Racism in the Credit Industry?
A recent study has shown that the number of people who pay an unusually high interest rate for their mortgage is rising. The overall numbers of people who pay more than the average interest rate is up considerably, from 11.5 to 24.6 percent in the last two years. And if you look at the statistics, almost all of these people are members of minorities.
A study done by the Federal Reserve shows that around 55 percent of African-American borrowers pay higher than normal interest on their mortgages. But it’s not just the African-American community that is getting hit with high interest rates. The same study showed that 46 percent of people who identify as Latino also pay a larger than normal monthly mortgage payment as a result of a higher than average interest rate on their loan. Only 17 percent of white borrowers fell into that category.
While a superficial analysis of these numbers might suggest rampant racism among our nation's lenders in spite of the provisions of the Equal Credit Opportunity Act, there might be another explanation. There is a strong connection between the interest rate offered and the borrowers' credit history, and many members of minorities have not built up strong credit histories. Members of minorities are also more likely to have negative information on their credit reports.
The interest rate that is offered on a mortgage (or any other loan) is directly proportional to the amount of risk the lender feels that they are taking by letting you use their money over time. If you have excellent credit, the chances of you getting the best possible interest rate are very high. On the other hand, if you have no track record of handling credit or significant black marks on your credit history, you are very likely to have to pay a very high interest rate. Because many African Americans and Latinos have fewer opportunities to make and repay small loans, and because they are disproportionately likely to get into financial trouble that results in dings in their credit rating (especially because many of them work jobs vulnerable to economic trouble and not providing health insurance), they are more likely to look like bad credit risks.
A related factor is the proliferation of high-risk non-conforming loans. Even as late as the 1990's, it was almost unheard of to buy a house without a significant downpayment, generally at least 10% with private mortgage insurance, and 20% to avoid having to pay PMI. In order to buy a house, you had to spend months or years saving to accumulate that downpayment, generally while also paying rent to someone else for your current dwelling. But in the first decade of the 21st century, it became increasingly possible to buy a house with no money down, as a result of programs that were intended to open home ownership to lower-income families. However, almost all these programs involved a higher interest rate for the simple reason that the lender is taking a greater risk by not having that money upfront. (And history has shown that the higher risk was true -- a much higher percentage of no-money-down and other non-conforming loans went into foreclosure during the 2008 housing crisis than mortgages with traditional downpayments).
In some of these specialized mortgage deals, home buyers are agreeing to let the closing costs associated with buying a home be folded into the interest rate. Again, this is a very risky and somewhat shady way for a family to buy a home with very little to no cash on hand. The catch is, of course, that you will end up paying significantly more over time than if you had just paid the closing costs up front.
While no one can suggest that racism is dead in America, it is possible that while African-Americans and Latinos pay more for their mortgages, it does not mean that lenders are unfairly singling them out for higher interest rates on the basis of race. Instead, there are a number of financial factors that tend to appear more frequently among our African-American and Latino communities which make it difficult for buyers to put down a normal downpayment and qualify for a regular mortgage, such that they are shunted into high-risk loan programs with substantially higher interest rates. If the statistics are broken out according to incomes, it is very likely that wealthy African-Americans and Latinos are paying interest rates comparable to whites in the same income brackets, while poor whites are trapped in the same no-money-down high-interest mortgages that are snaring poor African-American and Latino borrowers. The racism instead lies in the more subtle factors that leave African-Americans and Latinos disproportionately represented in the lower deciles of the economic ladder.
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