Minority residents in the United States have historically been met with discriminatory lending practices. For example, redlining denied credit and other financial services to residents in nonwhite neighborhoods. New analysis from the IU Public Policy Institute finds inequities still exist when it comes to home loan lending.
“Owning a home is one of the most important ways families can build wealth and increase their financial security,” says Joti Martin, a policy analyst at the IU Public Policy Institute. “Yet for far too many families of color, the dream of homeownership may still be out of reach because of inequities in home lending practices.”
Martin recently led a team of analysts who examined home loan denials in majority-Black neighborhoods in Marion County, Indiana.
About 1 in 5 people in Marion County live in a neighborhood where most residents are Black. People in these majority-Black areas often face barriers to homeownership, including lower incomes and higher poverty rates. They also face challenges when trying to secure a loan to buy a new home or improve or repair their current home.
The county’s homeownership rate sits at 54 percent but dips to 42 percent in its majority-Black neighborhoods—even though homes in these areas are typically cost less than the average Marion County home.
BUYING A HOME
PPI’s researchers looked at the 2018 Home Mortgage Disclosure Act data from the Federal Financial Institutions Examination Council to examine home loans that were applied for and denied in Marion County. The data revealed that Black residents in majority-Black neighborhoods are the least likely to apply for a loan to buy a home and the most likely to be denied when they do apply. Overall, lenders denied 11 percent of home purchase loan applications that are from residents in majority-Black neighborhoods, compared to 3 percent of those from people in non-majority-Black neighborhoods.
REFINANCING A HOME
Black residents who live in predominately Black areas of Marion County are more likely to refinance or upgrade their existing home than buy a new one. Yet, denial rates for these refinancing are higher in majority-Black neighborhoods than in other areas. In these neighborhoods, 32 percent of all refinancing applications are denied compared to 22 percent in other places around the county. For Black and Hispanic residents who live in predominately Black neighborhoods, the denial rates are even higher.
IMPROVING A HOME
The research found similar trends for home improvement loans. Lenders denied 42 percent of applications from majority-Black neighborhoods compared to 36 percent of other applications. Hispanic residents had the highest denial rates, regardless of where they lived. Meanwhile, Black homeowners in predominantly Black neighborhoods were more likely to secure a home improvement loan than Black residents in other parts of Marion County.
DENIALS CONTRIBUTE TO A CYCLE
Higher rates of denials for all three types of loans have long-term impacts on majority-Black neighborhoods and the people who live there.
Renters may not be able to purchase a home because they can’t save enough money for a down payment. If they have lower incomes, lower credit scores, or higher debt-to-income ratios, they may not be able to qualify for a home purchase loan.
If current homeowners in majority-Black neighborhoods are denied refinancing loans, they may have to continue to pay higher interest rates, forcing them to put more of their income toward their mortgage rather than saving that money or purchasing a new home.
When residents are denied home improvement loans, they may not be able to make necessary repairs to keep their home safe or make upgrades that would increase their home’s value.
OPPORTUNITIES FOR LENDING ORGANIZATIONS
Lending companies can help by improving lending practices in majority-Black neighborhoods. Researchers at PPI point to three ways these organizations could help residents build wealth through homeownership:
Connect residents to federal, state, and local loan programs that offer support such as down payment assistance or relaxed mortgage requirements.
Educate residents on managing their financial resources by offering budgeting classes, credit counseling, or prepurchase homeownership counseling. Given that high debt-to-income ratios and poor/insufficient credit history are the primary causes for loan denials, increasing financial literacy and money management skills could help residents have more opportunities for homeownership.
Financial institutions should invest in practices, programs, and partnerships that can build trusting relationships in majority-Black communities. These organizations should:
- Ensure equitable banking terms for all customers
- Prioritize diversity among their lending staff
- Re-evaluate compensation structures that could prioritize working with high-income clients over low-income clients
- Partner with local groups that have strong ties and investments in Marion County’s Black neighborhoods