By Clea Benson and Alexis Leondis
The share of mortgage lending to minority borrowers fell to at least a 14-year low as U.S. regulators struggle to ease credit to blacks and Hispanics shut out of the housing recovery.
These borrowers, whose share of the purchase mortgage market has been shrinking since the collapse of subprime lending, continued to lose ground to white borrowers through 2013, according to federal data released this week. Blacks and Hispanics were a smaller portion of borrowers last year than they were in 2000, before the housing bubble.
Minorities, who tend to have less savings and lower credit scores than whites, have been hit hardest by lenders who are giving mortgages only to the strongest borrowers. Fair-lending advocates and civil-rights groups are urging the government to create new loan products and change how creditworthiness is determined to give blacks and Hispanics greater access to one of the best vehicles for building wealth.
“These numbers are a wake-up call that the housing market is a major driver of the economy and it can’t be a vibrant market when so many new households are excluded from it,” said Jim Carr, a former Fannie Mae executive who is now a scholar at the Opportunity Agenda, a New York-based organization that works on racial equity issues.
Minorities Drop
The share of mortgage lending to blacks for home purchases slipped to 4.8 percent in 2013 from 5.1 percent in 2012, according to data collected under the Home Mortgage Disclosure Act, which requires lenders to report the race and income of loan applicants. Blacks, who are about 13 percent of the U.S. population, reached a high of 8.7 percent of mortgage borrowers for home purchases in 2006.
Hispanics — about 17 percent of the U.S. population — fell to 7.3 percent of borrowers in 2013 from 7.7 percent in 2012 and a high of 11.7 percent in 2006.
Whites, whose proportion of the population is shrinking, are taking a bigger chunk of the mortgage market. They were 70.2 percent of borrowers last year, and 69.9 percent of borrowers in 2012.
The nation’s top housing officials have pledged to work with lenders to resolve one of the major causes of tight credit that disproportionately affects minorities: disputes over who pays when risky mortgages fail.
Julian Castro, the secretary of the Department of Housing and Urban Development, last week said the agency would clarify rules governing when lenders have to absorb losses from soured mortgages insured by the Federal Housing Administration. The Federal Housing Finance Agency, which regulates mortgages backed by Fannie Mae and Freddie Mac, amended its loan buyback rules earlier this year.
Target Programs
The mortgage disclosure data show that modifications of rules are not enough to bring blacks and Hispanics back to the mortgage market, said Julia Gordon, director of housing finance and policy at the Center for American Progress in Washington, which has ties to the Democratic Party.
“It’s really time to bring back the concept of targeted programs to help get people of color into the system,” Gordon said. “We have seen time and again it’s possible to do safe sustainable low-down-payment lending to people with nontraditional credit histories.”
Addressing the decline in minority lending is important at a time when the gap between rich and poor is growing, Carr and Gordon said. Only the richest Americans enjoyed gains in income from the economic recovery during 2010-2013, as median earnings fell for all others, a report this month from the Federal Reserve showed. Household wealth and incomes have become increasingly stratified during the recovery, thanks in part to gains in the stock and housing markets.
Wealth Building
Median income adjusted for inflation rose 2 percent to $223,200 for the wealthiest 10 percent of households from 2010 to 2013, while the bottom 60 percent experienced the biggest declines, according to the Fed’s survey of consumer finances.
“A lack of homeownership leads to a lack of wealth building,” said Yana Miles, policy counsel at the Durham, North Carolina-based Center for Responsible Lending. “When you own and have a responsible mortgage, you’re building equity in your home and you have a stable payment every month, so you can save, focus your finances elsewhere and pass wealth to your children.”
Homeownership continues to be a significant source of household wealth, even in the aftermath of the housing crisis, according to a September 2013 study by Harvard University’s Joint Center for Housing Studies. Owning a home is consistently linked with increases of as much as $10,000 in net wealth for each year a home is owned, the study said. In contrast, renters generally don’t experience any wealth gains.
Creditworthiness
Helping blacks and Hispanics enter the market may require a change in the way creditworthiness is determined, fair-lending advocates say. They criticize the reliance on scores from the Fair Isaac Corp. to determine who gets a government-backed loan.
