An Unequal Price
How the Housing Finance Industry Penalizes Black and Brown Homebuyers
Ebony, 2017
This article was first published on May 25, 2021
Fifty-three years after the passage of the 1968 Fair Housing Act that outlawed discrimination in the housing market transactions, Black homebuyers today are still subject to an unequal playing field when attempting to purchase a home. A recent NPR story identifies four issues with how the housing finance industry works to disparately impact them as they pursue the American Dream of homeownership:
First, how credit scores are determined: Black credit scores are 60 points lower than the average white credit score, in part due to the practice of not including regular bills that people pay (think cell phones, utility bills, sometimes even monthly rent) in the way the typical FICO score is calculated. Instead, the credit score industry uses types of credit worthiness that skew towards types of credit that higher income people use.
Second, risk-based pricing: Mortgage giants Fannie Mae and Freddie Mac, who provide about 50 percent of mortgages to Black homebuyers, charge more to lend money to customers they deem as risky. The two main variables in determining risk are credit scores (see above) and size of the down payment. Sometimes called the “Poor Pay More” fee, this drives up the price for people with less wealth and lower credit scores, people who are disproportionately Black and brown.
Third, mortgage insurance: This is required for borrowers who start with less than a 20% down payment, basically another way to charge for a risky loan, even as these borrowers are charged for risk in other ways. Nine of 10 Black homebuyers are charged for mortgage insurance compared to only 6 in 10 white borrowers.
Fourth, racial bias in seemingly race-neutral algorithmic loan writing: a 2019 UC Berkeley — NBER study found that even after controlling for risk, Black and Latinx mortgage borrowers are charged a higher rate than white homebuyers in similar financial positions. The Fair Housing Act does allow discrimination based on “creditworthiness”, even as the data shows “creditworthiness” really means Black and brown.
Certainly these are not the only barriers to Black homeownership, but just a few that exist even as laws against explicit racial discrimination were adopted. The consequence of a housing finance system that makes it hard for Black and brown people to achieve homeownership means that it is more difficult for Black and brown families to not only have a stable place to live, but also hinders their chances to build wealth that will open up opportunities to pursue their version of the American Dream and have wealth to hand down to their children.
Read and listen to more here: https://www.npr.org/2021/05/07/994812031/black-homebuyers-today-pay-an-unequal-price
