A closer look at loan numbers shows that the housing bust not only hurt African American and Hispanic households most, but they benefit least from today’s favorable market for new homeowners. Compared to 2001 lending standards, as many as 1.2 million loans were “missing” in 2012 alone due to lower credit availability—disproportionately impacting African American and Hispanic households. The number of new mortgage loans is at its lowest in more than a decade and borrowers with low FICO scores are shut out. But changes in home purchase loan volume during the boom, bust, and recovery reveal just how much harder minorities are getting hit.
Minorities borrowers are decreasing in share
The figure below separates the annual distribution of new home purchase loans by borrower race and ethnicity. From 2001 to 2012, the share of non-Hispanic whites increased from 68 to 71 percent of all borrowers. Asian borrowers increased from 4 to 6 percent. Although African American borrowers increased from 6 percent in 2001 to 8 percent in 2005, by 2012 their share dropped to just 5 percent. Hispanic borrowers followed similar pattern: increasing from 9 percent in 2001 to 13 percent in 2005, before dropping to less than 9 percent by 2012.
Race and ethnicity in the boom and bust
As the above figure shows, when prices peaked in 2005 and 2006 (the years a new homeowner would want to avoid), a disproportionate number of minority borrowers entered the housing market. From 2001 (a year representative of typical lending standards) to 2005 (the peak of the housing bubble), the number of purchase mortgages increased by 102 percent for African Americans borrowers, 129 percent for Hispanics, and 106 percent for Asians. Yet for non-Hispanic whites, the increase was a modest 41 percent.
After 2005, however, the number of purchase loans to African American and Hispanic borrowers declined by 76 and 78 percent. For African Americans, that’s a decline from over half a million loans to 131,470 between 2005 and 2012; for Hispanic borrowers, a decline from 986,206 in 2005 to less than 250,000. Yet loans to non-Hispanic white and Asian borrowers declined by only 56 and 59 percent.
Who is benefiting from the recovery?
While all borrowers lost household equity in the Great Recession and are now feeling the crunch of tightening credit, minority borrowers may feel it most. Many of these minority borrowers received the kind of predatory mortgages now forbidden under the Dodd-Frank Act. With the subsequent downturn in prices, particularly in minority neighborhoods, higher minority default rates are not surprising. Now, strict credit standards and lowered FICO scores due to missed payments or foreclosure prevent many of these same borrowers from entering the housing market despite lower prices.
Few think that 2005, with rampant no- and low- documentation lending, is the correct year to use as a desired comparison for credit accessibility standards. However, even when comparing 2001 with 2012, the number of purchase loans to African American and Hispanic borrowers still declined by 55 and 45 percent, while lending to non-Hispanic whites and Asians only declined by 41 and 15 percent. If 2001 credit availability standards were applied in 2012, more households would be receiving mortgages. Today’s credit inaccessibility is locking out African American and Hispanic borrowers disproportionately—at exactly the point in the economic cycle that favors new homeownership.