Is There a Race Gap in Home Equity Loans?

Access to home equity isn’t equal, and the data on home equity loans isn’t perfect

The specific impact of home equity loans—as opposed to that of the broader mortgage market—has been difficult to suss out. Scholarly treatments looking at instruments for tapping equity note that both homeownership and access to home equity extraction are worse for communities of color, according to data assembled from 2018 to 2020 by the Urban Institute.

Home equity loans allow homeowners to tap into equity. They often have favorable interest rates, and they can help homeowners invest in their home for future wealth. Erasing racial inequality from the home loan market could help communities of color build wealth now and for future generations.

Key Takeaways

  • In the context of the racial wealth gap—given that so much of the wealth in the United States is bound up in housing—imbalances in these loans remain a concern for inequality.
  • Reviews of federal data released under the Home Mortgage Disclosure Act (HMDA) show a general racial disparity in the ability to extract rising housing equity, but the specific data on home equity loans makes it hard to pinpoint its exact impact.
  • Erasing inequality from the home loan market could help communities of color build wealth.

Understanding the Race Gap in Home Equity Loans

In the context of the racial wealth gap, home equity loans are important as a component of building wealth, especially as a lot of the wealth in the United States is connected to housing and property. Much of it is tied to appreciation gains for homeowners. The price of a single-family home has moved upward at roughly 4.3% every year over the past 30 years, according to the National Association of Realtors, the largest real estate trade association in the U.S. In the past 10 years, that rate has accelerated to 8.3%.

Given this, racial dynamics of people’s ability to tap into home equity is connected to wealth equality in the country. Broad studies of people’s attempts to grab hold of their home equity—not focused solely on home equity loans—have noted racial disparities. This has led some scholars to suggest that even when there are favorable interest rates, not everyone has equal access to home equity extraction.

In the years since the housing boom of the mid-2000s, homeownership rates themselves have slumped faster for Black and Hispanic communities than for Whites. Researchers speculate that part of this has to do with the extra hurdles to getting approved for a home mortgage. Most notably, minority communities experience higher denial rates and submit fewer applications.

In addition, structural racism—especially through practices such as redlining and racist underwriting guidelines in the insurance industry—has helped shape these trends historically.

The reasons for home loan rejection vary by race. Black applicants are most often turned down for poor credit history. Whites, Asians, and Hispanics are most commonly denied for high debt-to-income (DTI) ratios.

Tapping Home Equity Using Different Tools

The Urban Institute reports that from 2018 to 2020, older homeowners increasingly tapped their equity. However, that increase was mainly driven by cash-out refinancing—and the increase was mostly due to White homeowners, not Black or Hispanic ones.

That study was focused on older borrowers and looked at cash-out refinancing, home equity conversion mortgages (HECMs), and home equity lines of credit (HELOCs). For those in the prime years of home buying, the main tools for extracting equity are HELOCs and cash-out refinancing. (HECMs are aimed at older homeowners.) Existing analysis of these younger groups also points toward disparate access, especially for Black (a 54.2% denial rate) and Hispanic borrowers (48.2%). The denial rate lowers to 36.7% for Asians, while it’s only 26.5% for Whites.

Access to home equity across time has seriously disadvantaged some communities. Predatory lending, for example, may have cost Black communities millions of dollars in home equity. This is due to housing segregation and other disparities that created “racialized patterns of subprime lending,” a National Institutes of Health study notes.

Access to Home Equity Loans

What about home equity loans, which account for a small share of the total outstanding mortgage debt? It’s difficult to pull out specific figures based on available studies, but they do note impacts that are connected to such loans. One study, for example, notes that Black parents who pay for their kids’ college also take out a higher number of home equity loans than those who don’t, a relationship that doesn’t hold for White parents.

Another study points to disparate access to home equity loans as seed funding for businesses. It shows that a larger share of Black and Hispanic applicants do not receive the amount of funding for which they asked.

There may be more-detailed studies coming. One reason why specifics are hard to come by is that intensive analytic data by race was not gathered until relatively recently.

The Data Gap in Home Equity Information

The main source of public information on home borrowing is the federal data released under the Home Mortgage Disclosure Act (HMDA), a 1975 law requiring that mortgage lenders keep information on their lending. This led to a data gap that hid the extent of the racial division in access to home equity.

Until 2018, the federal HMDA data omitted some types of home equity loans, including those taken out to cover medical costs or consolidate debt. The vast majority of subprime home equity loans have been used for those purposes. In addition to missing information on loans themselves, data about the racial and ethic composition of borrowers was also absent.

Aggressive collection practices on medical debts can lead to a lien being placed on a house, keeping the homeowner from taking out a home equity loan in the first place—a practice that has been connected to the racial wealth gap.

For a long time. data provided only scant information about borrowers. Glaringly missing was racial/ethnic composition. That eventually changed, but not with enough detail. Until relatively recently, data collection offered only six racial and ethnic options and forced a single choice: “White, Black, Hispanic, Asian or Pacific Islander, American Indian and Alaskan Native, or other.” New technology—such as collecting the information over the telephone and online—also led to missing racial/ethnic data.

