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U 'redlining' report: banks still hurting non-white homebuyers

University of Minnesota researchers ran some mortgage numbers, concluding redlining is so bad wealthy minorities are having a tougher time getting mortgages than poor whites.

The report, from the U Law School's Institute on Metropolitan Opportunity (pdf),  asserts that, even after the economic recovery, Wells Fargo and other banks didn't distribute mortgage loans proportionally in diverse areas — in particular, underserved north Minneapolis.

Wells Fargo, the area's largest mortgage lender, disputes the institute's claim.

According to the report:

Though blacks and Hispanics typically have lower incomes than white borrowers, income differences do not explain the disparities — very-high-income blacks and Hispanics were more likely to receive subprime loans than very-low-income whites.

In fact, very high income blacks were 3.8 times more likely to receive subprime loans for home purchases than very low income whites, and 1.9 times more likely to receive subprime refinance loans.

Although income is not the sole determinant of whether applicants obtain loans, it is hard to believe that credit profiles or economic factors other than income could justify differences of this magnitude between very-high-income black applicants and very-low-income white applicants.

Maps: Subprime mortgages and people of color
The first map below shows concentration of subprime mortgage loans by census tract. The second map shows the percentage of the population that are people of color.
Sources: Home Mortgage Disclosure Act; U.S. Census Bureau, SF1

The bank responds that the study didn't include government or FHA-back mortgages, leaning heavily on the report's acknowledgement that non-racial factors play a part. (Wells Fargo's full response is at story's end.)

Not unexpectedly, the report has angered those who work with low-income Minnesotans.

"This report shows redlining is alive and well, and in some ways worse than it's ever been. It's not only immoral and unjust, but illegal,” said Anthony Newby, executive director of Neighborhoods Organizing for Change.

Steve Fletcher of Minnesota 2020 explains in a blog post that redlining is a term for when neighborhoods, rather than individuals, are evaluated on credit risk. Declining or risky neighborhoods, he says, tended to be predominantly nonwhite.

Fletcher discusses how the policies caused harm:

For multiple generations in our country, white families with the same household income have been given the opportunity to own property, earn equity, pass it on to their families, and build wealth over generations. Black families, on the other hand, have either been denied access to home loans or given subprime loans that are set up for failure. Even for black families that manage to get stable loans and build equity in their own home, the pattern of geographic discrimination against predominantly nonwhite neighborhoods leaves vacant homes and neglected properties that lower the property value for the whole neighborhood.

Fletcher asserts that biased institutions can say race wasn't a turndown factor, while using location to produce the same effect.

The report, authored by Myron Orfield, outlines how mortgage evaluations should work:

Lenders ... could ensure that loan origination rates are similar for households with similar economic profiles (regardless of race). They could also eliminate practices that currently lead to lower lending rates in diverse and majority-minority neighborhoods than would be expected given household incomes in those areas.

For instance, if the home purchase and refinance loan portfolios of the region’s banks simply reflected the regional distribution of homeowners and the actual mix of household incomes in each neighborhood, more than 13,300 additional loans would have been made in diverse and majority non-white neighborhoods over the four years from 2009 to 2012 (a 55 percent increase).

Some advocates for the poor believe lawsuits against the banks should be considered.

Rev. Kelly Chatman, pastor of Redeemer Lutheran Church in Minneapolis and member of ISAIAH’s clergy caucus, said in a statement:

"The racist practices of banks and mortgage lenders are unacceptable, and our faith calls us to respond. The Bible says, and I believe, that when one part suffers, every part suffers with it. The city needs to take action to end the suffering and make sure the banks repair the harm that has been done."

And Minneapolis City Council Member Cam Gordon said: "Lawsuits have been used in other cities, like Baltimore and Memphis. As we look into this, we'll look into remedies used in other cities."

Wells Fargo's corporate communications office provided this response to Orfield's study:

First, we note that the loans included in the study exclude government or FHA-backed mortgages which represent approximately 20 percent of the loans made during the study period. In addition, the study does not address many key factors besides income that go into a credit decision, such as borrowers’ credit scores and how much debt they have.

Wells Fargo has always been a leader in fair and responsible lending, and lending in all communities is a focus for our company.  As a result,Wells Fargo is by far the largest mortgage lender in the Twin Cities; overall, in lending to borrowers representing all racial and ethnic groups, and in lending in diverse and minority communities.

• We are dedicated to helping our customers achieve their financial goals through homeownership and we remain committed to making credit accessible to consumers.

• Wells Fargo has always been a leader in implementing policies to ensure fair and responsible lending, and lending in all communities has always been a focus for our company.

• Wells Fargo is by far the largest mortgage lender in the Twin Cities; overall, in lending to borrowers representing all racial and ethnic groups, and in lending in diverse and minority communities. Our market share in lending to minority borrowers and in minority communities is consistent with our overall market share.

• In the 2009-2012 period, Wells Fargo originated more than twice as many loans overall than the second largest lender, as well as more than twice as many loans to African American borrowers, more than three times as many loans to Hispanic borrowers, and more than twice as many loans in predominantly minority neighborhoods.

• In September 2012, we partnered with Minneapolis and St. Paul city leaders and local not-for-profit groups for NeighborhoodLIFT® , a unique program that provides down payment assistance, education, and access to potential homebuyers to purchase properties inside the city limits. The Twin Cities, our NeighborhoodLIFT commitment included $9 million for down payment assistance, locally designed programs to meet housing priorities, and local home buying education and support events. It also included a five-year mortgage lending goal of $1.9 billion.

