The Mortgage Approval Process Is Biased
Mortgage Approval Process: Racial, ethnic, and other prejudices have historically had an impact on home ownership. Recent studies have labeled the overall decline in racial inequality in housing as “slow, unequal, and fragile”—even in the places where it has improved.
There has been little or no progress in certain regions. Events like the COVID-19 pandemic and the Great Recession of 2008 had a negative impact on minority homeownership rates, especially in Latinx and black communities. According to other studies, LGBTQ+ populations may also experience difficulties getting financing.
Studies reveal that racial bias—particularly in the loan approval process—continues to reinforce racial discrimination and influence the racial wealth gap despite the existence of laws that forbid discrimination in the housing industry.
The bias that occurs in the mortgage loan sector is examined in this essay.
Mortgage Approval Process: Discriminatory Practices
The primary asset of many families, and sometimes a sizable amount of their total wealth, is their home. This is especially true for Hispanic and non-white families, whose homes might make up a sizeable chunk of their total income.
Mortgage Approval Process: In addition, there are significant racial disparities in the mean value of properties held by families:
- Families of color: $150,000
- $200,000 for Hispanic families
- Families of white, non-Hispanic origin: $230,000
Most people require loan approval because they cannot afford to buy a home altogether. A number of procedures in this approval process will assist in obtaining a mortgage for them. Homeownership depends on the lending sector, which is expected to expand. Freddie Mac predicts that housing demand will increase despite the COVID-19 pandemic’s consequences. According to the agency, home sales will actually hit 6.9 million in 2022 before increasing to 7 million the following year, while mortgage originations will increase from $2.1 trillion to $2.2 trillion.
According to a thorough analysis of the available data conducted by the Urban Institute in 1999, minority homeowners in the United States experienced discrimination from mortgage lending companies in two key ways:
Differential Treatment: When qualified minority homeowners are discouraged from applying for a loan, denied a loan, or given disadvantageous loan conditions due to their race or ethnicity.
Disparate Impact: This type of discrimination happens when minority loan applicants are rejected at a higher rate than white applicants in a way that cannot be explained as a business requirement, even if the reasons for this discrepancy aren’t immediately apparent.
Mortgage Approval Process: Mortgage Inequality and Ownership
Any form of housing discrimination is forbidden by the Fair Housing Act. The law, which forbade discrimination in housing on the grounds of race, religion, gender, family status, disability, and ethnicity, was passed in 1968. The objective was to make sure that everyone had access to housing, whether it came from owning a home or renting one.
Despite the statute, Black Americans still have disproportionately lower homeownership rates than White Americans. This may indicate that prejudice is still present and has an effect on minority homeownership rates. According to Alanna McCargo of the Urban Institute, there is a sizable and expanding discrepancy in homeownership between racial and ethnic groups. “We are losing ground, not just because we haven’t made any progress. We cannot keep moving backward, either.
As of the second quarter of 2022, non-Hispanic white Americans made up over 74.5% of homeowners.
According to the St. Louis Fed, this contrasts with the 45.3% of Black Americans and 57.3% of all other races, including Asian, Native Hawaiian, and Pacific Islanders.
Even when they were eligible for prime loans, Black and Hispanic customers who bought houses at the height of the housing bubble were more likely to be granted subprime loans than Whites and Asian Americans, according to McCargo, who also noted that their recovery rates were slower than Whites.
Mortgage Approval Process: Separation and disparate rejection rates
Racial prejudice still exists in mortgage loans, according to a 2022 study from the National Community Reinvestment Coalition. Black and Hispanic borrowers continue to experience disproportionately high levels of rejection, according to the study’s authors, despite the fact that the majority of forms of discrimination in the housing market have decreased or stopped (including the most extreme forms, like lying about the availability of advertised housing units).
The study found that while inequalities in mortgage costs still exist for Blacks, Hispanics, and Asians, racial gaps in loan denials marginally decreased between the 1970s and 2020. By forcing those with weak preferences into neighborhoods with residents of similar racial backgrounds, discrimination like this solidifies racial segregation. By making it more difficult for Blacks to really accumulate wealth, just serves to widen the racial wealth divide.
This conclusion is supported by additional research, such as a 2019 LendingTree analysis that found racial variations in lending rejection rates. In that study, non-Hispanic White borrowers had the lowest denial rates—7.9%—while Black borrowers had the highest—17.4%.
