Inequitable communities and how African American distrust in banks effects their ability for conventional mortgage approval.
Reveal Center’s investigative article, “For people of color, banks are shutting the door to homeownership”(access here), reviews current lending disparities for African American and Latino mortgage applicants. This yearlong analysis examined public records for 31 million applicants in 2015-16 that were denied for conventional mortgages. Although the article sheds light on a few relevant issues, it fails to address, the difficult requirements for conventional mortgage approval, regardless of race and highlight the high level of approvals of Blacks utilizing other lending products created to offset and catch the fallout of conventional denials.
As a former Community Reinvestment Act (CRA) Officer and Emerging Markets Lender, with 20 years of experience with first time homebuyers and low-to-moderate income individuals, I strongly believe there are both economic and historically relevant factors that are must be examined with respect to mortgage lending practices. Improving opportunities for homeownership isn’t solely a matter of economics/finances, but a matter for social justice as well.
According to the Federal Deposit Insurance Corp. data, approximately 18% of African American families don’t have traditional bank accounts, compared with 7% of all Americans. For much of America’s History, legislation restricted minority access to mainstream financial services. The Freedman’s Bank, incorporated in 1865, was established to provide banking services for Blacks. Its collapse was a major blow to the confidence and livelihood of black depositors. Booker T Washington noted: “When they found out that they had lost, or been swindled out of all of their savings, they lost faith in savings banks, and it was a long time after this before it was possible to mention a savings bank for Negroes without some reference being made to the disaster of the Freedman’s Bank.” Jim Crow laws as well barred blacks from regular banks and forced them to look for other options. Taking this into account, it makes perfectly good sense why Blacks do not trust the financial industry, let alone place their money into bank accounts. Black wealth issues are not new problems.
As a lender, I experienced black first-time homebuyers without bank accounts, yet they would have $1000’s in a shoe box stored under their mattress for safe keeping. This happened so often that we documented the funds as “Mattress Money”. The funds were not traceable, or documented so they were not allowed in the transaction. Often encouraged to open a bank account to save, African Americans declined due to fear of losing their money or not being able to access it once deposited. Sadly, many African Americans are not able to build credit or reap the benefits of interest bearing accounts or money market funds. Traditionally, Blacks have rarely invested in vehicles that would grow their money such as stock and bonds, or certificates of deposits. Most simply take their paycheck home and manage finances without the benefit of financial services. The damage done to black wealth and confidence long before banks became too big to fail. Let’s face it, it is nearly impossible to get a conventional home purchase mortgage if you don’t have a bank account or a relationship with a banker in your community. Individuals with strong relationships with financial institutions are generally more financially secure. They can obtain credit to help with daily life expenditures, maintaining a sustainable life style and they are able to make the larger purchases for necessities like appliances or cars, without excessive fees, and high interest rates. This ultimately leads to more disposable income.
To take a serious look at why the denial rate of Blacks for home mortgage, in comparison to Whites, is nearly double, we must consider all the various types of purchase mortgage products. A complete understanding of the conventional mortgage loans specifically helps to uncover barriers contained in the product, which in effect contribute to additional disparities for Black buyers and low income consumers. Wealth and financial stability are factors linked to loan approvals. The net worth of the average African American family is $9,000. By comparison, the average White family net worth is $132,000. Conventional mortgages are the most difficult mortgages to qualify for especially for individuals or families with low net worth, a less than stellar credit history and first-time homebuyers, whether you are Black or White.
Before the mortgage meltdown in 2007-2008 subprime lending products were offered to close the homeownership gap. It proved itself as a tool that successfully led to loan approvals for African Americans and people of color. Although not an ideal product, those who would have never been able to purchase a home were able to realize the dream of homeownership. Furthermore, it was one of the first tools that African American’s had access to create wealth through refinance and home improvements. Relaxed guidelines, such as limited income documentation, no bank account requirements, unseasoned funds, were offered. Many people who may have had difficulty maintaining perfect credit because of previous life setbacks like divorce, job loss, medical emergencies costs etc., could reach the mark of economic prosperity with home ownership despite their challenges. The interest rates were usually higher, but a majority of the home purchase products required no downpayment or financed in the downpayment
Although the subprime product was ideal for Black applicants that faced barriers in conventional lending (large down payments, depth of credit history, significant financial reserves) the subprime product answered all disparate issues that Blacks faced with conventional lending.
