Racial minorities still much more likely to be denied mortgages in the Twin Cities, study finds
Racial minorities in the Twin Cities are two to three times more likely than white people to be denied a mortgage, regardless of their credit scores and other key factors that play into the approval process, new research finds of the Federal Reserve Bank of Minneapolis.
The bank found that mortgage rejection rates for Asian applicants were 3.5%, compared to 4.2% for Latino applicants and 5.5% for black applicants. White applicants were turned down 1.7% of the time.
“We have one of the largest homeownership gaps in the country and that’s something that hasn’t changed much over time,” said Alene Tchourumoff, senior vice president of development and the Fed’s community engagement, in an interview. “We wondered: what are some of the characteristics that might explain variations in homeownership? »
The Fed used more detailed information, including the applicant’s credit score, that was not available or incorporated into previous analyzes of mortgage denials, to better understand why people of color are less likely or less in able to buy a house. For many people, home ownership is essential to building long-term wealth.
Tchourumoff said many previous studies have only looked at the role of race in the mortgage application process, leaving those studies open to criticism that they don’t reflect the most critical considerations in the underwriting process.
This analysis was based on federal Home Mortgage Disclosure Act (HMDA) mortgage data from 2018 to 2020 for nearly 100,000 borrowers in the seven-county metropolitan area of Twin Cities. He focused on those who applied for a conventional 30-year mortgage, which tends to be the lowest risk mortgages.
The research – which was carried out by Ben Horowitz, Kim Eng Ky and Katie Lim – monitored property location, mortgage loan-to-value and borrower debt-to-income ratios.
“It was really about trying to come up with apples-to-apples comparisons,” said Ryan Nunn, assistant vice president for community development and engagement. “We could see that it’s not about location and neighborhood. It’s about people and how they look on paper.”
Conventional loan applications accounted for approximately 56% of home purchase mortgage applications for single-family, owner-occupied homes in the Twin Cities area during this two-year period. About 20% of those requests were for homes in Minneapolis and St. Paul, with the rest in surrounding suburbs.
The researchers noted that some of the variations in refusal rates could be explained by differences in income and wealth. Black household income, for example, is less than half the median white household income.
While the Fed report paints a full picture of the differences in denial rates across racial and ethnic groups, it doesn’t fully explain why the discrepancies exist. This is a question that puzzles the mortgage industry itself.
“I don’t think it’s a systemic evil here, but there’s something systemic here that’s puzzling,” said Keenan Raverty, vice president of Bell Bank Mortgage. “It’s a little confusing why this is happening.”
Public-private partnerships to help narrow the gap in denial rates and increase home ownership for racial minorities have been underway for decades, Raverty said. But they went off the rails slightly during the 2008-09 recession, when the industry focused on helping existing homeowners avoid foreclosure.
The focus has now shifted back to closing the homeownership gap, said Raverty, who is on the leadership team of the Homeownership Opportunity Alliance, a coalition of organizations, businesses and citizens. individuals working to increase home ownership for minority members in Minnesota.
The 2020 homeownership rate in the United States rose to 65.5% in 2020 – a record 1.3% increase from the previous year – while the homeownership rate of blacks was just 43.4%, which was slightly lower than a decade earlier, according to a recent report by the National Association of Realtors.
Bell Bank Mortgage, which is Minnesota’s largest retail mortgage lender, recently hired Kasey Kier to be the company’s first national director of community development. After 27 years with the Minnesota Housing Finance Agency, most recently as an assistant commissioner, Kier is tasked with helping the company address some of those issues.
Closing the gap between racial owners, Kier said, will require public and private partnerships. The McKnight Foundation recently announced the GroundBreak Coalition, which aims to create a $2 billion fund to address inequality in the region.
Lenders also need to help dispel the myths that have led minorities to believe home ownership isn’t possible, Kier said.
“People don’t realize they don’t have to do it alone,” she said. “We need to better engage with communities and develop the right partnerships and the right programs. Things won’t change if we don’t have the intention to change things.”