products that meet those intermediate needs and abilities,” said Cowan. “We have to make sure that banks come up with products that are in-between FHA standards and their prime standards, so that people can get the appropriate credit that they deserve.”
Seen as the alternative for many borrowers who are unable to qualify for loans insured by a private lender, government-backed loans have less stringent requirements and require a lower down payment. But they can be more expensive in the long-term and offer less financing options. On the other hand, conventional loans offer more flexibility in terms of payment choices, but are harder to qualify for and often require a larger down payment than government-backed mortgage products.
Credit ratings usually act as the primary determining factor in lending qualification, with conventional loan approval going to those with a score of at least 620 and above. Those seeking government-backed loans have traditionally needed a credit score of at least 580.
The report’s findings were based on 2010 data from the Home Mortgage Disclosure Act, which requires lending institutions to report public loan information. The data revealed that FHA and VA loans made up three out of every four home mortgage loans made to black borrowers, and two of every three made to Latino borrowers. Conversely, only one out of every three government-backed loans was made to white borrowers.
In Chicago, the disparity was even larger, with 81 percent of black borrowers and 70 percent of Latino borrowers receiving government-backed loans, while only 35 percent of white and 23 percent of Asian borrowers received government–backed financing.
“Certainly over the last couple of years, we have noticed a lack of access to conventional financing in our neighborhoods,” said Anne Cole, a senior program associate at Neighborhood Housing Services of Chicago, which provides housing-related services to neighborhoods located on the city’s South and West Sides. “Our own lending arm, which is Neighborhood Lending Services, has seen an increase in our market share in those neighborhoods, which is not always a good thing because it means that other conventional lenders have left.”
The report offered no concrete evidence of discriminatory practices on the part of conventional lenders, but as Cowan said, the disparities do warrant investigation. “It certainly merits a closer look by states and federal governments for possible legal action,” Cowan said.
Chicago has had a long, documented history of racial discrimination within the housing market ever since blacks began migrating to the area from southern states in the early part of the 20th century. Common practices at the time included the use of restrictive housing covenants by home sellers to keep neighborhoods racially segregated. Mortgage lenders were also known to use tactics such as redlining to limit minorities’ access to loans and services.
An example of such was highlighted in 2009 when Illinois Attorney General Lisa Madigan filed a lawsuit against leading mortgage lender Wells Fargo alleging the company steered black and Latino homebuyers into riskier subprime loans and charged them than it did white customers. The case concluded earlier this month, with Wells Fargo agreeing to pay $175 million in damages.
In terms of the report’s findings, Madigan spokeswoman Natalie Bauer said the office was aware of the report and planned to meet with the drafters to review the data in order to see whether the matter warrants further investigation.