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Racial disparity in mortgage rates is widespread between African-American and White borrowers, according to a newly published study which found more financially vulnerable African-American women suffer the most. The study, led by Ping Cheng, Ph.D., professor of finance at Florida Atlantic University's College of Business, used data from three waves of U.S. Survey of Consumer Finance and found that African-American borrowers, on average, pay about 29 basis points more than comparable White borrowers, or 0.29 percent more. Their article was published in the July 2015 issue of The Journal of Real Estate Finance and Economics.
Dr. Cheng and his fellow researchers, Drs. Zhenghou Lin and Yingchun Liu of California State University, Fullerton, found that the rate disparity mainly occurs to young African-American borrowers with low education, as well as those borrowers whose income and credit disqualify them for prime lending rates. Additionally, among borrowers in the higher rate groups, African-American women seem to receive much more disparate treatment than African-American men.
"Our finding is that there is a discrepancy between blacks and whites in terms of mortgage rates," Dr. Cheng said. "When we further dig into the data, we find that generally the low-income African-American women who are heads of households pay the highest. They are the most vulnerable to sub-prime lending and higher mortgage rates."
Among women borrowers who fail to qualify for the low-rate (prime) mortgages, African-American women, on average, are charged 57.36 basis points (or 0.5736 percent) more than their White counterparts. For a typical $250,000, 30-year mortgage at the current prevailing rate of 3.75 percent per year, the rate difference implies an extra $82.86 per month in mortgage payment for the African-American women borrower.
If this $82.86 per month was placed in some kind of savings or investment account earning a modest two percent per year, the balance would reach $40,825 when the loan is paid off at the end of 30 years. This is the amount of wealth the black women borrowers would lose compared to their White counterparts.
"When all the traditional variables are controlled—similar mortgage product, similar income level, similar education level, similar shopping behavior—African-Americans overall, as a group, end up paying a higher rate on average," Dr. Cheng said.
Empirical studies running statistical models are not able to answer the question of why such discrepancies exist. However, the study's findings suggest the risk perception for lower-income African-American women is worse than that for White borrowers with comparable income and credit quality, Dr. Cheng said.
"We can only suggest correlations," Dr. Cheng added. "We can only say this high rate discrepancy is consistent with the behavior of racial discrimination, but we cannot say it is the result of racial discrimination."