The mortgage approval process refers to the steps related to securing a home mortgage. Estimates report that nearly two-thirds of a typical American household’s wealth comes from homeownership, making it crucial for prosperity. Lending is central to homeownership in the U.S., and the market is projected to grow. Fannie Mae, the government-sponsored entity that guarantees mortgages through a secondary mortgage market, estimates that home sales and purchase mortgage originations will rise by 6.2% and 14.5%, respectively, in 2021.
Historically, homeownership has been influenced by racial, ethnic, and other prejudices. Even in the areas where it has improved, recent studies have characterized the reduction of racial inequality in housing generally as “slow, uneven, and fragile.” In some places, however, there has been little to no improvement. Recent phenomena such as the Great Recession of 2008 and the COVID-19 outbreak have also diminished minority homeownership rates, particularly for Latinx and Black communities. Other studies have suggested LGBTQ+ communities also face marked inequalities in access to housing financing.
- The mortgage approval process refers to the actions connected to securing a home mortgage.
- Recent studies have suggested that while the most aggressive forms of home approval discrimination have declined or ceased, racial bias, particularly in the mortgage approval process, continues to entrench racial segregation and influence the racial wealth gap.
- Since the Fair Housing Act of 1968 was passed, the housing gap between minorities and White families has actually grown, driven primarily by the effect of the 2008 Great Recession.
- A study of consumer lending in traditional and financial technology markets found that algorithmic lenders do not entirely eliminate “impermissible” bias as considered under American law.
In the last four decades the most naked forms of discrimination, such as “direct denials” of housing availability, have declined. Housing inequalities among Whites, Blacks, and Hispanics have also declined, but the continued existence of inequalities points toward discrimination, scholars say.
Notably, despite the existence of laws that prohibit discrimination in the housing market, recent studies have suggested that racial bias—particularly in the mortgage approval process—continues to entrench racial segregation and influence the racial wealth gap.
Forms of Discrimination
A comprehensive review of the evidence published by the Urban Institute in 1999 found that minority homeowners in the U.S. had faced discrimination from mortgage lending institutions, which took two main forms. The first is “differential treatment,” which occurs when qualified minority homeowners are discouraged from taking a loan, denied a loan, or offered unfavorable loan terms because of their race or ethnicity. The second is “disparate impact,” which is present when minority loan seekers are disqualified at a higher rate than Whites in a manner that cannot be justified as a business necessity, even when the reasons why this difference exists aren’t immediately obvious.
Mortgage Discrimination and Homeownership
Since the passing of the 1968 Fair Housing Act, which prohibits housing discrimination based on race or ethnicity, the difference in homeownership rates between Whites and Blacks has actually grown.
A 2019 report from Alanna McCargo, then the vice president for housing finance policy at the Urban Institute, put the situation in stark terms. “A significant racial and ethnic homeownership gap persists in our country,” McCargo said. “These gaps are large by every measure, and they are worse than the gaps that existed when private race-based discrimination was legal. We have not simply failed to make progress; we are losing ground. And we cannot continue to go backward.”
The former vice president for housing finance policy at the Urban Institute, Alanna McCargo, published testimony in 2019 that described the racial and homeownership gaps in the U.S. as “worse than the gaps that existed when private race-based discrimination was legal.”
As of 2017, U.S. Census data revealed homeownership gaps among the racial and ethnic categories it tracked. While Whites had a homeownership rate of 72%, Blacks were only at 42%, Hispanics were at 47%, and Asian Americans and Pacific Islanders combined had about 57%.
Black and Hispanic communities especially had bought homes during the peak of the bubble and were more likely to be offered subprime loans than Whites and Asian Americans, even when they qualified for prime ones, according to McCargo. Their recovery rates had also been slower than Whites, she reported.
Disparate rejection rates and segregation
A 2020 metastudy from Northwestern University reported that racial discrimination has persisted in mortgage lending. While most forms of discrimination in the housing market had declined or ceased, including the most extreme forms, such as lying about the availability of advertised housing units, the authors of the study said that Black and Hispanic borrowers still face disproportionately high levels of rejection.
From the 1970s to 2020, the Northwestern study noted, the data showed that racial gaps in loan denial have only decreased slightly, while racial gaps in mortgage cost have not declined at all for Blacks, Hispanics, and Asians. Lincoln Quillian, the sociology professor who led the study, has commented that these forms of discrimination entrench racial segregation by pushing those with weak preferences toward neighborhoods where their own race predominates, which fuels the racial wealth gap by making it harder for Blacks to build wealth.
Other studies have seemed to corroborate this finding and extend it. A report from LendingTree in 2019, for instance, also indicated racial differences in lending rejection rates. According to that report, Black borrowers have the highest denial rates, at 17.4%, and non-Hispanic Whites have the lowest, at 7.9%.
LGBTQ+ rejection rates
A 2019 study showed that LGTBQ+ couples faced 73% higher rates of loan rejection than straight couples with similar applications. They also were more likely to be charged higher fees and higher interest rates.
Historical Discrimination and Laws
In U.S. history, discrimination has shaped the mortgage approval process. Some have characterized the current inequalities in housing as the lingering hangover of historical inequalities.
In the 20th century the Federal Housing Authority (FHA) encouraged White middle-class homeownership. However, the practices it used, including redlining and restrictive covenants, denied minorities access to federally subsidized housing and mortgage insurance.
In 1968, during the Presidency of Lyndon B. Johnson, the U.S. put into effect the Fair Housing Act, which makes housing discrimination based on race or ethnicity illegal. A follow-up to the 1964 Civil Rights Act, the Fair Housing Act was signed in the days immediately after the assassination of Martin Luther King Jr., who had become affiliated with the struggle for fair housing during the 1966 open housing marches in Chicago. The key aim of the Fair Housing Act, according to some summaries, was to “curtail discrimination in the housing sector.”
The Equal Credit Opportunity Act of 1974 broadened protections to interactions with places that regularly extend credit, including banks and other institutions that offer home loans. It makes it illegal to discriminate because of race, color, religion, national origin, sex, marital status, age, or public assistance.
Housing discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or with HUD.
The emergence of digital mortgage platforms, which automate the process of seeking loan approval, has also raised the question—in the New York Times and elsewhere in the popular press—of whether they reduce discrimination.
A recent University of California, Berkeley study of consumer lending in traditional and financial technology markets found that fintech doesn’t completely remove bias. While algorithmic lenders reduce disparities in rates, and many show no discrimination in loan rejection rates, they did not eliminate “impermissible discrimination,” because they may profile consumers for low-shopping behavior and operate in weaker competitive environments. They charged otherwise-equivalent Latinx and Black borrowers $765M more per year for refinance mortgages, the study reported.
The Bottom Line
In the United States homeownership accounts for as much as two-thirds of the wealth of a typical household. The mortgage approval process, therefore, represents a large potential stumbling block on the road to wealth and stability.
McCargo’s testimony highlighted several changes she said would improve the situation. Her recommendations included promoting an equitable housing finance system that is sensitive to the fact that minorities are more likely to lack a credit history, as well as an expansion of credit access, an update of credit scoring systems, and modernization of the FHA. McCargo also suggested improving down-payment assistance programs, creating a “robust small-dollar mortgage market,” and outreach and counseling for renters and home-ready millennials, among other proposals.