Report Raises Questions Over Racial Lending Disparities

From [HERE] Seven consumer advocacy groups say their analysis of mortgage data raises questions about whether mortgage lenders are steering minority borrowers into government-backed mortgages that are slightly more expensive than conventional mortgages.

The report looked at lending data disclosed by banks under the 2010 Home Mortgage Disclosure Act. “The findings indicate persistent mortgage redlining and raise serious concerns about illegal and discriminatory loan steering,” according to the report released Thursday. The majority of government-backed loans are issued by the Federal Housing Administration, which allows borrowers to make down payments of just 3.5% and remains virtually the sole source of low down-payment mortgages for homeowners today.

FHA loans require borrowers to pay mortgage insurance premiums no matter how much equity they have. Conventional loans, meanwhile, typically require mortgage insurance when borrowers have less than 20% in equity. Insurance premiums vary depending on the borrowers’ credit score and other risk factors.

“It’s not that the [FHA loan] isn’t a good product,” said Spencer Cowan, vice president at the Woodstock Institute, a Chicago-based research organization. The problem, he said, is that “to the extent that a borrower who could qualify for conventional financing is instead offered an FHA product, that person is being disadvantaged.”

The report showed that home buyers in minority neighborhoods in Los Angeles received government-backed loans five times as often as those in predominately white neighborhoods. Borrowers looking to refinance in minority communities were 6.5 times more likely to receive FHA or other government-backed loans than those in predominately white neighborhoods.

One shortcoming of the study is that it didn’t determine whether or how often white and minority borrowers with similar down payments or credit scores received different loan products.

Industry officials said the report could instead reflect larger socioeconomic challenges, including the loss of wealth from the housing bust and economic downturn that has left borrowers in minority communities with less equity for a down payment. “The FHA owns the low-down-payment market. In that space, the FHA is less expensive. It’s not a matter of steering,” said David Stevens, who served as the agency’s commissioner for two years. He is now the chief executive of the Mortgage Bankers Association.

The report underscores the outsized role that the FHA and other government agencies play in providing credit to minority home buyers. In 2004, government-backed loans accounted for around 22% of loans to African-American home buyers, as the private sector offered much easier qualification standards. But by 2010, the share of government-backed lending jumped to 80% of purchase loans to African Americans, according to HMDA data.