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December 1, 2016

Increasing access to mortgages for minorities

December 1, 2016

A version of this post originally appeared on The M Report.

Over the past 10 years, the mortgage lending environment has seen a large swing in credit availability, and the effects have been most dramatic for minority populations. African American and Hispanic borrowers saw enormous gains in homeownership in the years leading up to the financial crisis, but tighter credit conditions since the crisis have hit these populations harder than their white and Asian counterparts.

Given the dramatic growth projected in minority populations, we must expand access to mortgages so homeownership can continue to be a bedrock of the US economy.

Minority homebuying peaked at the worst time

African American and Hispanic borrowing peaked in 2005, exactly when home prices peaked and subprime and exotic mortgage products were proliferating. In other words, a disproportionate number of nonwhite borrowers purchased homes in a lax lending environment—exactly the wrong time.

Beginning in late 2005, and accelerating during the financial crisis, home prices declined, resulting in a spike in delinquencies and foreclosures. Many families who became homeowners during the run up in prices and freely available credit environment, faced great distress several years later.

Now that credit has tightened so severely, minority populations are disproportionately blocked from the market, unable to buy a home and build the wealth and economic stability associated with ownership.

How hard is it to get a mortgage today?

We have tracked credit availability and watched the shifts in lending that create a tight credit environment. Our Housing Credit Availability Index measures default risk, the probability that mortgage borrowers will become delinquent for 90 or more days.

This measure indicates that the probability of default rose from 12 percent in 2001 to a peak of 16.5 percent in 2005–06 before declining to the current level of 5 percent. Lenders are taking less than half the credit risk they were taking in 2001—a period of reasonable credit standards—and less than one-third the credit risk they were taking in 2005–06, when credit standards were too loose.

Mortgage borrowing by race from 2001 to 2015

Share of Purchase Originations by Race and Ethnicity

  White African American Hispanic Asian Other 
2001 67% 6% 9% 4% 14%
2003 68% 6% 10% 5% 11%
2005 61% 8% 14% 6% 11%
2007 66% 7% 11% 5% 10%
2009 70% 6% 9% 6% 9%
2011 70% 6% 10% 6% 9%
2013 72% 5% 9% 6% 9%
2015 70% 6% 10% 6% 9%

Source: HMDA and Urban Institute calculations.
Note: Includes all owner-occupied purchase loans, not limited to first liens.

The share of non-Hispanic white borrowers dropped from 67 percent in 2001 to a low of 61 percent in 2005, before increasing to 70 percent in 2015. The share of African American borrowers increased from 6 percent in 2001 to a high of 8 percent in 2005, before receding to 6 percent in 2015. The Hispanic share increased from 9 percent in 2001 to 14 percent in 2005, before declining to 10 percent in 2015.

Asians are the only minority group whose market share has not declined in the post-crisis period, increasing from 4 percent in 2001 to 6 percent in 2005 and remaining close to that level.

From 2001 to 2015, the number of mortgages taken out to buy owner-occupied homes declined 27 percent. The number of loans to Hispanic borrowers declined 19 percent, while loans to white and African American borrowers declined 24 and 33 percent, respectively. The number of loans to Asian borrowers increased 10 percent.

Bigger boom and bigger bust for minority borrowers

Purchase Origination Volume by Race and Ethnicity

  White  African American Hispanic  Asian  Other Total 
2001 2,993,768 272,404 401,297 171,491 640,145 4,479,105
2003 3,327,463 309,668 513,550 227,868 527,032 4,905,581
2005 3,769,749 486,605 876,165 343,261 705,674 6,181,454
2007 2,654,950 294,924 438,522 204,324 406,802 3,999,522
2009 1,737,366 142,697 234,753 144,034 232,871 2,491,721
2011 1,472,641 117,210 205,837 118,443 188,276 2,102,407
2013 1,953,196 132,300 235,650 167,586 237,022 2,725,754
2015 2,269,262 182,979 324,198 189,415 292,035 3,257,889
Pct. change '01-'05 26% 79% 118% 100% 10% 38%
Pct. change '05-'15 -40% -62% -63% -45% -59% -47%
Pct. change '01-15 -24% -33% -19% 10% -54% -27%

Source: HMDA and Urban Institute calculations.
Note: Includes all owner-occupied purchase loans, not limited to first liens.

When we break down these changes into two distinct time periods—2001 to 2005 (the peak) and 2005 to 2015 (the bust and recovery) —it’s clear that minorities had a bigger boom and a bigger bust than white borrowers.

From 2001 to 2005, African American and Hispanic borrowing increased 78 and 116 percent respectively, compared with 26 percent for white borrowers. From 2005 to 2015, the number of minority borrowers declined 62–63 percent compared with a 40 percent decline in white borrowers.

How do we open up access to mortgages?

The disparate impact of tight credit is largely because of the differences in credit scores between white and nonwhite borrowers. So what can be done?

Lenders need to reevaluate the underwriting toolkit with an eye toward changes that would help minorities regain ground on homeownership. For example, lenders could consider the income of members of multigenerational families who are not parties to the mortgage. Lenders could evaluate borrowers more holistically, considering both primary and secondary jobs.

Many minority borrowers do not have a deep credit history, so using credit scores such as Vantage or the new versions of FICO would be beneficial, as both these metrics score more borrowers than the model currently in use:  a FICO model released in the early 2000s.

The need to act now

If we don’t act, fewer households will become homeowners at the point in the economic cycle when it is most advantageous to do so. And minorities will continue to miss this wealth-building opportunity. The median family wealth for homeowners is $195,400, and for most of these households, their home is the most valuable asset. The median family wealth for renters is $5,400.

This disparity has consequences for the housing market and the broader economy. Fewer potential homebuyers means the housing market will continue to recover more slowly. And fewer buyers creates a strain on related benefits to the economy, such as spending on home goods and an increase in construction jobs.

As the minority population continues to grow, this disparity in homeownership will increasingly affect our economic vitality. Now is the time to responsibly expand access to mortgage credit to the full range of creditworthy borrowers.

Hugo Malara, left, and his fiance Maria Sorto watch television at their rental home in Las Vegas, Monday, Feb. 23, 2009. No longer able to make his monthly mortgage payment after losing his job at a neon sign company, Malara paid $800 to a former mortgage broker, but later learned that by the time they wrote him the check, the bank had already sold their home at auction. Photo by Jae C. Hong/AP

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