A 2018 update to the HMDA revamped racial and ethnic data collection, considerably improving the tracking of race and ethnicity of loan applicants. Comparisons by race would have been virtually impossible before then.

Can lenders discriminate because of race?

No. The Equal Credit Opportunity Act (ECOA) explicitly bans loan denial for race and other protected classes, such as sex and being on public assistance.

Can lenders ask about race?

Yes. Lenders have to keep information regarding their lending practices, so they may ask for demographic information for some limited reasons. However, it’s illegal for them to reject an application based on race.

What is structural racism?

According to the National Institute on Minority Health and Health Disparities, a joint venture of the U.S. Department of Health and Human Services (HHS) and the National Institutes of Health, “Structural racism and discrimination (SRD) refers to macro-level conditions (e.g., residential segregation and institutional policies) that limit opportunities, resources, power, and well-being of individuals and populations based on race/ethnicity and other statuses, including but not limited to:

  • Gender
  • Sexual orientation
  • Gender identity
  • Disability status
  • Social class or socioeconomic status
  • Religion
  • National origin
  • Immigration status
  • Limited English proficiency
  • Physical characteristics or health conditions”

The Bottom Line

Home equity loans are tools for extracting equity from housing. Analysis of federal data suggests that there are disparate loan rates by race for mortgages. Still, the place of home equity loans in this equation, specifically, is a little tougher to sort out.

These questions arise in a climate in which housing prices have, on average, increased for decades, affected by the momentum of structurally biased practices, according to researchers. Scholars report that it’s clear that access to home equity extraction isn’t equal. Lack of equal opportunity to tap into equity can be particularly problematic after retirement, when home equity can be useful for buffering financial risk.

The issue of inequitable lending has become increasingly visible in the public sphere. In a small reflection of that visibility, President Biden declared June 2022 as National Homeownership Month to signal awareness of gaps in intergenerational wealth connected to homeownership in the U.S. And Wells Fargo, one of the largest lenders in the country, committed funds to a racial equity initiative following a Bloomberg news investigation that alleged disparate mortgage refinancing practices during the pandemic.

Article Sources
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  1. Urban Institute. “More Older Americans Are Drawing Wealth from Their Home Equity, but Racial Gaps Persist.”

  2. National Association of Realtors. “Housing Wealth Gains for the Rising Middle-Class Markets.”

  3. Urban Institute. “What Different Denial Rates Can Tell Us About Racial Disparities in the Mortgage Market.”

  4. Pew Research Center. “Blacks and Hispanics Face Extra Challenges in Getting Home Loans.”

  5. National Institutes of Health, via National Center for Biotechnology Information. “Race, Space, and Cumulative Disadvantage: A Case Study of the Subprime Lending Collapse.”

  6. Urban Institute. “Housing Finance at a Glance: May 2022,” Page 6.

  7. Collegio Carlo Alberto. “Racial Differences in Effects of Parental Income & Wealth on Financing of Children’s College Attendance, Quality & Graduation,” Pages 2, 16, 33, and 39 (Pages 4, 18, 35, and 41 of PDF).

  8. U.S. Small Business Administration, Office of Advocacy, via Internet Archive. “Financing Patterns and Credit Market Experiences: A Comparison by Race and Ethnicity for U.S. Employer Firms,” Page 27.

  9. Board of Governors of the Federal Reserve System. “Frequently Asked Questions About the New HMDA Data,” Page 2.

  10. U.S. Department of Housing and Urban Development Archives. “Stark Differences: Explosion of the Subprime Industry and Racial Hypersegmentation in Home Equity,” Page 31 (Page 33 of PDF).

  11. National Consumer Law Center. “The Racial Health and Wealth Gap: Impact of Medical Debt on Black Families,” Page 15 (Page 17 of PDF).

  12. U.S. Office of the Comptroller of the Currency. “Missing Race Data in HMDA and the Implications for the Monitoring of Fair Lending Compliance,” Page 1 (Page 2 of PDF).

  13. National Community Reinvestment Coalition. “NCRC’s HMDA 2018 Methodology: How to Calculate Race and Ethnicity.”

  14. U.S. Department of Justice. “The Equal Credit Opportunity Act.”

  15. Consumer Financial Protection Bureau. “Can a Lender or Broker Ask Me About My Race, Color, Religion, National Origin, or Sex?

  16. National Institute on Minority Health and Health Disparities. “Structural Racism and Discrimination.”

  17. The White House. “A Proclamation on National Homeownership Month, 2022.”

  18. Wells Fargo Newsroom. “Wells Fargo Expands Efforts to Advance Racial Equity in Homeownership.”

  19. Bloomberg. “Wells Fargo Rolls Out New Racial Equity Initiative Amid Scrutiny.”

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