Applying for a mortgage is one of the most important applications most will ever fill out in their lifetimes; getting denied because of simple omission can set the process back by weeks. According to a new report by Zillow, the rate at which Black applicants were denied mortgages is 84% higher than white applicants in 2020 (the latest year for which data is available). This is up from the 74% rate seen in 2019.
Nationwide, 19.8% of Black applicants were denied a mortgage in 2020, the highest rate for all races, and is much higher than the 10.7% denial rate for white applicants.
The data for this report was gleaned from the Home Mortgage Disclosure Act that requires financial institutions to publicly disclose loan-level information about every mortgage. This anonymized data is to show how well lenders are meeting the needs of their communities, compile raw data that public officials can leverage in decision-making processes, and most importantly to shed light on discriminatory lending practices.
“Households of color, as well as renters and lower-income households, were more likely to report encountering housing and economic challenges due to the pandemic,” wrote Nicole Bachaud, an Economist and Market Analyst for Zillow. “Black households were more likely than white ones to report a job or income loss and difficulty keeping up with mortgage or rent payments. This disproportionate impact of the pandemic on Black households has stalled efforts to close gaps in credit access, homeownership, home values, and mortgage denial rates, making the journey to equity even slower than it already was.”
Prior research from Zillow shows that income inequality is the root cause of inequality in the mortgage space for people of color. According to the HMDA, black borrowers had an average income of $67,000 in 2020 compared to a median $83,000 for all applicants.
“This may help explain why Black mortgage applicants had smaller down payments in 2020 than applicants from other races,” Bachaud wrote. “Black applicants put down a median of 3.5% on home purchase applications, just barely above the absolute minimum of 3% required for most conventional loans, and less than half the overall median down payment of 8.9% from all applicants.”
Black applicants also applied for less expensive homes in 2020 in comparison to other races—$225,000 compared to $275,000 for all applicants.
The study found that the most common reason Black applicants were denied was due to lack of credit or credit history (37%). Lack of access to traditional financial systems in primarily Black communities along with a higher prevalence of non-traditonal banking services such as payday lenders are both key factors that contribute to the poor credit health of not just borrowers, but communities as a whole.
“This lack of credit leads to higher mortgage denials for credit-related reasons, but even those with otherwise decent credit are impacted by the unequal U.S. financial landscape,” Bachaud wrote. “Roughly one in seven Black households were unbanked in 2019, and more than half don’t have any savings for retirement. The fact that there are very limited (or sometimes no) traditional depository institutions in predominantly Black communities is one reason for that. Not having access to bank accounts makes it challenging to save money for lump sums like a down payment, regardless of income.”
But better credit and higher savings rates alone aren’t silver bullets that should be expected to balance the market in favor of Black mortgage applicants, even those that do manage to successfully achieve homeownership. Surmounting the huge barriers to homeownership is the first step, but hardly the last in the journey to housing parity. The value of Black-owned homes themselves has long lagged behind those of other races—in October 2021, Black-owned homes were worth 16.7% less than the typical U.S. home, which leaves less home equity for Black homeowners to tap into, all else equal.”
“Part of this problem revolves around disparities in the valuation of homes, including appraisals and property tax rates, which are often unfavorable to homeowners of color and/or largely non-white neighborhoods,” Bachaud concluded.” Black homes and homes in Black neighborhoods are often appraised at lower values, but tax assessments are higher than they should be. This causes Black homeowners to receive less than they should in sales and pay more than they should in taxes—further deepening the wealth gap”
A silver lining is that Black-owned homes are growing faster in value than other races—1.5 percentage points ahead of all home values—and is expected to steadily increase in 2022.
While there is no easy formula to follow, in October the Urban Institute and the Federal Home Loan Bank of San Francisco (FHLBank) have committed $1.5 million to a new program called “Racial Equity Accelerator for Homeownership” which will “develop and incubate innovations in housing finance, including underwriting and financial technology.”
"The yawning homeownership gap between whites and communities of color has only grown and with it, BIPOC [Black, Indigenous, and people-of-color] communities have missed out on opportunity and wealth accumulation,” said Urban Institute President Sarah Rosen Wartell. "The evidence is clear and the time is ripe for seizing the moment, and every segment of the home lending industry should work together to address long-standing barriers."
San Francisco-based FHLBank will work with its member financial institutions to promote equal home ownership, create economic development projects, and expand access to affordable housing. The two-year program and financial contribution reflect the bank’s “call-to-action" for the industry to evaluate the “systemic barriers that continue to limit people of color from achieving homeownership, and implement tangible solutions that enable and ensure equity in homebuying.”
Click here to view the study in its entirety, including a state-level breakdown of data.