The mortgage lending sector discriminates against LGTBQ+ couples as well. When comparing heterosexual couples with similar applications, these couples experienced a rejection rate for loans that were 73% higher. Additionally, they had a higher likelihood of paying more in fees and interest.
Mortgage Approval Process: Laws and Historical Discrimination
In the past, discrimination has influenced how mortgage applications are approved in the US. Some refer to housing disparities as the lasting effects of prior disparities.
During the 20th century, the Federal Housing Administration (FHA) promoted homeownership among white middle-class people. However, the methods it employed, such as redlining and restrictive covenants, prevented minorities from receiving mortgage insurance and federally subsidized housing.
As was already mentioned, the Fair Housing Act outlawed discrimination in housing on the basis of race, ethnicity, and other characteristics. Martin Luther King Jr., who became involved in the fight for fair housing during the 1966 open housing marches in Chicago, was assassinated in the days immediately following the signing of the Fair Housing Act, a follow-up to the 1964 Civil Rights Act.
Some claim that the principal goal of the Fair Housing Act was to “curtail discrimination in the housing sector.”
With the passage of the Equal Credit Opportunity Act (ECOA) in 1974, protections for dealings with institutions that habitually grant credit, such as banks and other lending institutions, were expanded. It prohibits discrimination on the basis of age, marital status, race, color, religion, or national origin.
Mortgage Approval Process: Discrimination in Housing in the Digital Age
With rising customer demand for accessible financial services, the rise of digital applications surged through the financial sector, changing how institutions conduct business. People can now apply for and receive approval for mortgage loans more easily thanks to digital mortgage platforms. However, it also begs the question of how they handle racial discrimination in the marketplace.
Mortgage Approval Process: According to a University of California, Berkeley study, fintech doesn’t entirely eliminate bias. Many of the studies suggest that loan rejection rates are not biased. Algorithmic lenders did, nonetheless, lessen differences in rejection rates; they did not, however, abolish “unlawful discrimination.” This is due to the possibility that they may categorize consumers based on their low levels of shopping and their participation in less intense competition. They increased the cost of refinancing mortgages for otherwise equal Latinx and black borrowers by $765 million annually.
Mortgage Approval Process: Markup’s study revealed that, despite having similar financial records, lenders were declining mortgage applications from persons of color more frequently than white applicants in 2019. Even when algorithms are in use, minority borrowers are 40%–80% more likely than white borrowers to be rejected for home loans. The costs involved with mortgage applications, which are frequently non-refundable, were also noted in the research as an additional disadvantage for individuals who aren’t approved.
Mortgage Approval Process: Which law forbade housing discrimination?
Following the passage of the Fair Housing Act in 1968, it is now unlawful to discriminate against anyone looking for housing on the basis of their race, religion, national origin, gender, skills, or family status. Discrimination in the purchase, sale, rental, and financing of properties, regardless of the kind, is prohibited by the Act’s provisions.
Mortgage Approval Process: What Indicators Exist That My Lender Discriminated Against Me?
If you were denied a mortgage even though you were eligible for one, if someone made an effort to dissuade you from applying, or if you received a loan with less favorable terms and circumstances, you may have been the victim of discrimination. If your lender canceled your account without giving you a good reason, you might also have been subjected to discrimination.
Mortgage Approval Process: How Can I Complain About Discrimination Against a Mortgage Lender?
You can complain to the Consumer Financial Protection Bureau if you think you’ve been treated unfairly by a mortgage lender for any reason. You can contact the organization directly by calling 1-855-411-CFPB or submitting your complaint online (2372). Check the relevant website for additional details. Some state governments also defend citizens from other types of discrimination.
The Bottom Line Up to 40% of the prosperity of a typical American household is attributable to homeownership. This implies that obtaining mortgage approval could be a significant roadblock to financial security.
Several adjustments that McCargo claimed would help the situation were addressed in her testimony. Her recommendations included encouraging the development of an equitable housing finance system that takes into account the fact that minorities are more likely than others to lack a credit history, as well as the expansion of credit access, modernization of the FHA, and updates to credit scoring systems. Among other things, McCargo proposed enhancing down payment assistance programs, developing a “strong small-dollar mortgage market,” and providing outreach and counseling to renters and millennials who are ready to buy a home.