Refinancing Bias: Does Race Play a Role?

Looking to get a mortgage to refinance your home at a low rate? Better check not only your bank account and credit score but your neighborhood's racial profile.

According to a new report that surveyed loans in seven major cities across the country: among the big four bank holding companies that now dominate the mortgage market -- Chase, Bank of America, Citigroup, and Wells Fargo -- the number of prime refinances jumped by nearly one-third in predominantly white neighborhoods in seven cities between 2006 and 2008, while they declined by the same amount in neighborhoods where most residents are members of minority groups.

Overall, for both purchase and refinance mortgages, prime lending plummeted by 60 percent in minority neighborhoods, compared with just 28 percent in areas where most borrowers are white.

The report from seven research and advocacy groups analyzes Home Mortgage Disclosure Act data for Boston, New York City, Charlotte, Chicago, Cleveland, Los Angeles, and Rochester, looking at loans that cost no more than 3 percent higher than the Treasury rate.

The new numbers suggest that the benefits of those expensive interventions are going to some neighborhoods much more than others – with race as a dividing line. Has racial profiling poisoned the mortgage application process?

It's impossible to know exactly why this alarming gap between lending in minority neighborhoods and white neighborhoods is growing. But other research suggests that fewer black and Latino buyers have even been attempting to buy homes than white buyers.

The Pew Hispanic Center found that between 2006 and 2007, as the mortgage market started to tank, applications from black and Latino buyers fell by more than one-third while those from whites fell just 19 percent. Those minority borrowers were less likely to have their applications approved. And black and Latino borrowers have been much more heavily represented than whites in the high-priced loan market.

Credit scores, often damaged by subprime lending, likely have something to do with the racial gap in mortgages. During the bubble, minority borrowers were much likelier than white borrowers to end up with high-priced subprime mortgages, even when their incomes and credit scores were similar. Such loans often set those borrowers up to fail.

The National Community Reinvestment Coalition recently found that in Washinington, D.C., minority homeowners were far more likely to go into foreclosure than white owners with similar credit scores and loan sizes.

Remember, it was during this period -- when big bank lending to white neighborhoods surged -- that it sank in minority areas.

The federal government was doing everything in its power to keep mortgages available at low rates and encourage Americans to buy homes. The Fed bought billions and billions in mortgage-backed securities from Fannie Mae and Freddie Mac, whose shares Treasury purchased to keep the companies solvent.

The Fed kept interest rates low, and once Freddie and Fanny came under government control, those lenders marketed low-rate refinances as a way to help struggling homeowners keep their mortgage bills down. Meanwhile those four big banks received bailouts via TARP, without which they would not have stayed in business.

It's an eerie echo of the old days when many minority borrowers could not get mortgages, in a practice known as "redlining." Banks and the federal government used maps like the one pictured above to decide where they would back home loans.

As credit gets tighter, the race gap is widening again. Whether or not racial profiling is to blame, the trend is a distressing -- and one that hopefully can be addressed as housing markets recover.

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