What does it take to convince federal watchdogs that mortgage bankers can’t be trusted to make housing loans without discriminating by race and ethnicity?
If they need proof beyond all the obvious observational and circumstantial evidence available to the rest of us, then they should pay attention to a study being released today that was conducted by one of my colleagues at the Center for American Progress. Based on an analysis of 2006 federal mortgage data, researchers found that black and Hispanic borrowers were three times more likely than white borrowers to be saddled with high-priced loans. As defined by the Federal Reserve, a high-priced loan is one having an annual percentage rate at least 3 percent higher than a Treasury security of the same maturity.
“Overall, 17.8 percent of white borrowers were given higher-priced mortgages when borrowing from large banks in 2006, yet 30.9 percent of Hispanics and a staggering 41.5 percent of African-Americans got higher-priced mortgages,” the report said. “Only 11.5 percent of Asians got higher-priced mortgages.”
That, in and of itself, is damnable. But, wait, the data grows more disturbing as you drill deeper into the report.
This study is significant because it focuses on the banks that were “responsible for originating more than 1 of 3 of every higher-priced mortgage in the nation at the height of the housing bubble in 2006.” What’s more, the studied banks “are crucial to restoring the mortgage market to get the housing market back on its feet,” Andrew Jakabovics and Jeff Chapman write.
Authors Jakabovics (associate director for housing and economics at the Center for American Progress) and Chapman (research director for the Washington State Budget and Policy Center in Seattle) examined the lending patterns of 14 banks heavily invested in mortgage lending. They label them “systemically significant banks and subsidiaries” largely because of their size and because they’ve all received massive government bailout assistance during the past year.
The report focused on wealthy borrowers of all races instead of lower-income borrowers to minimize arguments that minorities typically have lower incomes and pose higher credit risks, Jakabovics said.
Bank of America—According to the report, Bank of America "stopped originating subprime loans [i.e., those with higher interest rates, traditionally offered to riskier borrowers] in 2001. Less than 3 percent of BofA’s loans were higher priced in 2006. In 2006, high-income African Americans and Hispanics, 1.9 percent and 1.5 percent, respectively, had higher mortgages." Which means: Black people were paying a higher price than some other racial groups to borrow the money to pay for their homes.
At Countrywide (now owned by Bank of America) "African Americans were more than twice as likely to pay higher prices (29.6 percent compared to 13.6 percent).”
Wells Fargo—In 2006, Wells Fargo was the second largest subprime loan originator. African-American borrowers were particularly likely to pay higher prices—47.3 percent compared to 16.7 percent of white borrowers.
JP Morgan Chase—In 2006, JP Morgan Chase was also more frequently charging higher prices to African-American and Hispanic borrowers than whites and Asians. Moreover, in 2008, it acquired federally seized Washington Mutual, whose lending practices in 2006 showed the largest racial/ethnic gap. "Fully 56.9 percent of African Americans and 42.3 percent of Hispanics paid higher prices, compared to 16.9 percent of whites. The gap was even wider among high-income borrowers, with African Americans paying high prices 55.2 percent of the time and Hispanics 46.1 percent of time, compared to 13.2 percent of white borrowers," according to the report.
Citigroup—"Among high-income Citigroup borrowers, 7.1 percent of whites paid higher prices for loans in 2006, compared to 32.9 percent of African Americans and 16.2 percent of Hispanics."
Why aren’t federal investigators looking into how badly some banks have conducted their affairs? Indeed, if racial discrimination in mortgage lending is illegal and immoral, why do these banks seemingly display an even-handed level of racial and ethnic discrimination?
The simple reason is that nobody has demanded that they do better. There’s no powerful lobby for minority banking customers. As outlined in a July report by the Center for Responsible Lending, in the minds of federal officials, the interests of mortgage seekers has consistently not rated as high as guaranteeing that the banking system ran smoothly.
“Consumer protection often went neglected, if anything, an afterthought or a box to check,” the report said. “Federal regulators' failure to restrain abuses that led to today's credit crisis demonstrates the need for a single agency focused on protecting consumers to ensure financial institutions flourish in a sustainable way.”
This conclusion is supported by a drumbeat of similar findings in recent years.
A 2007 study by New York University’s Furman Center for Real Estate and Urban Policy (based on 2006 data) found stark racial differences between New York City neighborhoods where subprime mortgages were common and neighborhoods where they were less common. The subprime mortgages are a key index because they often have higher interest rates, fees and penalties. So it should come as no surprise that the NYU researchers noted households in black or Hispanic neighborhoods were more likely to have more expensive home loans than whites.
So what can—and should—be done about this?
Jakabovics and Chapman recommend a federal inquiry by Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program (TARP), which administered the federal bailout of overreaching banks. That’s a start toward insuring that taxpayers’ money doesn’t support discrimination.
The authors also call for an independent regulator on consumer protection to safeguard against unfair lending practices. Not a bad idea, either. A fierce watchdog is needed to enforce anti-discrimination in the financial sector.
But minority mortgage seekers can arm themselves with knowledge about how the process works and be willing to ask—and walk away if offered a loan that seems too costly.
Indeed, now that these banks are under federal TARP supervision, the Federal Reserve has not just the right but the duty to scrutinize the banks’ books and make public far more information than what is currently available under the Home Mortgage Disclosure Act.
Data such as credit scores, assets, loan-to-value ratios and other indebtedness that contribute to lending decisions wasn’t available to the authors, so they were wary of making sweeping assumptions about the reasons for the racial disparity in their findings.
“Without that backup data, we can’t say whether this is overt discrimination on the part of the banks,” he said. “But, at most, we can say these findings raise red flags that should be looked at by federal regulators.”
With the TARP bailout as an ace in the hole, the Federal Reserve has the power to make the banks’ lending decisions crystal clear. They should do just that.
Sam Fulwood III, a senior fellow at the Center for American Progress, is a regular contributor to The Root.