Communities in Crisis: Race and Mortgage Lending in the Twin Cities
“Homeownership has been the first step to building stability and wealth for Americans,” explains Myron Orfield, Executive Director of the Institute on Race & Poverty. “Research shows that during the peak years for subprime lending, people of color and the neighborhoods where they live were at a clear disadvantage in lending markets. This crisis has cost another generation of people of color the equal opportunity to join America’s middle class. Strong steps need to be taken to ensure equal access to credit and the promise of homeownership for people of color.”
The study shows that income was no shield against mortgage lending disparities for people of color. Lenders were substantially more likely to deny loans to people of color, regardless of their income. For instance, very high-income blacks, Asians, and Hispanics, making more than $157,000 a year, were much more likely to be denied mortgage loans than whites making less than $39,250. The denial disparities were greatest for black borrowers. The denial rate for blacks with incomes above $157,000 was 25%, while it was just 11% for whites making $39,250.
Similarly, even very high income people of color were much more likely to receive subprime loans. High and very-high income black and Hispanic borrowers were more likely to receive subprime loans than in any white income group.
Racial segregation in the Twin Cities contributed to the problem. Segregated neighborhoods of color in the Twin Cities are under-served by prime lending institutions. Both borrowers of color and white borrowers were less likely to apply with a prime lender in segregated neighborhoods of color than in predominately white neighborhoods, regardless of income.
“This unequal access to prime lenders, banks that issued mostly prime loans, contributed to higher subprime loan rates for people of color, ” said Eric Myott, a research fellow at the Institute, citing a national study that showed Minneapolis ranks last in the number of bank branches in communities of color among large metro areas in the nation. “However,” he said, “even when people of color accessed prime lenders, they were more likely to be denied than whites.”
While subprime lending is usually legal, racial discrimination in lending is not. Numerous laws, including the Fair Housing Act, The Equal Credit Opportunity Act, and the Community Reinvestment Act outlaw and attempt to remedy racial disparities in home mortgage lending. Federal officials, however, did not aggressively pursue lending discrimination during the subprime boom. Geneva Finn, a research fellow at the Institute commented that “this lack of effective enforcement of fair lending laws meant that discriminatory or predatory lending behavior faced little threat of punishment.”
Subprime lending disparities for communities of color became foreclosure disparities. The observed disparities in lending patterns correlate wih the impacts of the region’s foreclosure crisis. The enormous costs of foreclosures – to families who lose their homes as well s to cities and towns losing tax resources – have been greatest for communities of color. Both subprime lending rates and foreclosure rates have been highest in neighborhoods with the highest percentages of people of color. The impact of these patterns is especially notable in North Minneapolis, an area where prime lenders are notceably under-represented and subprime leanders are significantsly over-represented.
The study found that the Twin Cities has lending disparities that are not easily explained by income differences between groups. Likewise, it found that prime credit is not reaching neighborhoods that need it the most: the segregated, high poverty neighborhoods that the Fair Housing Act was designed to eliminate.
The report recommends a multi-faceted approach to mortgage lending disparities. “The mortgage market needs to be carefully monitored for unfair disparities and fair lending laws need to be enforced,” said Orfield. “In order to do that, we need to expand and aggressively enforce the Community Reinvestment Act, establish a fair housing center in the Twin Cities to monitor all segments of the housing market, and the scope of the HMDA data set needs to be expanded. Finally, federal enforcement of Fair Lending laws needs to resume in an aggressive manner.”