The U.S. Department of Housing and Urban Development (HUD) put out a press release yesterday detailing a settlement they've reached with a mortgage lender, called MortgageIT, Inc. The release and attached Conciliation Agreement depict a consistent trend of race-based discrimination woven throughout the mortgage loan process.
From the release:
A HUD review of MortgageIT’s 2007 and 2008 internal loan data alleged that African American and Hispanic borrowers paid APRs [Annual Percentage Rates] that were eight to ten basis points higher, on average than similarly-situated white borrowers. In addition, HUD alleged that African American borrowers were 65 percent and Hispanic borrowers 72 percent more likely to receive higher priced loans than similarly-situated white borrowers, African American and Hispanic borrowers also allegedly paid, on average, $707 and $906 more in fees, respectively. HUD also alleged that African-American applicants were 45 percent more likely to be denied a mortgage loan than similarly-situated white borrowers. Hispanic applicants were allegedly 35 percent more likely to be denied.
To summarize, black and Latino borrowers, who were in roughly equivalent financial situations, were allegedly charged more up front in fees than white borrowers, given less favorable loan terms, and sometimes denied a loan altogether. The agreement notes that in 9 percent of cases with a black borrower and 15 percent of cases with a Latino/Hispanic borrower, the borrower paid $5000 or more in excess fees (that is, above that which a similarly-situated white person would have paid). The settlement does not fully quantify the magnitude of economic impact these practices had. For example, did borrowers denied a loan based on their race go on to successfully get loans elsewhere? What impact did paying an extra $700 to $5000 in fees have on a family's long-term financial stability?
Under the agreement, the mortgage lender admits no wrongdoing and will pay $12.1 million to establish a fund to compensate borrowers who have experienced Fair Housing Act violations across the country. HUD certainly deserves recognition for following through on these particular allegations and reaching a settlement. However, this effort represents a mere drop in the bucket when it comes to staunching the hemorrhage of wealth from communities of color stemming from a documented pattern of deeply irresponsible and racially discriminatory practices on the part of many U.S. lenders.
Homeownership has historically been an important pathway to wealth creation for many Americans, but our public policies and private institutions have systematically failed to provide equitable and consistent access to this asset-building strategy for people of all races. Charging people more for mortgage products or denying them outright for loans based solely on race contributes directly to the immense disparity seen in the wealth holdings of white Americans and Americans of color. The racial wealth gap is huge and has grown, not shrunk, over the past several decades: in 2009, the gap in median wealth between black and white Americans amounted to over $230,000. This is triple the size of the gap that was already in place in the 1980s.
Recent research from the Institute on Assets and Social Policy (IASP) confirms the impact that differences in homeownership experiences have on racial wealth disparities. In a study published earlier this year, IASP researchers found that the number of years families had owned their homes was the largest single predictor of the gap in wealth growth by race, explaining roughly 27 percent of the difference in wealth growth over a 25 year study period. Discrepancy in homeownership explained more of the gap than differences in household income.
Violations of the Fair Housing Act can have a devastating impact on an individual or a family's financial situation, but the collective impact is arguably more insidious. Over time, patterns of discrimination reinforce themselves as they become part of the "natural" course of events. The racial wealth gap is not a "natural" phenomenon, that is, it did not emerge on its own from the organic decision-making and behaviors of people of color in the home buying market. Rather, the wealth gap that stems from disparities in homeownership emerged from a set of industry practices that are obscure to the customer by design coupled with concrete policy choices that prop up or fail to expose those same practices.
As Nikole Hannah-Jones of ProPublica has documented extensively, HUD regularly identifies instances of discrimination in the housing market, but lacks a strong enforcement mechanism. Indeed, in the settlement detailed yesterday, the mortgage lender did not have to admit any wrongdoing. ("Though we deny these allegations, we are pleased to put the matter behind us," a spokeswoman told American Banker.) HUD needs to send a stronger message to the mortgage lending industry that these practices are illegal and will not be tolerated. Until stronger enforcement of Fair Housing Act violations is implemented, this settlement represents just part of a larger trend of racial discrimination in the mortgage market that undermines the very promise of the American Dream: that Americans of any race who have worked hard and saved up can expect fair and equal treatment when they pursue homeownership.