The Mortgage Industry’s Race Problem

By Ryan Dosen

Racial discrimination in mortgage lending is apparently still a problem. Strides have been made and much attention has been paid to the issue, especially since the release of the Boston Fed’s well-known study back in 1992. However, according to a recent study, black borrowers still pay higher rates on their mortgages than comparable white borrowers.

 

The Study

Ping Cheng, Ph.D., professor of finance at Florida Atlantic University, led this recent study on potential racial discrimination in mortgage lending. Cheng’s report, “Racial Discrepancy in Mortgage Interest Rates,” reveals that “black borrowers on average pay about 29 basis points more than comparable white borrowers.” This means that black borrowers’ interest rates are, on average, 0.29 percent higher than the rates paid by comparable white borrowers.

Cheng’s study also found that “rate disparity mainly occurs to young borrowers with low education as well as those borrowers whose income and credit disqualify them from prime lending rates.” Subprime borrowers with lower credit qualifications certainly have to pay higher rates than buyers with excellent credit, but Cheng’s numbers show that lenders are being even harder on black subprime borrowers.

The study concludes by stating that, “while the racial disparity in mortgage rates is widespread between black and white borrowers, it is the more financially vulnerable black women who suffer the most.” Black women, according to the study, are charged an average of 57.36 basis points more than comparable white borrowers.  Based upon today’s current rates, this means that, on average, black women may be paying an $80 premium on monthly payments for a $250,000 mortgage.

 

The 1992 Boston Fed Study

In 1992, the Boston Fed released an important study on mortgage discrimination. The study found that “after controlling for financial, employment, and neighborhood characteristics, black and Hispanic mortgage applicants in the Boston metropolitan area [were] roughly 60 percent more likely to be turned down than whites.” According to a Fox News article from 2008, it turned out that the study was riddled with errors and that after the mistakes were corrected, “no evidence of discrimination remained.” Still, after the release of the Boston Fed study, the Justice Department went to work on the issue, making minority access to credit an important issue. Banks were given new criteria for credit histories, down payments and closing costs, and sources of income that had to be accepted. Violations were made subject to significant fines.

 

New Protections

Fast forward to a few years ago. The Dodd-Frank Wall Street Reform and Consumer Protection Act provided a tidal wave of federal regulations designed to help America avoid a repeat of the events leading to the Great Recession of the late 2000s. One of the many changes mandated by Dodd-Frank dealt with how loan officers, originators, and brokers were compensated.

According to Richard Cordray, Director of the Consumer Financial Protection Bureau, “before the financial crisis, many mortgage borrowers were steered towards risky and high-cost loans because it meant more money for the loan originator.” Basically, loan officers were sometimes able to make more money if they could get you to sign on the dotted line for a mortgage with less favorable terms. Not very cool.

Now, according to Jann Swanson of Mortgage News Daily, “the new rule prohibits steering incentives. A loan officer or broker cannot be paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees.” However, “the loan officer or broker can be compensated by way of other models such as on the number or size of loans or the aggregate dollar volume of loans written within a stated time period.”

So, loan officers now should only be getting paid based upon their volume of their business. Removing any incentive for selling higher rates should give loan officers no reason to do anything but get their clients into the best possible loans (read: no reason to gouge clients or discriminate).  But with loan officers only being incentivized to get their clients into the best possible loans, then how is it that race is still an issue?

 

Bank Location Discrimination?

Another study from the late 2000s by the National Bureau of Economic Research found that after controlling samples and comparing individuals with essentially the same financial situations, blacks were more likely to receive a high rate mortgage. The authors estimated that black Americans were 7.7 percent more likely to have a high-interest mortgage than comparable white borrowers. On the surface, this would seem to indicate blatant discrimination.

However, Stephen Ross of the University of Connecticut, a co-author of the National Bureau of Economic Research study, offered some interesting insight. He said that “a huge amount of the differences in high-cost loans is not whites and blacks going to the same lender and blacks being given a much higher rate…. Rather it’s the fact that there are big differences in the lenders that blacks and Hispanics are doing business with.” In terms of avoiding discrimination, Ross’ observation would seem to indicate that what matters most is the consumer’s decision on where and with whom they do business.

 

Protect Yourself

A banana at Store A can cost more than a banana at Store B. A mortgage at Bank A may carry a higher interest rate or different terms than a similar mortgage at Bank B. Different banks could have access to any number of different loan programs that may be a fit for you. The loan officers have to treat everyone the same and offer them the same products. But the products that the banks allow their lending officers to offer to consumers can vary greatly. Some will be a better fit for you than others.

The best way to protect yourself is to make sure that you are dealing with reputable loan officers from reputable lenders and to probably compare rates and programs between the lenders. A good place to start your search for the right lender and loan is asking your agent for a list of the trusted lenders that have served their clients well over the years.

 

– Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams – Brandywine Valley in West Chester, PA. Contact Ryan Dosen to inquire about buyer or seller representation or to learn more about a career in real estate by emailing ryan@waynemegillteam.com or calling 610-399-0338.

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.