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Minority Mortgage Lending Often Separate, Unequal

Charlene Crowell | 8/15/2012, 5:37 p.m.

New Research Shows Black, Latino Borrowers Dominate FHA, VA Loans

A new report on mortgage lending has found disturbing disparities in purchasing or refinancing a home located in communities of color. "Paying More for the American Dream VI", is the latest annual update on mortgage lending by a group of organizations seeking to understand how and why systematic inequalities in mortgage lending persist.

Focusing on lending impacts to communities of color and lower-income neighborhoods in seven of the nation's large metropolitan areas, Paying More shows a disproportionate number of Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) were found in Boston, Charlotte, Chicago, Cleveland, Los Angeles, New York City and Rochester.

The report acknowledges the important role played by government-backed mortgages; but also says the evidence of a two-tiered market has troubling implications. In part it states, "Although FHA lending is a vital source of credit for borrowers of color, the disproportionate prevalence of FHA loans in communities of color raises fair lending flags."

For example, the report found that in Los Angeles, homebuyers in neighborhoods of color received a government-backed loan five times more often than did those in predominantly white neighborhoods. Similarly, in Rochester, FHA and VA loans together accounted for 86.4 percent of all home-purchase loans made in communities of color. Among all metro areas surveyed, two out of every three home-purchase loans made in communities of color were government-backed.

A similar pattern emerged in refinance lending. In Chicago's communities of color, homeowners received government-backed refinance loans nearly five times more often than homeowners in predominantly white neighborhoods. For Los Angeles and New York City, the refinance disparities worsened respectively to 6.5 and 6.9 times as often as homeowners in white neighborhoods.

Other findings include:

In the seven cities combined, FHA and VA loans accounted for 74.5 percent of all home purchase loans made to black borrowers, and 66.3 percent of loans made to Latino borrowers - compared to only 35.9 percent of white borrows.

Cleveland had both the highest levels of government-backed refinance lending to black and Latino borrowers and also the highest rate of government-backed home purchase loans. For home purchases, over 85 percent were government-backed loans.

The report was jointly developed by: the California Reinvestment Coalition, the New-York based Empire Justice Center, Massachusetts Affordable Housing Alliance, Neighborhood Economic Development Advocacy Project, Ohio Fair Lending Coalition, Reinvestment Partners and the Chicago-based Woodstock Institute.

Since October 2010 three separate price increases on FHA loans have occurred. The most recent increase was the April announcement of the addition of an upfront mortgage premium payment that will add $1,500 in upfront costs for a typical home of $200,000.

Earlier research by the Center for Responsible Lending has shown that minority borrowers too often get higher-cost loans even when their credit and other loan qualifications match up with similar white borrowers who get more affordable loans.

The still unanswered question remains: What is the future of conventional mortgage lending in communities of color? Will we have a broadly accessible mortgage market that serves all qualified homebuyers - regardless of color?

In 1954's historic Brown v. Board of Education, the U.S. Supreme Court unanimously held that in the field of education, separate schools based on color were inherently unequal.

Why doesn't the same reasoning apply to lending?