How skewed mortgages keep people of color from accessing their dream homes
The new four-bedroom home in Charlotte, NC was Crystal Marie and Eskias McDaniels’ personal American dream, the reason they moved from beloved Los Angeles.
A long, lush lawn, 2,700 square feet of living space, a sparkling kitchen, a neighborhood pool and a play area for their son, Nazret. All for $ 375,000.
Pre-qualifying for the mortgage was a snap: they had high credit scores, earned around six figures each, and had saved more than they needed for the down payment.
But two days before they were supposed to sign, in August 2019, the loan officer called Crystal Marie with bad news: the deal was not going to end.
“It seemed like it was being rejected by an algorithm,” she said, “and then there was a person who could step in and decide whether or not to override it.”
She was told she was not eligible because she was a subcontractor and not a full-time employee, even though her colleagues were also subcontractors. And they had mortgages.
Crystal Marie’s colleagues are white. She and Eskias are black.
âI think it would be really naive for someone like me not to consider race to have played a role in the process,â she said.
While technology has made it easier for anyone to apply for a home loan, such innovations have not completely eliminated a: bias.
The long-standing discrimination people of color face in obtaining a home loan can be replicated in software-based loans, a technology that advocates say is supposed to prevent bias.
A survey by The Markup found that lenders in 2019 were more likely to turn down home loans to people of color than to white people with similar financial characteristics – even when the survey authors controlled for newly available financial factors than The mortgage industry has in the past allegedly explained racial disparities in lending.
Holding 17 different factors stable in a complex statistical analysis of the more than 2 million conventional mortgage home purchase applications reported to the government, they found that, compared to similar white applicants, the lenders were:
â 80% more likely to reject black applicants
â 70% more likely to refuse Native American applications
â 50% more likely to refuse applicants from Asia / Pacific
â 40% more likely to reject Latino applicants
These are national tariffs.
The American Bankers Association, Mortgage Bankers Association, Community Home Lenders Association, and Credit Union National Association have all criticized the analysis.
In written statements, the ABA and MBA rejected The Markup’s findings for not including credit scores or government loans, which are mortgages guaranteed by the Federal Housing Administration, the Department of Veterans Affairs and others.
According to The Markup article, government loans have different approval thresholds, which bring people into the market who would not otherwise qualify, but generally cost buyers more. Even the Federal Reserve and the Consumer Financial Protection Bureau, the agency that publishes data on mortgages, separate conventional and government loans in their research into credit disparities.
The nonprofit news organization said it was unable to include credit scores in its analysis because the CFPB removed them from the public version of the data, in part due to lobbying from the mortgage industry. citing the confidentiality of borrowers.
While mortgage lending decisions are formally made by the loan officers at each institution, they are largely driven by software, most of which is commissioned by a pair of quasi-government agencies.
Rules set by Freddie Mac and Fannie Mae
Freddie Mac and Fannie Mae were founded by the federal government to boost homeownership and now buy about half of all mortgages in America. As a result, they basically set the rules early on in the mortgage approval process.
They require lenders to use a particular credit scoring algorithm, “Classic FICO”, to determine whether an applicant meets the minimum threshold to consider for a conventional mortgage in the first place, currently a score of 620.
Launched over 15 years ago based on the 1990s database, Classic FICO is widely viewed as detrimental to people of color because it rewards traditional credit, to which they have less access than white Americans. It doesn’t factor in on-time payments for rent, utilities and cell phone bills, among other things, but will lower people’s scores if they fall behind on those bills and sued by debt collectors. . Unlike newer models, Classic FICO also penalizes people for past medical debts once they have been paid.
Yet Fannie and Freddie have resisted a flood of demands since 2014 from lawyers, the mortgage and housing industries, and Congress to authorize a newer model. They did not answer questions about why.
The approval process also requires a green light from Fannie or Freddie’s automated subscription software. Even their regulator, the Federal Housing Finance Agency, is not sure exactly how they decide, but some of the factors that companies believe their programs can affect people differently based on their race or ethnicity, have discovered. researchers.
For example, traditional banks are less likely than payday loan vendors to place branches in neighborhoods with predominantly black populations. Payday lenders don’t report payments on time, so they can only hurt credit.
People of color have faced decades of greater hurdles than whites when it comes to securing a home loan, even creditworthy borrowers being turned down at a higher rate or being unfairly charged lower rates. higher interest.
A Berkeley study found that face-to-face and online lenders rejected a total of 1.3 million creditworthy black and Latino applicants between 2008 and 2015. Researchers said they believed applicants ” would have been accepted if the candidate had not belonged to these minority groups. . “Indeed, when they used the income and credit scores from the rejected applications, but removed the race identifiers, the mortgage application was accepted.
The chairman of the business group representing real estate appraisers recently acknowledged that racial prejudice is prevalent in the industry, which sets property values, and said he has launched new programs to combat prejudice.
“If the data you enter is based on historical discrimination,” said Aracely PanameÃ±o, director of Latin American affairs at the Center for Responsible Lending, “then you are essentially cementing the discrimination on the other end.”
In written statements, Fannie said its software scans applications “regardless of race,” and both Fannie and Freddie said their algorithms are regularly evaluated for compliance with fair lending laws, internally and by the Commission. FHFA and the Ministry of Housing and Urban Development. HUD said he asked the pair to make changes accordingly, but would not release details.
Many large lenders also direct applicants through their institution’s underwriting software. How these programs work is even more mysterious; they are also owners.
Does the system need to be changed?
Some fair credit advocates have started to question whether the mortgage value system should be changed.
âAs an industry, we need to think about the least discriminatory alternatives, even if they are a valid predictor of risk,â said David Sanchez, a former FHFA policy analyst who currently heads research and development at the National Community Stabilization nonprofit. Confidence. “Because if we let risk alone govern all of our decisions, we’re going to end up in exactly the same place where we are now when it comes to racial equity in this country.”
The lender of Crystal Marie and Eskias McDaniels denied that race had anything to do with their refusal. In an email, LoanDepot vice president of communications Lori Wildrick said the company follows the law and expects “fair and equitable treatment” for every candidate.
The couple refused to give up after the loan officer told them the mortgage had not worked and asked their real estate agent for help. Crystal Marie’s employer sent several vouching emails.
At around 8:00 pm the day before the initial closing date, Crystal Marie received an email from the lender: âYou are cleared to close. She still doesn’t understand how she came to yes, but she is relieved and overjoyed.
âIt means so much to me as a black person,â said Crystal Marie, who said her family descended from slaves in neighboring South Carolina, âto own property in a place where there isn’t so much. long time you were a property.
“It’s so important.”
This story was reported by The Markup, and the story and data was distributed by The Associated Press. Khristopher Brooks of CBS News contributed reporting.