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Fair Lending? Not For Blacks

Studies offer suggestions for fixing the problem

Lew Sichelman headshot
Lew Sichelman
Fair lending?

“Mirror, mirror, on the wall, who’s the fairest of them all?” Not Blacks, at least not when it comes to housing finance.

I know the wicked queen was talking about beauty when she uttered those famous words in the Disney classic “Snow White.” But taking editorial license, let’s twist the meaning a bit to be fair, as in even-handed. And when it comes to Black home buyers, the fair meter in that context barely registers 50%.

Yes, 2021 was the fairest year for finding financing since the 2008 housing crisis for Black home buyers, according to a new report. But fairness was no better in 2021 than it was in 1990, according to the report from FairPlay. And if the past is prolog, the fairness meter is likely to drop in the near future if it hasn’t already.

That’s what happened during the Great Recession, when Fairplay’s mortgage fairness metric, which it calls Adverse Impact Ratios, took a nose dive for Blacks. And the signs already are present that it could happen again — credit card utilization is going up, average credit balances are rising right along with it, and credit scores are tanking.

Overall, however, neither Blacks nor Hispanics nor Native Americans have made any headway over the previous three decades compared to their white counterparts, the study found. And another report, this one from a group of Black realty agents and brokers, reinforces FairPlay’s finding.

According to the National Association of Real Estate Brokers’ “State of Housing in Black America,” the percentage of Blacks securing loan approval has been stuck at 7% since 2019. In 2008, it was just 6%, so it’s a tick better. But Blacks represent 12% of the U.S. population!

The two studies, which dropped the week after Thanksgiving, both base their findings on data collected from lenders under the Home Mortgage Disclosure Act, the most comprehensive publically available source that identifies race, ethnicity, and gender for mortgage applications.

FairPlay, an AI tool that identifies fairness-as-a-service solution for financial institutions reviewed all HMDA mortgage application data, including almost all mortgage applicants, from 1990 to 2021 — some 350 million transactions in all. And its 27-page “State of Mortgage Fairness” evaluated how much mortgage fairness has changed — or not — in the past 30 years.

Stuck In Neutral

NAREB’s 100-page document is an annual endeavor, with this year’s study using 2008 as its base year “so we can better understand Black homeownership progress since the height of the foreclosure crisis and the damage of predatory lending,” President Lydia Pope, who operates two real estate firms in Cleveland, explained in the report’s forward. The group isn’t widely known, but it has been active for 73 years.

“Stuck in neutral” is how the FairPlay study describes mortgage fairness — or better perhaps, the lack of same — for African Americans. That’s especially true in five Southern states — Alabama, Arkansas, Louisiana, Mississippi, and South Carolina — where persistent discrepancies in loan approvals are “deep and persistent” no matter how strong the macro-economic environment is.

The FairPlay study suggests an “alarming drop in mortgage fairness” for Native Americans and Latinos as well. The fairness meter has improved only for women. (Its Adverse Impact Ratios, which are borrowed from an employment context, measure the rate of approval for protected status applicants for the control group, in this case lucre.)

Fair lending? 2

“Our analysis shows that decades of policy interventions and economic reforms to equalize lending opportunities have largely failed to reduce the gap in loan approvals” between most minorities and Whites, the report maintains. While last year’s slight increase in underwriting fairness is an encouraging sign, we believe the persistent disparities in mortgage lending for Black and Native American borrowers deserves policymakers’ attention.”

NAREB has some thoughts on that score. The Maryland-based group’s recommendations are comprehensive. But, according to its study, “they recognize that significant actions must be taken to genuinely offer” Blacks a shot at the brass ring, otherwise known as the American Dream.

Release The GSEs

The report lists six changes it deems necessary to put Black home buyers on an even playing field. But above those, fixing “the broken housing finance system itself” by turning Fannie Mae and Freddie Mac into the federal corporation structure is Job One.

NAREB says the “most direct route” to accomplish its goals is to release the GSEs from conservatorship and re-charter them as a single and independent federal housing and community investment corporation that would eschew lucre and focus on expanding affordable housing. “Rather than profits,” the group says, “the new agency could lower borrowing costs for all consumers by eliminating fees and risk-based pricing.”

Here are the other changes NAREB would like to see:

• Eliminate loan level price adjustments — Assessing higher costs to those who are weaker financially is counterintuitive, NAREB maintains, because it makes financing less affordable and increases the risk of default. “LLPAs unfairly and disproportionately penalize the populations that were principal victims of exploitive lending.”

• End fees to access downpayment assistance — Some lending programs charge as much as 1.5 points for help with the downpayment because it is considered a risk element. But that’s “unfair and irrational,” the group argues because it contradicts the purpose of aid, which is to lower the cost to borrowers and decrease the overall risk. “Helping borrowers increase the down payments improves mortgage accessibility and sustainability.”

• Recalculate the impact of student loan debt — Also a contradiction is the treatment of deferred student debt as part of the borrower’s debt-to-income ratio, NAREB maintains, because it ignores the possibility of greater income in the future. “If borrowers cannot receive credit for future earnings increases, why should they be penalized for not-as-yet required education loan repayments?” the report asks.

• Leverage special purpose credit programs — SPCPs have been around for years as a way of meeting the credit needs of historically disenfranchised populations. But they have not become a significant vehicle for supporting affordable housing. NAREB, along with the National Fair Housing Coalition, which is leading the charge, would change that so SPCPs could “ultimately provide an alternative and productive lending channel to meet the credit need” of underserved markets.

• End discriminatory and abusive appraisal practices — Here, the group simply says more needs to be done to address what it calls “the pervasive racial bias” in home valuations and “undermine the major source of wealth” in Black communities.

• Fix the broken and out-of-date housing finance system — Noting that today’s housing finance system was built in the 1930s on “powerful discriminatory pillars,” the report says it is not equipped to address the housing needs in older urban communities, nor what it designed to address the racial economic disparities that exist today.

 “America needs a 21st Century housing finance system that has adequate capacity and flexibility to innovate and create affordable homeownership programs that can create millions, not hundreds, of new Black homeowners,” the report contends.

 Given the historic level of systemic, federally sanctioned, and enforced discrimination, the report concludes, it is impressive that African Americans have achieved any meaningful level of homeownership and speaks to their tenacity. But the time is long overdue for change.

 White households did not achieve 65 percent ownership rates without substantial federal assistance, NAREB points out. Now, more than ever, minority buyers need the same.

This article was originally published in the NMP Magazine January 2023 issue.
Lew Sichelman headshot
Lew Sichelman,
National Mortgage Professional Contributing Writer

Lew Sichelman has been covering the housing and mortgage sectors for 52 years. His syndicated column appears in major newspapers throughout the country. He also has been the real estate editor at two major Washington, D.C., dailies and spent 30 years on the staff of National Mortgage News, formerly National Thrift News.

Published on
Dec 28, 2022
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