Black Borrowers Bear the Brunt of Post-Crisis Lending Regulations

by Rheaa Rao

Racial inequality has seeped into home ownership with a decline in lending to minorities because of lower credit scores, the latest Federal Reserve report shows. While average household wealth has risen for Black, Latino and White families from 1983 to 2013, the racial wealth gap is still undeniable.

Minority households have lower returns to income earned compared to white households which often leads to increased exposure to alternative services that may be actually more difficult to repay- like credit cards. Black and Latino households are more likely to avail of such services (46 percent and 40 percent respectively) than White households (18 percent), according to the Corporation for Enterprise Development. This starts a vicious cycle- that of low-credit scores, mistrust, depleted savings and virtually no assets to show for.

Change in Average Household Wealth

Wealth in Dollars

Source: CFED (Corporation

for Enterprise Development),

2016.

Change in Average Household Wealth

Wealth in Dollars

Source: CFED (Corporation for Enterprise Development), 2016.

Change in Average Household Wealth

White

Wealth in Dollars

Latino

Black

 

Source: CFED (Corporation for Enterprise Development), 2016.

After the housing bubble burst leading to the financial crisis in 2008, lending has become stricter. The Black community has been at the brunt of this by occupying the lowest market share of mortgages regardless of their credit score as compared to the Latino and White community. However, in 2014, there is a visible drop in the market share of mortgages for borrowers who have credit scores below 659 across communities.

Market Share of Home Purchase Mortgages in 2006

Percentage of market share

Source: Federal Reserve, 2016

Credit Scores

Market Share of Home Purchase Mortgages in 2006

Percentage of market share

Source: Federal Reserve, 2016

Credit Scores

Market Share of Home Purchase Mortgages in 2006

Credit Scores

Source: Federal Reserve, 2016

Percentage of market share

Black borrowers with scores of 780 or more made up as low as 0.5 percent of 2014 mortgages. This was still marginally higher than 2006 where they accounted for 0.4 of the market share. But there was a spike amongst white borrowers with a score of 780 or more. They made up 19 percent of the mortgages in 2014 compared to 12 percent in 2006.

Market Share of Home Purchase Mortgages in 2014

Percentage of market share

Source: Federal Reserve, 2016

Credit Scores

Market Share of Home Purchase Mortgages in 2014

Percentage of

market share

Source: Federal Reserve, 2016

Credit Scores

Market Share of Home Purchase Mortgages in 2014

Credit Scores

Percentage of market share

“Within the white population, low-score lending has also declined sharply, but historically, a much small fraction of white borrowers have low credit scores compared with black and Hispanic borrowers,” Neil Bhutto and Daniel Ringo said in the latest Fed report. “Tighter credit conditions since 2006 has therefore had a disproportionate effect on minorities’ credit access.”