Study: Many minorities cut out of prime loan market

Josh Dix is looking at this house
A new study titled Communities in Crisis: Race and Mortgaged Lending in the Twin Cities, finds a striking disparity between African Americans and whites seeking prime home mortgages
MPR Photo/Jess Mador

It's an old story with new numbers.

The study, titled Communities in Crisis: Race and Mortgaged Lending in the Twin Cities, finds a striking disparity between African Americans and whites seeking prime home mortgages

Institute on Race and Poverty researchers
Institute on Race and Poverty researchers, left to right, Eric Myott, Baris Gumus-Dawes, Geneva Finn, Tom Luce found the Twin Cities had large minority mortgage denial disparities compared to whites and the lowest rate of neighborhood branch banks among 25 metro areas in the country.
Photo courtesy of the Institute on Race and Poverty

The ratio of rejection for African American is 3, even 4-to-1 compared to whites.

At the highest income level measured - $157,000 - for every four African American home loan purchase applications rejected only one white applicant was rejected.

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By contrast African Americans and other minorities are much more likely to get costly subprime deals. Again at the highest income level the ratio of African Americans with subprime home purchase loans is 6-to-1 compared to whites.

Measured in several different ways disproportionate numbers of blacks and other minorities have been rejected for prime loans and have resorted to much riskier subprime loans, according to Myron Orfield, director of the Institute on Race and Poverty.

"Across the board, black and Latino and Asian households have less access to the prime credit market; not only do they have that individually but the neighborhoods they live in are under-represented in terms of prime credit going into these neighborhoods."

Lax enforcement is one cause for the sharp disparity in lending behavior especially the past eight years, research fellow Geneva Finn says.

Myron Orfield
Institute on Race and Poverty director Myron Orfield says their new study, "Communities in Crisis," shows the Twin Cities has some of the widest racial disparities in mortgage lending including black borrowers with incomes in six figures facing a 25% denial rate compared with an 11% denial rate among whites earning less than $40,000.
Photo Courtesy of the Institute on Race and Poverty

"There's been a lack of pressure of federal enforcement of fair lending laws. And the absence of pressure to make loans in communities of color allowed there to be a hole in the market. Nobody was making loans in these neighborhoods, people couldn't go out easily and find a prime loan and subprime lenders discovered an empty market," she says.

There was unmet demand, according to Finn. The demand was happily met by swarms of often less than scrupulous and lightly regulated mortgage brokers selling subprime loans.

The Institute on Race and Poverty study finds the foreclosure crisis has been somewhat lighter in cities where there are more neighborhood branch banks. Residents in those neighborhoods have better access to big banks selling prime home loans.

The Twin Cities ranks dead last in number of branch banks in minority neighborhoods, institute research director Tom Luce says.

"We have a table in here showing the Twin Cities ranking 25th out of the 25 largest (communities) for the disparity between bank branches in these neighborhoods in high minority neighborhoods versus low minority neighborhoods.

The researchers note that Minnesota based Twin City Federal fares better than other banks in it's minority lending practices.

A decision to locate some full service branches in supermarkets is part of the reason, TCF spokesman Jason Korstange says.

"Many of the banks that you know, U.S. Bank and Wells Fargo and the rest, do supermarket banking but we probably put a little bit more emphasis on it than they might," he says.

In a response to a request for comment, Wells Fargo bank said it is committed to fair and responsible lending.

"Race is simply not a factor in our loan decisions," Wells Fargo spokesman Jim Seitz said in an email.

"We make our decisions based on the risk involved with the loan...Nothing in the report contradicts this -- and we're proud to be the leading home lender in the Twin Cities and the No. 1 lender to people of color," he wrote.

Forty years ago people of color who were decent prospects were routinely denied loans. Banks red-lined whole neighborhoods by declining to lend money to many who lived in them. Congress acted by outlawing housing discrimination and requiring banks to reinvest in minority communities.

Four decades later the conditions the laws are intended to address persist. The remedies the institute recommends include tougher enforcement of laws prohibiting the behavior. The study also recommends more robust use of the Community Reinvestment Act, the federal law requiring banks to do more business in their back yard.

There's money to be made if banks follow the rules, according to Geneva Finn.

"Nobody is asking banks to make bad loans. This report shows what banks aren't doing is making good loans to good loan prospects," she says.

If history is a guide the current economic crisis will end and people will once again view homeownership as a way to store wealth.

The question the Institute study poses is does the country have have the will to give borrowers of all colors a fair shake at a chance to participate.