Race Gap on Conventional Loans

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African-American and Hispanic borrowers have been largely shut out of the conventional mortgage market, according to a new report from Zillow and the National Urban League. Citing loan data reported under the Home Mortgage Disclosure Act, along with results from a Zillow poll of 700 mortgage applicants in December, the analysis found that whites accounted for about 69 percent of all conventional mortgage applications. The share of applications filed by blacks was under 3 percent; Hispanics represented only 5 percent.
Black and Hispanic borrowers are far more likely to apply for low-down-payment loans insured by the Federal Housing Administration. About 57 percent of black applicants and 60 percent of Hispanic applicants applied for FHA loans, compared with 30 percent of white applicants.
Access to financing that requires as little as 3.5 percent down is key for minority applicants who, on average, have lower incomes and credit scores than whites, said Stan Humphries, Zillow’s chief economist. They also have far lower rates of homeownership, which makes it harder to accumulate wealth over time and across generations. “Higher down-payment requirements have had the biggest impact on minority applicants for conventional mortgages,” Mr. Humphries said. “They just don’t have the savings nonminority groups have.”
And their conventional mortgage applications are more likely to be denied. One in four black applicants was turned down, compared with one in 10 white applicants, the report said.
As conventional lending standards have tightened, FHA-backed loans have become crucial to maintaining credit access in minority communities. But at the same time, Mr. Humphries said, FHA’s dominance among such borrowers hints at a problematic trend: “a different path to financing based on your race and ethnic group.”
And the FHA path can be costly. Although FHA-backed loans offer the initial advantage of less money down, their mortgage insurance premiums are considerably higher than premiums on conventional loans.
Julia Gordon, the director of housing finance and policy at the Center for American Progress, a liberal research group, has concerns about what she calls “the dual housing market,” and says she believes the conventional market ought to be making lower-down-payment loans more widely available. “Like all the other separate-but-equal arrangements,” she said, “this is not good for consumers or the market or for taxpayers. We are seeing creditworthy people who should be able to get loans in the conventional market but can’t.”
Ongoing discussions in Washington about how to wind down Fannie Mae and Freddie Mac should include a commitment to ensure that lenders make credit available equitably, she added.
Another approach to broadening access to conventional financing is to make it easier for first-time buyers to accumulate a larger down payment. One way that could be done is through reform of the mortgage interest tax deduction, which currently benefits wealthier homeowners, Mr. Humphries said. “If our goal there is to stimulate homeownership,” he pointed out, “it would be more efficient to restructure that as a tax credit for first-time home buyers as opposed to a deduction. That would help with a down payment.”
Jason R. Gold, a senior fellow at the Progressive Policy Institute, a research group, also proposed the creation of “HomeK” accounts, which would give workers the option of using up to half of their contributions to 401(k) retirement savings for a down payment on their first home.

By: Lisa Prevost, www.nytimes.com

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