FICO doesn’t include data from some sources that minorities might be more likely to use, they say, including small lending institutions such as credit unions or payday and subprime lenders that predominate in inner-city neighborhoods.
Lenders should consider alternatives, such as VantageScore, which evaluate borrowers who have thin credit files or past delinquencies differently than FICO, Carr said. And rather than typical fixed or adjustable-rate loans, the government-backed agencies should encourage lenders to offer shared appreciation mortgages, where lenders benefit from price appreciation of homes, or lease purchases, which enable renters to buy their homes, he said.
VantageScore
“The administration should be pushing Fannie, Freddie and FHA to push the envelope on innovation around risk assessment and do a better job of sorting out what constitutes a creditworthy borrower,” Carr said.
Anthony Sprauve, FICO’s senior consumer credit specialist, said the company is researching ways to incorporate data that better predicts creditworthiness of consumers without traditional borrowing histories.
“We’re absolutely aware of the problem and working hard to figure out a solution that’s fair for consumers and gives lenders the tools they need to make decisions appropriately,” he said.
The argument for changing credit-scoring methods may be getting traction: At the urging of the FHFA, Fannie Mae and Freddie Mac said this week that they will study using alternatives such as Vantage.
The study could take a long time to complete and the cost of using new credit scores “may be substantial,” Fannie Mae spokesman Andy Wilson said in an e-mailed statement. “We are confident that the tools in use today accurately consider a borrower’s credit history when lenders determine whether or not to approve a loan application.”
Lender ‘Flexibility’
Underwriting needs to become more flexible to reflect the varied experiences of minority borrowers who may have multiple jobs or extended families contributing to income, David Stevens, president of the Mortgage Bankers Association, said.
“I think we have to begin thinking about underwriting borrowers without the 1950s square-peg, square-hole philosophy,” he said. That could include incorporating alternative scoring methods such as Vantage, he said.
Regulators such as FHFA and the Consumer Financial Protection Bureau, which this year issued a rule defining risky mortgages as those with more than a 43 percent debt-to-income ratio, need to allow that flexibility, Stevens said. Such rules “don’t provide the ability for an underwriter to provide any common sense in the process,” he said.
The destruction of property values in minority neighborhoods is another obstacle to wealth-building for blacks and Hispanics, said Lisa Rice, vice president at the National Fair Housing Alliance in Washington. Inner cities, which were targeted by subprime lenders, were disproportionately hurt by foreclosures when home prices collapsed. Values fell 26 percent at the trough in 2011 from the peak in 2007, according to the S&P/Case-Shiller nationwide index.
Redlining Enforcement
Today most property transfers in those neighborhoods are cash sales to investors rather than mortgage purchases by owner-occupants. Rice said governments should create special lending programs for such communities with little comparable data. Distressed deals skew the data in neighborhoods, making it more difficult to get a loan sufficiently large for a standard purchase.
“If you can’t get a comp, you can’t get a loan,” Rice said. “Fannie lenders are going to have to fashion some type of program that will allow owner-occupants the ability to purchase the homes they live in. It’s going to take a concerted effort like that.”
Federal and local authorities are addressing the lack of credit in those neighborhoods by enforcing laws banning red-lining, or the practice of refusing to lend in particular locations. The Justice Department’s fair lending unit has stepped up enforcement of cases since President Obama took office in 2008.
Loan Denials
Cities also are starting to file redlining suits. Providence, Rhode Island, sued Santander Bank NA (SAN) in May, alleging the bank violated federal law because its loans to minorities decreased at the same time as its lending to whites increased. The bank said it rejects the accusation and will fight it in court.
The new mortgage data indicates that minorities may not be trying to borrow as much as they once did, said Bing Bai, a research associate at the Urban Institute’s Housing Finance Policy Center in Washington. The loan denial rate for blacks and Hispanics, typically higher than that for whites, is similar to where it was before the housing bubble collapsed.
“It’s definitely discouragement,” Bai said. “A lot more people are deterred from the market.”
Closing the race gap in lending also will require outreach to make minorities feel comfortable borrowing again, Gordon said.
“Certainly people of color right now don’t feel like the mortgage market is a place they’re wanted,” she said. “They’ve heard the coded speech about certain groups not being ready for homeownership.”
