Black mortgage applicants are more than twice as likely to be denied a loan for a mortgage than their white counterparts, according to a new report by the National Association of Real Estate Brokers.
The report released last month found that when Black families apply for a mortgage, their loan applications are denied 15% of the time, compared to 6% for white families.
Multiple studies examining the long list of hurdles Black homeowners face when trying to purchase a home have concluded that the cause of the disparities stem from institutional biases against the Black community that have been baked into the mortgage industry for decades.
"It is institutionalized racism,” Bruce Marks, the president and CEO of the Neighborhood Assistance Corporation of America (NACA) told Yahoo News. “The underwriting that lenders use is not reflective of the realities of working people and minority home buyers.”
Marks said the underwriting process, which is how lenders typically decide whether to approve a loan, is deeply flawed. “The underwriting is very restrictive and is not based on reality, because they use risk-based price lending, and in risk-based price lending, they use three criteria. One is a credit score, second is debt-to-income ratio, and the third is the loan to value. So when you look at those three criteria, a lot of people have a low credit score, not because they're not ready for home ownership, but because it takes into account things that are not relevant to every person's everyday lifestyle and existence.”
According to the most recent Census report, homeownership among Black people is the lowest of any group in the U.S. In November, the U.S. Treasury Department also revealed that the Black-white gap in homeownership rates was the same in 2020 as it was in 1970, just after the passage of the Fair Housing Act of 1968 — federal legislation intended to protect a potential buyer from seller or landlord discrimination.
The Treasury Department reported that in the second quarter of 2022, the rate for homeownership among white households was 75% compared to 45% for Black households, 48% for Hispanic households, and 57% for non-Hispanic households. Absent any intentional measures, the gap between white and Black homeownership rates will widen in the next two decades, according to one recent Urban Institute study.
The report from the National Association of Real Estate Brokers (NAREB) underscores Marks' assertion that Black households have missed out on the opportunity to purchase a home — a significant source of wealth for both Black and white homeowners — due to antiquated credit score models and “faulty credit scoring tools” that misrepresent their creditworthiness.
“Institutional biases that have and continue to undermine Black homeownership include financial institutions’ use of outdated credit scoring models. Not only are Blacks potentially prevented from buying a home when financial institutions use antiquated scoring systems, but also borrowers may be overcharged when those same outdated technologies are used to price loans at the borrower level,” the report states, adding that the current system was not designed to meet the needs of households whose “incomes and credit profiles differ from those of White households.”
Derrick Johnson, president and CEO of the NAACP, told Yahoo News that racial discrimination is deeply rooted in the financial industry and its lack of response to bias and racism. This is exemplified by systemic and discriminatory practices like redlining — which is defined by the Legal Information Institute as the “denial of services such as mortgages, insurance loans, and other financial services to residents of certain areas, based on their race or ethnicity.”
“We've seen an aggressive redlining strategy that created the current condition the Fair Housing Act was put in place to address,” Johnson said.
The NAREB report also notes that people of color were disproportionately victims of the 2008 housing foreclosure crisis. In the past decade, the report says, the Black community missed out on more than a decade of low mortgage interest rates. Black homeownership fell to a 50-year low in the second quarter of 2019.
NAREB says that one of the biggest obstacles for Black households is saving money for a down payment on a house. While their income level may match qualifications to be approved for a mortgage, they may struggle to provide the upfront costs. Black families are also less likely to have the wealth needed to purchase and sustain homeownership. As noted above, the typical white family has nearly eight times the wealth of the typical Black family and five times the wealth of the typical Latino family. The median net worth for Black households is $24,000, compared with $188,000 for white families.
The report also sheds light on data showing that Black homeowners are more likely to face biases in the appraisal process that could lead to undervaluation and that grossly limits the returns on homeownership investments made by Black people.
It uses as an example an August 2022 New York Times article that gave an account of a Black man whose home in Baltimore was appraised for $472,000. The man reportedly asked a white colleague to pretend to be the owner and have the property reappraised. The home jumped nearly 60% in valuation, with the property valued at $750,000.
According to the Bureau of Labor Statistics, 98% of home appraisers are white. Sanedria Potter, a Black appraiser, told NBC News that the lack of people of color in the industry is at the root of home appraisal bias.
A 2021 Brookings Institution report found that as a result of bias, the value of homes in Black neighborhoods was 23% less than it should be, and that this represented $156 billion in lost equity.
“The devaluation of homeownership and ownership by Black folks have been historically a challenge for us,” NAREB president Lydia Pope told NBC News. “When you’re appraising properties, you understand neighborhoods."
If you don’t know a neighborhood, she said, you don’t understand there is more to appraisals than meets the eye. "So a major issue is that we definitely have to hire more Black appraisers,” she said.
A Biden administration interagency task force released a report in March that confirmed appraisal bias — finding that houses in Black neighborhoods were on average appraised at less than half the value of houses in predominantly white communities.
And in the current tumultuous housing market, in which potential home buyers are faced with inflation, increased mortgage interest rates and high home prices, the NAREB report states that Black people have to compete with large institutional investors that have been aggressively purchasing properties, often with cash, and waiving home inspections and appraisals disproportionately in Black communities, virtually shutting down opportunities for homeownership.
The report lists several recommendations to close the racial disparity gap in Black homeownership, including eliminating risk-based or loan level pricing, eliminating penalty fees to access down payment assistance and ending discriminatory and abusive appraisal practices.
In October, the Federal Housing Finance Agency (FHFA) announced the validation and approval of two newer, purportedly more sophisticated and accurate credit scoring models, specifically, FICO 10T and VantageScore 4.0. NAREB called this “positive news,” but also acknowledged that the change will not take effect immediately.
In an email to Yahoo News, the Federal National Mortgage Association, known as Fannie Mae, outlined an equitable housing finance plan that includes “efforts to enhance homebuyer education and pilot programs to improve credit scores and to explore security deposit alternatives.”
The Neighborhood Assistance Corporation of America (NACA), 93% of whose members are minority homeowners, also touted a multiday event around the Martin Luther King Jr. holiday next year, which allows potential homebuyers to meet with homebuying counselors and underwriters to help close the homeownership gap.
“People can go through the whole process — workshop, uploading information, one-on-one counseling — and be underwritten in one day,” Marks said. “We are doing this in the rural communities, in the midsized communities in Alabama, in Texas. Then, we're expanding that nationwide, because the affordable markets are in your midsized communities and your rural communities.”
NACA said it is also mobilizing advocacy campaigns against big investors like Blackstone that buy up single-family homes and rent them out.
“They are taking away more homeownership opportunities than what the builders are building in terms of affordable housing,” Marks said. “If you look at places like Atlanta, Charlotte, other places around the country, you've got these big investors buying up the properties. Then we're also going into the low, the rural and the midsize markets where there is affordable housing, and particularly in these markets that have been overlooked and disinvested from since Reconstruction.”