The uneven recovery

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During the Millennium Boom, lender discrimination took the form of subprime lending, now it appears as a total denial of credit to minority and low-income borrowers.

The Chairman speaks out

Chairman of the Federal Reserve, Ben Bernanke, recently spoke at the Operation Hope Global Financial Dignity Summit. Operation Hope is a non-profit organization based in Atlanta, Georgia. Its mission: to provide financial literacy and “financial dignity” to disadvantaged individuals and communities.

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Federal Reserve: Challenges in housing and mortgage markets

The topic of Bernanke’s speech was twofold:

• the role of housing in the economic recovery; and
• how the current state of housing is affecting disadvantaged communities.

Essentially, Bernanke characterizes the recovery of both the broader economy and the housing sector as uneven. No surprise there. While housing is improving, the benefits of the recovery are not working their way into the underclass and the lower strata of the middleclass.

Although cautious, Bernanke cites the following positive indicators of the housing market’s recovery:

• house prices nationally have increased for nine consecutive months;
• residential investment has risen about 15 percent from its low point;
• sales of both new and existing homes have edged up;
• homebuilder sentiment has improved considerably over the past year; and
• real estate agents report a substantial rise in homebuyer traffic.

While encouraged, he also notes the flipside remains grim:

• construction activity, sales, and prices remain much lower than they were before the crisis;
• about 20% of mortgage borrowers remain underwater;
• 7% of mortgages are either more than 90 days overdue or in the process of foreclosure;
• the number of homes in foreclosure remains in excess of 2 million, three times the historical norm; and
• the national homeownership rate has slipped nearly 4 percentage points from its 2004 high of nearly 79%, and it now stands at a 15-year low.

Minority homeownership

Although the housing bust has affected us all, disadvantaged communities have suffered disproportionately. The greatest disparity can be found in a closer analysis of the homeownership rate.

Homeownership has declined the most among those with a household income of $20,000 or less. While the rate has fallen around 2 percentage points among other groups since 2004, homeownership among African Americans has fallen by a staggering 5 percentage points.

A disproportionate foreclosure rate in low-income communities is the primary cause for this precipitous drop in homeownership. High foreclosure rates in these communities sets off a vicious cycle of decreased property values, increased crime and thus drastically diminished tax bases. As a result, the foreclosure wave in low-income and minority neighborhoods has left an utter wasteland in its wake.

Lender discrimination now

Yes, the homeownership rate has fallen as a result of the housing bubble bursting and the ensuing financial crisis. But given the relative strength we have seen in the housing sector lately, why isn’t the rate improving?

Those who have lost their homes to foreclosure in recent years are lamentably limited from becoming homeowners, especially those in the low- to middle-income range. First lien mortgage lending from 2006 to 2011 has atrophied, falling by more than half nationwide.

But low income, African American and Hispanic borrowers have been hit the hardest. While mortgage lending has fallen 50% across the board, the number of purchase-assist loans granted to African American and Hispanics has dwindled by more than 65%. Among low-income neighborhoods, the pace of mortgage lending is down 75%.

The well-intentioned Fed Chairman has run the gamut of Federal Reserve (the Fed) policies designed to stimulate both the housing market and the greater economy. Unfortunately, all of the quantitative easing in the world has yet to help the disadvantaged to rejoin the ranks of homeownership.

Lender discrimination then

Lenders and borrowers are natural adversaries. This adversarial relationship is even more contentious when it comes to minority and low-income borrowers. The reason why minority and low-income communities are suffering the most now is because they were exploited the most during the bubble.

In 2006, at the height of the housing bubble:

• 52.9% of African American homebuyers financed their purchase with a subprime mortgage;
• 47.3% of Hispanics leveraged their purchase with a subprime loan; while
• a mere 26.1% of white homebuyers purchased a home with subprime financing. [Data courtesy of the Joint Center for Political and Economic Studies.]

Millions of dollars in housing wealth and up to 100 credit score points have been wiped from minority balance sheets. Lenders created this mess by preying on less educated and socially marginalized individuals.

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A new age for fair housing

You might say discrimination was occurring in the reverse — minorities were targeted and given unsustainable amounts of purchase-assist financing. Now, in a bitterly ironic twist, lenders are citing these groups as credit risks when it is the lenders who put them there.

The vicious cycle continues. While nationwide unemployment is now below 8%, the figure for African Americans is 14.3% as of October 2012. As we all know, the Great Recession leveled Depression-era unemployment on the nation. But the jobs that went first and fastest were those that belong primarily to minority groups: manufacturing and service industry jobs.

Disparate impact

Mortgage lending discrimination runs deep. To hear it from a lenders perspective, all decisions regarding the origination of a home loan are pure math — reason does not discriminate. However, redlining and other forms of racial discrimination are today merely veiled by the math.

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Many simply associate fair housing violations with disparate treatment — a lender overtly denies funding based on race or ethnicity. But the most prevalent and insidious form of discrimination occurs as disparate impact. This is when a lender’s policies apply equally to all groups but the impact disproportionately affects members of a particular race, gender, age group and so on.

Disparate impact is more difficult to identify and prove, but we can agree based on the numbers reported above that it is happening.

There is only so much the Fed can do to assist disadvantaged homebuyers. Much of the power lies in the hands of Congress to create the appropriate financial regulation and fiscal stimulus necessary to level the playing field for all Americans. Financial literacy initiatives from the non-profit sector are an excellent example of how the public can work on this problem without relying on the do-nothing Congress.

However, financial literacy is more than learning the difference between a fixed rate mortgage (FRM) and an adjustable rate mortgage (ARM). It means learning how to navigate a fundamentally flawed and adversarial process. In the meantime, it means securing a thoughtful and informed agent to represent the best interests of the homebuyer, rather than padding industry pockets.

During the housing crash, history repeated itself as tragedy. Agents, do your due diligence this time to ensure that history does not repeat itself as farce.

Related article:

The era of the financially illiterate homebuyer

To report lender discrimination, either in the form of disparate treatment or disparate impact, file a housing discrimination report online at HUD.gov.