The Mortgage Approval Process Is Biased. Prejudices about race, ethnicity, and other things have always affected who can own a home. Even in places where things have gotten better, recent studies have said that racial inequality in housing is getting better “slowly, unevenly, and fragilely.” In some places, there hasn’t been much or any change. Events like the Great Recession of 2008 and the COVID-19 pandemic also make it harder for Latinx and Black people to own their own homes. Other studies suggest that getting money is hard for LGBTQ+ communities as well.
Even though there are laws against discrimination in the housing market, studies show that racial bias, especially in the mortgage approval process, keeps people of different races apart and contributes to the wealth gap. In this article, some of the biases in the mortgage lending industry are looked at.
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Different kinds of bias
For many families, their home is their most valuable asset and can make up a big chunk of their total wealth. This is especially true for black and Hispanic families, whose homes can make up a big part of their total wealth.
Also, the average value of homes owned by families of different races is very different:
- $150 000 for black families
- $200,000 for Hispanic families
- White families who are not Hispanic: $230,000
Mortgage Approval Process
Most people can’t buy a home outright, so they need a loan. Several steps in this approval process will help them get a mortgage. The lending business is important for people to be able to buy their own homes. The business is expected to grow. Even though the COVID-19 pandemic is happening. Freddie Mac says that the number of people looking for a place to live will grow. The agency thinks there will be 6.9 million home sales in 2022 and 7 million in 2023. They also think that the number of mortgages taken out will go from $2.1 trillion in 2022 to $2.2 trillion the following year.
In 1999, the Urban Institute thoroughly reviewed the evidence and found that minority homeowners in the U.S. faced discrimination from mortgage lending institutions. This discrimination came in two main forms:
Differential treatment is when qualified minority homeowners are discouraged from getting a loan, denied a loan, or given bad loan terms because of their race or ethnicity.
Disparate Impact is a type of discrimination that happens when minority loan applicants are turned down at a higher rate than white loan applicants in a way that can’t be explained by a business need, even if the reasons for this difference aren’t immediately clear.
The most obvious discrimination in mortgage lending is when a person is turned down for a house. The number of straight-out denials has gone down. Inequalities in housing between whites, blacks, and Hispanics have also gone down, but the fact that they still exist points to discrimination.
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Discrimination in mortgages and owning a home
The Fair Housing Act says there can’t be any discrimination in housing. In 1968, a law made it illegal to treat people differently in housing because of their race, religion, gender, family status, disability, or ethnicity. The goal was to ensure everyone could find a place to live, whether they bought a home or rented one.
Even with the law, the homeownership rate among black Americans is still lower than among white Americans. This suggests that discrimination may still be going on and affecting the rates at which minorities buy homes. Alanna McCargo of the Urban Institute says that there is a big and growing gap between people of different races and ethnicities who own their own homes. “We haven’t just stopped making progress; we’re going backward. And we can’t keep moving backward.”
As of the second quarter of 2022, more than 74.5% of white Americans who owned their own homes were not Hispanic. According to the St. Louis Fed, this contrasts 45.3% of Black Americans and 57.3% of all other races, including Asians, Native Hawaiians, and Pacific Islanders.
McCargo says that when black and Hispanic people bought homes at the height of the housing bubble, they were more likely to be offered subprime loans than whites and Asian Americans, even if they qualified for prime loans. Their recovery rates were also slower than whites’.
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