African American and Hispanic households have been disproportionately affected by overly tight mortgage lending standards—and they constitute a surprisingly large share of the 4 million loans that were not originated due to tight credit standards from 2009 to 2013.
The implications of reduced mortgage lending for the economy are clear: a slower recovery in housing, less economic activity associated with home purchases, and fewer opportunities for wealth building during an opportune time to purchase a home. But our new analysis of the decline in lending across racial and ethnic groups adds another concern to this list.
Significant racial gaps
While the number of home purchase loans made in 2013 decreased by 36 percent since 2001 (a decline that the Housing Finance Policy Center has thoroughly explored in past work), minority borrowers have felt an even greater tightening. Loans to African American and Hispanic borrowers declined by 50 percent and 38 percent respectively, compared a decline of just 31 percent for white borrowers. Loans to Asian borrowers increased by 8 percent.
When we examined the number of loans that would have been made if credit standards remained similar to 2001, we found that African Americans and Hispanics represented a larger portion of these missing loans than one would expect based on these groups’ share of the mortgage market. Hispanic families represent 8 percent of total loans and 9 percent of the missing loans. African American families represent 5 percent of the total loans and 9 percent of the missing loans. Meanwhile, while white families represent 72 percent of the total loans, they represent only 55 percent of the missing loans.
Differences in FICO scores drive much of the disparity
Since the recession and postcrisis period especially, a mortgage loan applicant’s FICO credit score has carried tremendous weight in a lender’s decision to either approve or deny a loan. When we examined FICO score, race, and decline in lending volume together, we found that differences in the FICO score distribution across the groups could explain most of the gap in lending. Borrowers of all races in the less-than-660 FICO score group, which represents low-credit households, experienced very large declines in the number of loans across the board. In the higher FICO groups, white borrowers actually had slightly larger declines than Hispanic and African American borrowers.
Totaling all FICO groups together, though, white borrowers fared better than Hispanics and African Americans because white borrowers are more likely to be in a higher credit bucket. More than 64 percent of white borrowers in 2013 had a FICO score of 720 or greater, compared with 41 percent and 33 percent of Hispanic and African American borrowers respectively. (Our study did not explore what drives the differences in FICO scores, a complicated and important subject in its own right).
While loans to low- and moderate-credit Asian borrowers declined similarly to other groups, high-credit Asian borrowers had an enormous (56 percent) increase in loan volume. This increase was large enough to result in an overall increase in loans to Asian borrowers, despite the drop in loans to lower-credit Asians.
This research suggests that tight credit is not just an issue for the health of the overall economy, but one that affects racial and ethnic groups differently. Very restricted lending standards leave us with the unfortunate reality that large shares of low- and moderate-credit African American and Hispanic households may remain outside the credit box until policymakers take action to expand it.