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Jewish World Review Dec. 10, 2001 /25 Kislev, 5762

Beth Lemanowicz

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Consumer Reports


Homeownership disparity not black and white


http://www.NewsAndOpinion.com -- DOES racial discrimination exist in America's banks? Data recently released from the Association of Community Organizations for Reform Now (ACORN) seems to suggest so. According to them, Latinos are denied mortgage loans one and half times more often than whites and African Americans are rejected more than twice as often as whites. An ACORN spokesman declared that "discrimination is a major factor, if not the major factor," in racial disparities for mortgage denial rates.

But is there more to this data than simply the legacy of Jim Crow? First, the total number of mortgage rejections decreased from 1999 to 2000. However, white denials decreased by a greater percentage than minority rates did, contributing to a 26 percentage point difference between whites and minority homeownership rates. Second, the number of approved conventional loans (as opposed to government-backed loans) for minorities increased, but the ACORN study shows that minorities receive a smaller proportional share of loans compared to their percentage of the population.

Could factors other than race better explain the differential? An applicant's credit history is usually the biggest factor in assessing loan worthiness. ACORN premise is substantially weakened due to the fact that mortgage institutions are prohibited from asking applicants about their race.

Understandably, mortgage lenders are to defending their practices. They maintain that race is not a factor in credit scores, which are used to establish loan eligibility based on credit history. Creditors are paid by volume - why would they turn down money from anyone due to race? A potential issue, then, is not whether mortgage applicants are denied loans based on their minority status, but whether minority loan applicants have poorer credit histories. Fannie Mae studies show minority renters have less income, less net wealth, and lower credit scores, supporting the possibility that minority status and credit history are linked.

If overt discrimination is not the problem, why might minorities have a harder time obtaining mortgages? Rick Green of Business Week proposes that there might be "unintentional biases built into" credit scoring formulas. Not everyone from the same income bracket can achieve the same credit ratings. Additionally, credit scores are based on lending practices more prevalent in white communities, such as home-equity loans, and more readily accessed when compiling credit histories. In contrast, credit scoring gives little or no merit to good payment records of sub-prime loans, community group loans, or local finance company deals, all of which are more common in minority communities. Sub-prime lenders may even withhold good payment records to discourage customers from refinancing at lower rates. ACORN appropriately acknowledges that lower-income minority individuals may choose sub-prime deals because they are unaware of the alternatives.

ACORN believes that race may still play a role, as their results show that government-backed loans account for an unequal share of minority home purchases in comparison to whites, evidence that discrimination in conventional lending might exist. In response, Jim Kubovec of the Mortgage Association of Minnesota argues that minority groups are disproportionately represented in lower-income brackets and may gravitate toward government-backed loans (created to help lower-income groups obtain mortgages) because they have more lenient credit approvals and lower down payments. ACORN has a counter argument: Some borrowers can and should receive conventional loans, but mortgage lenders frequently encourage minority applicants to apply for government-backed loans.

On a more hopeful note, the 2000 Census data provide reason for optimism in mortgage lending practices: Over 66 percent of Americans are homeowners, up 3 percent from a decade ago. Additionally, age appears to be a major factor in mortgage lending. While only 18 percent of households under 25 years of age own their own homes, 81 percent of those age 65 to 74 are homeowners. ACORN has yet to release a study declaring age to be a factor of discrimination in loan approval rates.

The complexities aside, it is not unreasonable to suspect some racial features in mortgage lending practices. As Mark Thompson of Washington State's Department of Financial Institutions puts it, discrimination in other areas of society may "bleed into" lending. Indeed, it is naive to presume that subtle forms of discrimination borne out of individual prejudices are completely extinct. But not every obvious racial disparity, as in lending rates, necessarily reduces to discrimination.

Rather, it appears that poor credit histories among minorities and a lack of education about mortgage lending are the biggest factors responsible for minorities receiving fewer loans than whites. A real solution to residual injustices should do more than simply issue blame.



Beth Lemanowicz is Research Assistant with the Statistical Assessment Service (STATS), a nonprofit, nonpartisan research organization in Washington. Comment by clicking here.

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© 2001, Barbara Amiel