Study: Minorities still much more likely to be denied a mortgage in the Twin Cities
Racial minorities in the Twin Cities are far more likely than white people to be denied a mortgage, regardless of their credit scores, home location and other key factors, new Federal Reserve research finds Bank of Minneapolis.
The rejection rate for Asian applicants in the region was 3.2%, for Latino applicants 3.3% and for black applicants 4.3%. The rejection rate for white applicants was 1.7% over the three-year period the Fed studied.
“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 of the Fed’s community engagement, in an interview.
“We wondered: what are some of the characteristics that might explain variations in homeownership? she added.
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 were unable to take into account factors such as credit scores in the mortgage application process, leaving these studies open to criticism that they did not reflect the most important considerations. most critical in the underwriting process.
This analysis was based on federal mortgage data from the Home Mortgage Disclosure Act for nearly 100,000 borrowers in the seven-county metropolitan area of Twin Cities. It focused on those who applied for a conventional 30-year mortgage, which tends to be the lowest risk mortgages, from 2018 to 2020.
The research – 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.”
The study covers 56% of mortgage applications for owner-occupied housing in the Twin Cities area during this three-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 various factors, including wealth. Black household income, for example, is less than half the median white household income. Other differences that could not be observed, such as employment, are also important, they said.
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.
“Yes, this systemic gap remains in our industry,” said Keenan Raverty, vice president of Bell Bank Mortgage. “We, along with other mortgage companies in Minnesota and across the country, need to help people overcome barriers to homeownership.”
Public-private partnerships aimed at closing the gap in denial rates and increasing minority homeownership have been underway for decades, Raverty said. They went off the rails slightly during the 2008-2009 recession, when the industry focused on helping existing homeowners avoid foreclosure.
The focus has now returned to closing the homeownership gap, said Raverty, who is on the leadership team of the Homeownership Opportunity Alliance, a coalition of organizations, businesses and individuals who s strive to increase minority ownership in Minnesota.
According to a recent report from the National Association of Realtors.
Bell Bank Mortgage, Minnesota’s largest retail mortgage lender, recently hired Kasey Kier to be the company’s national director of community development. After 27 years with the Minnesota Housing Finance Agency, most recently as Assistant Commissioner, Kier is responsible for helping the company solve some of these industry-wide issues and be part of the solutions in communities. that Bell serves.
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 owning their own home 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.”