Fair housing, mortgages, and the U.S. Supreme Court

Texas Department of Housing and Community Affairs v. The Inclusive Communities Project. In the case, the state government asserts that a decades-old component of the Fair Housing Act of 1968— the law that prohibits all types of discrimination in housing, intentional and unintentional—is unconstitutional. The section of the law in dispute relates to unintentional discrimination because housing tax credits that were given to property developers to build affordable housing resulted in housing being constructed in mostly high-poverty minority neighborhoods.

Regardless of the constitutional merits of the case, there is little question that unintentional discrimination in housing persists in the United States. Recent economics research suggests that policymakers ought to examine the ways in which access to homeownership differs for different racial and ethnic groups—especially given the importance of homeownership as a wealth-building tool for Americans of all backgrounds. One of the more recent and telling studies is “Race, Ethnicity, and the High Cost Mortgage Lending,” by economists Patrick Bayer of Duke University, Fernando Ferreira of University of Pennsylvania, and Stephen L. Ross of University of Connecticut, They find that even when controlling for common lending risk factors, African American and Hispanic borrowers face higher cost mortgages than borrowers overall.

In the 2014 report, the researchers link data gathered under the Home Mortgage Disclosure Act on home purchases and refinancing between 2004 and 2008 with public records data and credit reporting data. This allows them to include variables such as credit worthiness and the ages of the borrowers, while also examining the effects of mortgage-and-refinancing lending by geography, by the various lending units of financial institutions, and by market-wide disparities such as the prevalence of sub-prime lenders in certain housing markets.

The three economists examine seven metropolitan housing markets and find that racial and ethnic differences in the incidence of high-cost loans persist even when controlling for a number of factors, among them credit scores, the ratio of loan amounts to housing prices, the presence of subordinate liens, and mortgage and other debt levels relative to income. African American borrowers have a 7.7 percentage point higher likelihood of obtaining a high-cost loan, and Hispanic borrowers a 6.2 percentage point higher likelihood, relative to an overall incidence of 14.8 percent for high-cost loans among home purchase mortgages. This means these black and Hispanic families are spending more money to stay in their homes and have less left over for other needs.

No doubt the higher incidence of high-cost loans among African American and Hispanic borrowers has important implications for the families affected. But it can also be a barrier to homeownership—the higher the cost of an original mortgage the less likely some borrowers will be able to obtain one—leading to growing wealth disparities and a less stable economy.

Bayer, Ferreira, and Ross also find that some of the difference in the higher mortgage rates offered to minority borrowers can be attributed to their neighborhoods. Minorities in high-poverty neighborhoods and African Americans in communities that are majority African Americans with lower levels of education all experienced higher mortgage rates. But the key factor in the higher borrowing costs is the type of lender these borrowers use or have access to. The three economists suggest that the segmenting of the mortgage finance market into prime and subprime lenders played a large role in the differential treatment of similar borrowers applying for mortgages during their period of study.

This points to a challenge for policymakers—they have to figure out how to ensure fair access to responsible borrowers that does not limit their potential to build wealth and contribute to society while achieving what many still think of as the American dream of homeownership.

June 12, 2015


Credit & Debt

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