According to government estimates, between two
and three million cases of housing discrimination take place each
year, victimizing persons of color who seek to either purchase or
rent a place to live. This discrimination takes several different
forms, some of which are rather blatant, and others of which appear
more subtle: claiming that the last apartment was just rented, when
it fact it wasn't; charging higher interest rates for the same mortgage
loan offered to a white person on better terms, or flatly rejecting
persons of color for a loan at all, even while offering the same
loans to whites with similar credit.
Yet, despite decades of studies confirming the existence
of housing bias, conservatives regularly devise and offer excuses
for disparate housing outcomes, all of which presume that there
are logical reasons why folks of color get loans less often, or
on less favorable terms, and none of which reasons have the least
bit to do with racism. As with white denial of racism in labor markets,
the refusal of many in the white community to acknowledge the existence
of bias in housing signifies an overwhelming need to rationalize
inequality in the U.S.
Although skeptics downplay discrimination against
persons seeking to buy a home, by saying that higher mortgage rejection
rates for blacks are merely the result of having worse credit histories,
the facts say otherwise.
The most comprehensive study of mortgage bias was
conducted by the Boston Federal Reserve Bank and considered 38 different
factors that could result in disparate lending. Among the factors
examined were several measures of income, credit history, loan type
and collateral. Even with all factors considered, blacks were still
nearly 60 percent more likely to be rejected for a mortgage compared
to similarly credit-worthy whites. Despite criticisms of the Boston
Fed study, the research has held up to extensive scrutiny. Indeed,
the methodology of the study was considered sound enough by Boston
banks so as to gain their participation to begin with, no doubt
because they expected (incorrectly as it turned out) that the research
would exonerate them from claims of bias. Furthermore, two follow-up
studies, both of which added control variables, found equal or higher
levels of bias than were found in the original study.
Another study in Louisville sent black and white "testers"
to banks with equal credit ratings and financial characteristics,
and had them request conventional mortgages for the very same housing.
Repeatedly, blacks were given less information or encouragement
to apply, and were subjected to differential and unequal treatment
in terms of loan prequalification. For example, blacks were often
told their income and credit was inadequate to qualify for the loans
they sought, while whites with identical incomes and credit were
told they would qualify for the same loans.
Conservatives criticize studies that find evidence
of mortgage bias, based on different outcomes for persons at the
same credit rating, by arguing that default analysis shows different
outcomes are justified. Specifically, they argue that since black
default rates are higher than the rates for whites, at every level
of pre-loan creditworthiness, banks are merely engaging in rational
decision making when they reject blacks for such loans, aware that
the risk of default is higher. But there are multiple flaws with
this line of reasoning.
First, this argument ignores that default rates and
foreclosure rates are far from the same, and it is only when loans
are foreclosed that their default status becomes visible in data.
Secondly, lenders control whether or not a late loan (technically
in default) is going to be called in or not, and the available evidence
suggests lenders are more aggressive in foreclosing on loans paid
late by blacks than whites. In part, this is due to the ability
to turn the lower-cost homes (with higher than average loan-to-value
ratios) more quickly for greater profit once the loan is called
Another problem with the default analysis approach
is that it assumes that since blacks are higher average credit and
default risks, therefore, there is no discrimination when a particular
black applicant for a loan gets turned down. But this argument extrapolates
from group averages to individuals in a way that is not only illegal
(it is unlawful to discriminate against a person because of the
average characteristics of that person's racial group), but also
irrational. After all, just because blacks as a group have higher
default rates, doesn't mean that any given black loan applicant
will likely default, and to treat them as if they would is to treat
them on the basis of a statistical average over which they have
no control, and which is likely to be wrong far more often than
right (since most blacks will not default on their loans).
Finally, when loan default rates are not massively
different between whites and blacks (and they aren't), lenders should
care more about the average loss on a default, rather than the average
rate of default between one type of borrower and another. As such,
it is important to note that the expected monetary loss to a lender
from a defaulted black loan is actually less than the average for
loans to whites (understandable, since the size of the loan in the
latter case is likely higher), so market theory would predict lower
rates of foreclosure on black loans if discrimination were not operating.
