|According to government estimates, between
two and three million cases of housing discrimination take place each
year, victimizing persons of color who seek to either purchase or
rent a place to live. This discrimination takes several different
forms, some of which are rather blatant, and others of which appear
more subtle: claiming that the last apartment was just rented, when
it fact it wasn't; charging higher interest rates for the same mortgage
loan offered to a white person on better terms, or flatly rejecting
persons of color for a loan at all, even while offering the same loans
to whites with similar credit.
Yet, despite decades of studies confirming the existence of housing bias, conservatives
regularly devise and offer excuses for disparate housing outcomes,
all of which presume that there are logical reasons why folks of
color get loans less often, or on less favorable terms, and none
of which reasons have the least bit to do with racism. As with white
denial of racism in labor markets, the refusal of many in the white
community to acknowledge the existence of bias in housing signifies
an overwhelming need to rationalize inequality in the U.S.
Although skeptics downplay discrimination against persons seeking
to buy a home, by saying that higher mortgage rejection rates for
blacks are merely the result of having worse credit histories, the
facts say otherwise.
The most comprehensive study of mortgage bias was conducted by
the Boston Federal Reserve Bank and considered 38 different factors
that could result in disparate lending. Among the factors examined
were several measures of income, credit history, loan type and collateral.
Even with all factors considered, blacks were still nearly 60 percent
more likely to be rejected for a mortgage compared to similarly
credit-worthy whites. Despite criticisms of the Boston Fed study,
the research has held up to extensive scrutiny. Indeed, the methodology
of the study was considered sound enough by Boston banks so as to
gain their participation to begin with, no doubt because they expected
(incorrectly as it turned out) that the research would exonerate
them from claims of bias. Furthermore, two follow-up studies, both
of which added control variables, found equal or higher levels of
bias than were found in the original study.
Another study in Louisville sent black and white "testers"
to banks with equal credit ratings and financial characteristics,
and had them request conventional mortgages for the very same housing.
Repeatedly, blacks were given less information or encouragement
to apply, and were subjected to differential and unequal treatment
in terms of loan prequalification. For example, blacks were often
told their income and credit was inadequate to qualify for the loans
they sought, while whites with identical incomes and credit were
told they would qualify for the same loans.
Conservatives criticize studies that find evidence of mortgage
bias, based on different outcomes for persons at the same credit
rating, by arguing that default analysis shows different outcomes
are justified. Specifically, they argue that since black default
rates are higher than the rates for whites, at every level of pre-loan
creditworthiness, banks are merely engaging in rational decision
making when they reject blacks for such loans, aware that the risk
of default is higher. But there are multiple flaws with this line
First, this argument ignores that default rates and foreclosure
rates are far from the same, and it is only when loans are foreclosed
that their default status becomes visible in data. Secondly, lenders
control whether or not a late loan (technically in default) is going
to be called in or not, and the available evidence suggests lenders
are more aggressive in foreclosing on loans paid late by blacks
than whites. In part, this is due to the ability to turn the lower-cost
homes (with higher than average loan-to-value ratios) more quickly
for greater profit once the loan is called in.
Another problem with the default analysis approach is that it assumes
that since blacks are higher average credit and default risks, therefore,
there is no discrimination when a particular black applicant for
a loan gets turned down. But this argument extrapolates from group
averages to individuals in a way that is not only illegal (it is
unlawful to discriminate against a person because of the average
characteristics of that person's racial group), but also irrational.
After all, just because blacks as a group have higher default rates,
doesn't mean that any given black loan applicant will likely default,
and to treat them as if they would is to treat them on the basis
of a statistical average over which they have no control, and which
is likely to be wrong far more often than right (since most blacks
will not default on their loans).
Finally, when loan default rates are not massively different between
whites and blacks (and they aren't), lenders should care more about
the average loss on a default, rather than the average rate of default
between one type of borrower and another. As such, it is important
to note that the expected monetary loss to a lender from a defaulted
black loan is actually less than the average for loans to whites
(understandable, since the size of the loan in the latter case is
likely higher), so market theory would predict lower rates of foreclosure
on black loans if discrimination were not operating.
Furthermore, if risk of default in the abstract is less important
than size of the monetary loss in case of default, the entire notion
of recalibrating discrimination estimates based on different default
rates becomes untenable.