The Reveal article sites the challenges faced by Rachelle Faroul, a 33 year old African American, in her efforts to purchase a home in Philadelphia. When Faroul applied for a loan, she thought she was an ideal candidate. A graduate from Northwestern University, with a good credit score, a fair amount of savings and a computer programming teaching position as a contractor for Rutgers University. Faroul however was denied in her journey to homeownership based on her income factors. Although her earnings as a contractor were moderate, they were inconsistent. So she got a full-time job at the University of Pennsylvania managing a million-dollar grant to strengthen her loan application. However, it was not approved. Based on the facts presented the denial appeared questionable. Ms. Faroul’s employment as a contractor changes the dynamics for home loan approval. Not her credit score, not the amount of savings as stated in the Reveal article, but how she filed her income and what her adjusted gross income was. As a lender, my experience has shown me that contract employees take multiple deductions when filing their taxes which can easily decrease the net income so low, that it is unable to afford a new mortgage payment.
More importantly, what Ms. Faroul instead lacked was support in the lending process. Changing your employment in the middle of the approval process is a surefire way to get denied home loan. Regrettably, Ms. Faroul also changed industry. She went from a teaching position to a grant management position. Customarily, you need, at a minimum, one year of experience in a new line of work to show stability of income. Improved relationships with lenders, combined with Financial literacy support is key for increase approval rates for African Americans.
An additional concern posed by this article, is the suggestion that potential home buyers visit multiple lenders to seek preapproval for a mortgage loan. This undoubtedly adds to the distrust felt by many African Americans for financial institutions. Lenders have a very tough job when they have to work with a first time homebuyer or those not familiar with the home buyer process. Increased fears are a hinder the process.
My professional opinion is that after one year, Ms. Faroul was able to qualify because she finally had one year on the job, paid off her collection and had extra income going toward disposable income, all these factors strengthened the application. Not ethnicity.
It is so important for people to know how to pick and choose a lender. There are lenders that are knowledgeable and have experience working with people with credit challenges, they are community lenders, or CRA lenders. CRA Mortgage Loan Officers have knowledge of all the programs and down payment and closing costs assistance grants in your community in addition to all special loan programs. If you have some concern, shop around. Shop for a qualified lender. Interview them. Ask questions. Get a referral. Make sure the lender you pick is qualified to meet your needs for successful home purchase. This is the largest purchase in your life, it is a huge responsibility and at times can be over whelming. It is very important that you choose a lender you can trust and build a good relationship with.
I did some digging into the housing products offered in Pennsylvania and in checked the webpage for the State Finance Agency. I found several lending products that offered loans with competitive rates, and lower fees. In addition to the PHFA first mortgage, they have down payment and closing cost assistance. They offer Keystone Government Loans and have Keystone Home Loan Program for certain areas through participating lenders. The borrower in the article purchased in Philadelphia county which qualifies for all the home buyer’s assistance products listed on the states website. Nicetown Pennsylvania is also in Philadelphia County which has a home repair program for the homes.
In my professional opinion, Ms. Raoul should have gotten approved by a community lender, using the specialized products for Philadelphia County, she could have saved herself time, money and anguish.
As a Community Reinvestment Act (CRA) Officer, my job was to make sure that I engaged with low-to-moderate income individuals and in various communities, educating them on banking products and services. It is vitally important that consumers have access to banking products and services. Work with nonprofits, churches, and key stakeholders creates educational initiatives and programs.
Historically high-income individuals have been able to borrower money, take out loans, manage credit responsibly and leverage banking products and services to open businesses, travel, go to college and low-income people could not. Community Reinvestment Act provides compliance to ensure low-to-moderate income individuals have access to banking products and services, down payment and closing cost assistance, credit repair services, financial literacy classes, home buyer’s education and small business classes. The Reveal article points to disparities without regard to benefit of compliance to reverse discriminatory mortgage practices. The irresponsible portrayal may serve to discourage Blacks in the home-buying process. Conventional loans are the hardest loans to qualify for, whether you are black or white. In majority minority communities there are many factors contributing to denial rates for conventional mortgages; high insurance rates, appraisal gaps versus purchase price, blighted fringe neighborhoods, industrial communities, no comparable sales, and poor-quality collateral. To tackle these issues is a matter of economic recovery ties to social justice. Rebuilding the trust between banks and African Americans is an equally important factor. African Americans must be shown how to utilize specialty lending products and how to protect our home investments through upgrades, landscaping and safe walkable streets. The demand for economic recovery in African American neighborhoods must include building and improving the quality of schools, grocery stores and neighborhood amenities to attract potential buyers. Properties located in an industrialized neighborhood or a blighted neighborhood as referenced in the Reveal article, or communities with inequitable amenity desertion will also lead to denial, because the collateral will be rated as high risk. Social constructs for community will help to create holistic plans for stronger neighborhoods. Approvals for conventional mortgages is on the list, however improving the financial stability and literacy of borrowers must be prioritized.