Furthermore, if risk of default in the abstract is
less important than size of the monetary loss in case of default,
the entire notion of recalibrating discrimination estimates based
on different default rates becomes untenable.
Given the higher average loss on loans to whites,
it is whites who should be held to the higher standard: yet, no
evidence suggests this happens.
One of the problems with comparing creditworthiness
in the first place, so as to "justify" racial disparity
in lending, is that research has found lenders are more willing
to give information to whites with bad credit on how to clean up
their files, and underwriters tend to give whites the benefit of
the doubt with spotty credit in a way they don't with borrowers
One infamous example of this process, though hardly
anomalous, involved Northern Trust, in Chicago, which settled with
the Justice Department over violations of the Equal Credit Opportunity
Act. Northern had allowed whites with spotty credit to offer extensive
explanations for their credit blemishes, while denying such an opportunity
to minority loan seekers.
What's more, Northern had refused to consider bonuses,
overtime pay or child support as sources of income when determining
a black applicant's creditworthiness, whereas these were taken into
consideration for white loan-seekers.
Evidence from around the nation suggests that lenders
often seem less interested in giving loan information to black customers
than whites, are quick to urge blacks more so than whites to seek
loans elsewhere, and are more likely to discourage black loan seekers
by telling them how complicated and time-consuming the application
process might be. Blacks are also more likely than whites to be
told that they won't qualify for the loans they are seeking, even
before they have filled out the necessary paperwork needed for a
lender to make such a determination.
Interestingly, data from the Home Mortgage Disclosure
Act demonstrates that while blacks and whites with excellent credit
appear to be treated equally, there is a substantial gap between
the way whites and blacks with bad or questionable credit are treated.
As the Wall Street Journal reported in 1995, nearly seventy percent
of whites with poor credit are able to receive a mortgage, compared
to only sixteen percent of blacks with equally poor credit.
Even when folks of color do have worse credit, this
fact is hardly independent of racism. Rather, worse credit for blacks
(especially the poor) often stems from the practices of the secondary
mortgage market. As several studies have shown, banks often reject
borrowers of color, even when they have credit records similar to
whites with the same incomes. Then, these rejected applicants turn
to secondary or "sub-prime" lenders, often owned by the
very banks that turned them down (or which are subsidized by them
in the form of credit lines), and which specialize in loans to persons
who can't otherwise get financing. These sub-prime lenders charge
3-5 times the interest for the loans they offer than the bank would
have that originally rejected the supposedly high-risk applicant.
By doing so, lenders make exceptionally high profits and place borrowers
in great jeopardy by driving up the amount they must repay, thereby
increasing the likelihood of default, late payments, or missed payments,
all of which would then taint future credit records.
A recent study of Citigroup (which includes Citi,
the group's sub-prime lender), found that Citi in North Carolina
has been charging higher interest even to borrowers who could have
qualified for regular loans. In the process, over 90,000 mostly
black borrowers have been roped into predatory loans, and as a result
have paid an average of $327 more per month for mortgages than those
getting loans from a prime lender. This adds up to over $110,000
in excess payments over the life of the loans, on average. And at
the same time that banks are steering blacks with good credit to
sub-prime lenders, whites with good credit who apply for loans with
sub-prime lenders are routinely referred to prime lenders, who offer
loans at lower interest rates.
The collective impact of housing bias is enormous.
Most obviously, it deprives families of color of billions of dollars
in lost potential wealth and assets. Studies place the cost of present-day
discrimination at over $4 billion annually for people of color,
and further estimate that today's black communities have been deprived
of nearly half-a-trillion dollars in wealth due to past and present
housing discrimination in the U.S.
Likewise, housing preferences and subsidies for white
families (in the form of Homestead Act benefits, and racially-restrictive
FHA and VA loans), alongside "urban renewal," (which resulted
in the destruction of about one-fourth of all homes lived in by
African Americans in the 50s and 60s to make way for office parks,
parking lots and shopping centers), have pushed the racial housing
gap in America to chasm levels.
This inequality in housing, compounded by inequality
in labor markets, then results in profoundly unequal educational
opportunities and access for persons of color, relative to whites:
the subject to which we will turn in Part IV of this series.