Given the higher average loss on loans to whites, it is whites
who should be held to the higher standard: yet, no evidence suggests
One of the problems with comparing creditworthiness in the first
place, so as to "justify" racial disparity in lending,
is that research has found lenders are more willing to give information
to whites with bad credit on how to clean up their files, and underwriters
tend to give whites the benefit of the doubt with spotty credit
in a way they don't with borrowers of color.
One infamous example of this process, though hardly anomalous,
involved Northern Trust, in Chicago, which settled with the Justice
Department over violations of the Equal Credit Opportunity Act.
Northern had allowed whites with spotty credit to offer extensive
explanations for their credit blemishes, while denying such an opportunity
to minority loan seekers.
What's more, Northern had refused to consider bonuses, overtime
pay or child support as sources of income when determining a black
applicant's creditworthiness, whereas these were taken into consideration
for white loan-seekers.
Evidence from around the nation suggests that lenders often seem
less interested in giving loan information to black customers than
whites, are quick to urge blacks more so than whites to seek loans
elsewhere, and are more likely to discourage black loan seekers
by telling them how complicated and time-consuming the application
process might be. Blacks are also more likely than whites to be
told that they won't qualify for the loans they are seeking, even
before they have filled out the necessary paperwork needed for a
lender to make such a determination.
Interestingly, data from the Home Mortgage Disclosure Act demonstrates
that while blacks and whites with excellent credit appear to be
treated equally, there is a substantial gap between the way whites
and blacks with bad or questionable credit are treated. As the Wall
Street Journal reported in 1995, nearly seventy percent of whites
with poor credit are able to receive a mortgage, compared to only
sixteen percent of blacks with equally poor credit.
Even when folks of color do have worse credit, this fact is hardly
independent of racism. Rather, worse credit for blacks (especially
the poor) often stems from the practices of the secondary mortgage
market. As several studies have shown, banks often reject borrowers
of color, even when they have credit records similar to whites with
the same incomes. Then, these rejected applicants turn to secondary
or "sub-prime" lenders, often owned by the very banks
that turned them down (or which are subsidized by them in the form
of credit lines), and which specialize in loans to persons who can't
otherwise get financing. These sub-prime lenders charge 3-5 times
the interest for the loans they offer than the bank would have that
originally rejected the supposedly high-risk applicant. By doing
so, lenders make exceptionally high profits and place borrowers
in great jeopardy by driving up the amount they must repay, thereby
increasing the likelihood of default, late payments, or missed payments,
all of which would then taint future credit records.
A recent study of Citigroup (which includes Citi, the group's sub-prime
lender), found that Citi in North Carolina has been charging higher
interest even to borrowers who could have qualified for regular
loans. In the process, over 90,000 mostly black borrowers have been
roped into predatory loans, and as a result have paid an average
of $327 more per month for mortgages than those getting loans from
a prime lender. This adds up to over $110,000 in excess payments
over the life of the loans, on average. And at the same time that
banks are steering blacks with good credit to sub-prime lenders,
whites with good credit who apply for loans with sub-prime lenders
are routinely referred to prime lenders, who offer loans at lower
The collective impact of housing bias is enormous. Most obviously,
it deprives families of color of billions of dollars in lost potential
wealth and assets. Studies place the cost of present-day discrimination
at over $4 billion annually for people of color, and further estimate
that today's black communities have been deprived of nearly half-a-trillion
dollars in wealth due to past and present housing discrimination
in the U.S.
Likewise, housing preferences and subsidies for white families
(in the form of Homestead Act benefits, and racially-restrictive
FHA and VA loans), alongside "urban renewal," (which resulted
in the destruction of about one-fourth of all homes lived in by
African Americans in the 50s and 60s to make way for office parks,
parking lots and shopping centers), have pushed the racial housing
gap in America to chasm levels.
This inequality in housing, compounded by inequality in labor markets,
then results in profoundly unequal educational opportunities and
access for persons of color, relative to whites: the subject to
which we will turn in Part IV of this series.
Part I of Tim Wise’s series, May
Part II, on criminal justice, May
Tim Wise is the author of White Like Me: Reflections on
Race from a Privileged Son (Soft Skull, 2005) and Affirmative
Action: Racial Preference in Black and White (Routledge, 2005)
Footnotes for this article can be obtained from the author at [email protected].
His writings can be found at www.timwise.org.