Black mortgage applicants are being turned down at a much higher rate than their White counterparts.
If homeownership is the epitome of having achieved the American Dream, for Black mortgage applicants the goal continues to be a dream deferred, according to a newly released study. According to research from Zillow drawn from federal Home Disclosure Act data, the disparity between Black and White mortgage applicants – a historical fissure – has widened even more amid the COVID-19 pandemic at an alarming rate. From 2019 to 2020, the mortgage denial for Black applicants compared to their White counterparts grew from 74% to 84%.
While discrepancies between White and Black applicants are historic, the recent rise even took the economist in charge of the study by surprise.
“We’ve done this research in the past,” Zillow economist Nicole Bachaud said in a telephone interview with Mortgage Professional America. “There is a significantly higher rate of denials for Black applicants every year in this data. What we saw between 2019 and 2020 was that the gap between denial rates for Black and White applicants grew in the last year.”
The gap was more conspicuous amid record-setting times for home refinancing, as those owning houses were able to dip into their properties’ equities for quick cash given skyrocketing home values. “A lot of that has to do with the fact that there were more refinance applications in 2020, which typically have lower denial rates because they’re coming from existing homeowners and also they’re much more likely to come from White applicants because White applicants are more likely to be homeowners already,” Bachaud said of the widening gulf with Black applicants. “So that kind of lowers the White denial rate whereas Black home purchase denials grew larger so the gap is getting bigger.”
Even before launching into the next study illustrating gaps between the two population segments, Bachaud anticipates an ever-widening gap in the future. “There were millions more refinancing apps in 2020 than any year in the past. And I’m sure when we see 2021 data it’s going to be even millions more than that.”
One saving grace: The widening gap isn’t attributable to lender bias, but the methods of assessing creditworthiness, the economist noted.
“What we’re seeing in this data is not necessarily explicit bias from the lenders themselves,” Bachaud said. “The number one reason for Black mortgage denials are based on credit – either lack of credit history, bad credit scores, some sort of derogatory mark on a credit report.” To be sure, the issue is not new but rooted in past nefarious practices designed to deny Black applicants homeownership. Still, the gap continues to widen despite modernity, Bachaud suggested. And some elements preying on minority borrowers continue to exist in many communities.
“The discrepancies in creditworthiness between Black and White Americans stems back to redlining before the Fair Housing Act came into place,” she said. “A lot of those effects are still largely at play in a lot of communities. There are far fewer banks and far more predatory lending institutions in Black and Brown communities across the country. Income discrepancies still exist.”
In conducting her research, Bachaud discerned how smaller lending institutions are less likely to deny Black mortgage applications – a reality buttressed by a separate Zillow study examining various banks’ practices conducted last spring.
“This data set is looking at all depository and lending institutions,” she said. “Smaller banks were much less likely to deny applicants regardless of a lot of these factors. That does tell us that these smaller banks, typically community banks that are more invested in the places they’re located, are more likely to value the relational aspect and less likely to deny.”
There may be hope on the horizon, though. Bachaud noted new efforts by such institutions as Fannie Mae and Freddie Mac to include rent histories as part of the reckoning in approving mortgage applications.
But for now, vestiges of the past continue to exist in denying Black mortgage applicants disproportionately, she added. “There are a lot of systemic issues that have never been fixed that are still leading to a lot of these underlying reasons why Black mortgage applicants are more likely to be denied.”