A week ago Thursday, I was honored to participate in a Congressional Black Caucus Foundation forum assessing the extent to which the Fed exacerbates U.S. economic inequality. Views were mixed on that front, but several panelists stoutly condemned financial institutions for actively discriminating against people and communities of color and the Fed for allowing them to get away with it. That won’t be the last we hear of this.
As our recent assessment of the latest mortgage data make clear, these allegations are not without merit. That underlying factors are complex and sometimes include contradictory evidence does not belie the fact that data remain problematic, the industry is deeply distrusted, and the White House has made racial equity a top-priority Presidential action item. First to what the data do and don’t show and then to what will be done about them unless some of the things that can instead be done are quickly done.
The latest HMDA data show troubling denial disparity ratios (DDRs), interest-rate, and cost disparities when minorities are compared to whites. The DDR for Blacks was 2.6:1, rates were .125 percentage points higher, and the cost of a loan was 38% more. Black credit scores were the lowest among demographic groups (690) and loan amounts were the smallest, but these differences are still striking.
Little noticed but even more puzzling are the DDRs for Asians versus whites. Asian DDRs were 1.4:1 even though credit score and loan amounts were the highest of all demographic groups. Asian interest rates were .125 percentage points lower than white borrowers, but they paid 13% more for their mortgages.
These data reflect all purchase mortgages and thus to some degree also reflect the higher rates and costs associated with the FHA mortgages on which Blacks disproportionately rely. The higher Asian loan-cost numbers also might be the result of greater reliance on jumbo loans, but the DDR remains troubling even if some of these factors explain certain disparities.
Rate disparities are also problematic. As we’ve noted before, Blacks are markedly less likely than whites to refinance a mortgage, sharply blunting the benefits of ultra-low interest rates and increasing their cost of home ownership. And, that’s when they own a home. A new Fed paper shows that only seventeen percent of young Black families owned their homes, less than half the rate for whites their own age. This not only exacerbates overall wealth inequality, but makes it increasingly impossible for young Black households to even catch up with their older peers. I called my book Engine of Inequality because the richer you are, the richer you get and the poorer the poorer unless policy intervenes. If homeownership does not become more equitable, inequality will grow even worse.
As a result, there’s a major push for racial-equity policy. This is most immediately apparent for the GSEs, whose regulator has sharply heightened its focus on racial equity and any disparate impact that might impair it. In July, it pronounced a new fair-lending policy, establishing a tough new approach even as it solicited comment making clear that a good deal more of this is soon to come.
FHFA and HUD have also collaborated on a new joint enforcement policy. FHFA and HUD will surely prioritize algorithmic underwriting in all of these efforts, addressing discrimination concerns outlined in a recent Fed staff paper and an in-depth Bloomberg story. GSEs won’t be the only lenders put through these wringers.
However, these also aren’t the only wringers primed to ensure equitable mortgage access. The banking agencies have less jurisdiction in this arena than they used to, but that doesn’t mean that they don’t have any. Acting Comptroller Hsu has already issued his first fair-lending enforcement action following an announcement of an OCC focus on this question. The Fed has yet to do so, but it’s under pressure to take a more active stand above and beyond its work to finalize a new CRA rule. The typical way banking agencies address demands from Congress to get tough when they aren’t sure they want to is to find an egregious violator or two and hang them out to dry in harsh public sunlight.
That’s what will be done. What can be done not only to avoid these wringers but also engage constructively with this continuing problem?
A lot of initiatives are under way – see Fannie’s decision to use rental data to assess ability to repay and a raft of industry commitments to increase Black home ownership. There’s more to do on expanding access to borrowers seeking small-dollar mortgages and to reduce refi inequity, but there’s also a lot of attention to these issues that promises improved outcomes.
The challenge for mortgage lenders is not so much coming up with ideas, but also executing on them and, when new programs are up and running, getting the policy credit all this hard work warrants. Thus, what can and indeed also should be done is an effort not only to do good, but also to prove it.