To address disparity issues, in November 2013 we announced Wells Fargo NeighborhoodLIFT grants totaling $1.15 million focused on directly helping people to improve credit scores, reduce debt, increase savings and gain knowledge to become sustainable homeowners. The nonprofit organizations coordinating the work, with $80,000 grants each are: BuildWealth, Hmong American Partnership, Minneapolis Urban League, Emerge, CLUES, NEDA and Employment Action Center. This work is ongoing during 2014.

In addition, the Minnesota Homeownership Center received a grant of $200,000 for the research study and to implement outreach programs to underserved communities. TPT/ECHO received a $390,000 grant for 2014 focus group analysis, educational programs and documentaries addressing the root causes of financial challenges and opportunities for cultural communities.

• We continue to support ongoing homebuyer education efforts; for example, on Saturday, April 4, we worked with the MN Homeownership Center to organize a homebuyer education workshop that was attended by 90 potential first-time homebuyers and featured presentations in English, Hmong and Spanish.

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Comments (8)

using the formula

Wells Fargo: "the study does not address many key factors besides income that go into a credit decision, such as borrowers’ credit scores and how much debt they have."

It seems unlikely they have anyone sitting there saying, "well, these people are not white so in the sub-prime bin they go". However, you can imagine tweaking that formula -- how you balance income, savings, credit, etc -- to get any number of different results. If you base it on savings and credit, how can you expect people to be upwardly mobile? I don't know how they make their decisions, but it seems like you certainly *could* effectively redline while still making what appear to be quantitatively-driven decisions.

Who got the deeds?

I live in North Minneapolis where we need resident owners who care about their property like a body needs water to live. It looks to me like there is no problem buying AS AN INVESTOR if you're non-white as my block has a number of minority owners who do not reside in the properties, and of course it shows. Most resident owners invest in the property to have a decent living space and protect the investment. These carpetbagger absentee landlords do no such thing, and at least one owes thousands in fines and STILL has a rental license. The city could do more to help resident owners, but this is North Minneapolis, so we can expect to have lip service and little else. It's really time to impose upkeep fees on absentee landlords. At least then the weed beds on either side of me, reducing my value by association, would look like lawns.

What is the problem with income & credit score requirements?

What is the problem with having income, credit score and asset requirements? Having no such requirements ended in the sub-prime disaster. Canada had these requirements AND required 20% down payment. Canada did not suffer from the sub-prime disaster.

We must learn from history and not repeat the sub-prime mistakes.

I guess we have to repeat:

"Though blacks and Hispanics typically have lower incomes than white borrowers, income differences do not explain the disparities — very-high-income blacks and Hispanics were more likely to receive subprime loans than very-low-income whites."

This is a pretty clear and unambiguous statement.

Statement's meaning

The only logical conclusion from this statement is that there are some additional consideration beside income that affect banks' decisions. It does not mean that the race is one of them.

Cognitive Dissonance

These reports by Myron Orfield always make me wonder "Do.the data scream when he tortures them?" In order to believe this report you have to simultaneously think the banks are greedy capitalists but will ignore a potentially lucrative market because they are racist.

Does everyone who works at these banks deliberately ignore their own self-interest? Why would a loan officer willingly reject a client if the loan will make them money - in this case more money for originating a loan with higher than market interest rates? If this market is so under served, doesn't it make sense that another competitor would swoop in and pick the low hanging fruit?

The only reason for rejection rates to be higher that makes economic sense is that the default rates on loans to these residents is higher. The proof would be to examine default rates between borrowers in different areas. If the default rates are similar then the banks are making rational lending decisions. If the default rates vary significantly then the banks will either lower their lending criteria to make more loans to borrowers with lower risk of default or raise them to reject borrowers with a higher risk. Anything less is long-term economic suicide.

Dissonance?

The Dissonance here is the mental acrobatics being deployed to avoid obvious conclusions. Again:

"... income differences do not explain the disparities — very-high-income blacks and Hispanics were more likely to receive subprime loans than very-low-income whites."

So there must some OTHER explanation besides race... despite the fact race is the prominent variable. Obviously a wealthy person with dark skin is a greater debt risk than poorer person with white skin because... what?

Look, we have a variety of studies over the course of decades demonstrating these prejudices in everything from job applicants to police profiling. Loan officers will recognize racial qualities even if a race question isn't actually part of the application process. Names, accents, etc. are usually clues. It's not that loan officers are KKK members or anything, we just have a lot of durable stereotypes that are a lot of people are invested in, even if it's subconscious.

And: "Does everyone who works at these banks deliberately ignore their own self-interest? Why would a loan officer willingly reject a client if the loan will make them money "

As the article clearly states, banks are not forgoing the business of Blacks and Hispanics, they're just charging more for it by issuing sub-prime loans instead of standard loans. I remind everyone that sub-prime loans are more expensive for borrowers than standard loans and more lucrative for lenders. The business model actually encourages discrimination... that's why it's called "institutional racism."

Statistics

"we have a variety of studies over the course of decades demonstrating these prejudices in everything from job applicants to police profiling." All those studies are exactly the same as this one. The idea is always the same: There is statistical difference between races which proven in the study and than a conclusion follows that is is caused by racism. Logically, this is nonsense. Do we have more black basketball players because of anti-white bias? Yes RACE may be a prominent variable but it doesn't mean that RACISM is.