It has long been known that Black and Latinx people and women of any race are more likely to be put into non-conforming mortgage loans, even if they qualify for conventional mortgage products. (recent link, there are many!)
Why does this matter? Because many non-conforming loans cost the borrower more money – either in the form of closing fees or interest rates. Minority people, and women of all races and ethnicities, pay more for mortgages that similarly qualified white men.
This problem extends to homeowners who are seeking to refinance, too. Black homeowners face getting low appraisals, which limits how much they can borrow on a refinancing of their mortgage.
Refinancing is a big financial benefit. Homeowners can lower their interest rates, take equity out of their house, or restructure their debt to a longer or shorter period. In the past two or three years, I’ve been following stories about how white people’s houses appraise for more than Black people’s houses. Research and carefully documented anecdotal evidence supports a suit about mortgage discrimination.
Appraisal, repeating redlining patterns
Historically (until 1968), lenders were allowed to refuse to lend in “hazardous” neighborhoods. The map boundaries of those neighborhoods were red: thus, “redlining.” “Hazardous,” unapologetically, meant Black.
It became a fact that Black neighborhoods failed to go up in value, or declined because of restricted access to mortgages. If people cannot get a mortgage for a home, they cannot buy it. So demand for houses in redlined neighborhoods were depressed due to chronic low demand. Lack of access to lending became a cycle of limited investment (mortgage access) leading to limited demand. Then the current owners did not have access to lending, which contributed to difficulty financing improvement.
Fast forward to 53 years after redlining was outlawed. If a Black person’s home is compared to other homes in a formerly redlined neighborhood, the price depression continues.
In cities, it is easy to find significant differences in value based on neighborhood. Think of the old expression “on the wrong side of the tracks.” In a city, two houses that can be used for comparison in an appraisal may differ in value by a good bit, depending on which side of those tracks it is on. That wrong side is often an old redlined area.
Both houses – the redlined one and the never redlined one — may be legitimate choices for a comparable property: same size, same distance away, and similar condition. What if the appraiser’s choice is affected by the race of the current owner? If bias is in play, it would significantly change an appraisal result. When Black homeowners get low appraisals on their property, it can prevent that Black homeowner from refinancing their current property.
The value difference is startling. In the case in this article, two appraisals came in at $110,000 and $125,000 when the appraiser saw a Black homeowner. When a third appraiser saw a white face, the same house appraised at $259,000.
There are standards for mortgage appraisals. But there is judgment involved in which houses are used for comparison. Bias explains some of the differences that Black (and Latinx) homeowners experience.
To add insult to injury, the homeowner in the same article was also quoted extraordinarily high interest rates, compared to the norm at the time. (Interest rates change all the time, but there is a typical rate for any given day or week).
Lessons on inequity from my day job
As most of you know, I work a day job as a real estate buyer’s broker. I run a company that helps people buy houses.
Owning a house is a way to build wealth. Owning a house turns your housing costs into wealth. As you pay down your mortgage, you have something of value that you can sell. When Black and Latinx people experience obstacles to buying and maintaining a home, their ability to increase their net worth suffers. The playing field for mortgage lending must improve!
The latest figures from the U.S. Census Bureau show the median net worth for an African American family is $9,000, compared with $132,000 for a white family. Latino families did not fare much better at $12,000. Real estate has a lot to do with that disparity.