In this section, we highlight key characteristics of the mortgage market for Black borrowers. As reported in Section I of this report, lenders received over 966,000 mortgage applications from prospective Black homebuyers in 2019 and approximately 472,000 home purchase mortgages were obtained by Black homebuyers. This is a substantially higher number than 2018, when about 247,000 mortgages to Black borrowers were originated. In addition, there were over 690,000 loan applications that were either rejected, withdrawn or incomplete in 2018 and 2019, which likely includes loans that were originated later. In sum, as of 2019, the number of mortgage loans to Black borrowers was on the rise. It is too soon to know the extent of the impact of the pandemic on this trend.
Table 2.1 lists the top 10 lenders of mortgage loans to Black borrowers based on 2019 HMDA data. These lenders are responsible for 24 percent of all mortgage originations for Black homebuyers. The top 50 lenders for loans to Black borrowers is included in the Appendix.
Table 2.1 The top 10 lenders to Black borrowers accounted for 24 % of the market in 2019.
|Number of Loans to Black Borrowers
|% Market for Black Borrowers
|QUICKEN LOANS, LLC
|UNITED SHORE FINANCIAL SERVICES, LLC
|NAVY FEDERAL CREDIT UNION
|FREEDOM MORTGAGE CORPORATION
|WELLS FARGO BANK, NATIONAL ASSOCIATION
|NATIONSTAR MORTGAGE LLC
|BANK OF AMERICA, NATIONAL ASSOCIATION
|FAIRWAY INDEPENDENT MORTGAGE CORPORATION
|JPMORGAN CHASE BANK, NATIONAL ASSOCIATION
Figure 2.1 compares the profile of the average Black homebuyers in the FHA versus the conventional mortgage markets. The average Black homebuyer is between ages 35 and 44 and has a FICO score of 626. The average Black homebuyer obtains an FHA mortgage for $209,000, has a DTI ratio of 40 percent, a downpayment of 2.5 percent and an income of $112,000. In the conventional market, Black homebuyers borrow an average of $236,000, put 5 percent down, have a DTI of 39 percent, and have an average income of $209,000.
In 2018, 53 percent of Black mortgage borrowers obtained Federal Housing Administration (FHA) or Veterans Administration (VA) loans, compared to 23 percent of White borrowers. At the same time, 73.6 percent of White homebuyers obtained conventional loans, while 45 percent of Black homebuyers took out conventional mortgages. These differences are summarized in Figure 2.2. The implications of these patterns are discussed further in the section of this report entitled “Mortgage Rates and the Extra Cost for Black Homeowners” (Aronowitz, Golding and Choi).
In terms of market share, as shown in Figure 2.3, White homebuyers comprised 75 percent of the conventional mortgage market, and 14.5 percent of FHA, while Black borrowers accounted for a mere 4.6 percent of the conventional market and 37 percent of FHA. As a point of reference, the Black population in the U.S. is 14.6 percent. The cost implications to homebuyers of these differences can vary depending on interest rates and other factors (see Aronowitz, Choi and Golding in this report). Approximately half of FHA and VA loans were originated by non-banks, which suggests that Black borrowers are largely being served by institutions that fall outside of the regulatory purview of the Community Reinvestment Act (CRA).1
Mortgage Loan Denials
As shown in Figure 2.4, Black applicants are more than twice as likely to have their applications rejected, and this has been the case consistently over time. Since the 2008 housing crisis, loan rejection rates have trended downward for all racial/ethnic categories-- possible due to the chilling effects of heightened awareness of mortgage credit tightening.
The HMDA system requires lenders to report a reason for rejecting a loan. There is significant variation in the frequency of these reasons based on the race of the applicant, as presented in Figure 2.5 below. Regardless of race or ethnicity, DTI and credit history are the most common reasons cited for loan rejection. However, the proportion of rejections due to DTI and credit history are significantly higher for Black applicants. In addition, Black applicants were less likely than White applicants to be rejected due to issues with the collateral or incomplete applications. The disparities in the average DTI and credit history for Black versus White borrowers are discussed later in this report as they have major implications for underwriting and loan pricing.
As shown in Figure 2.6, based on 2018 HMDA data, Black borrowers pay higher rates on average than White borrowers in both the FHA/VA and conventional markets. The shaded bars represent all ethnicities within the racial category on the left, the bar in the center indicates those who are not Hispanic/Latinx within that racial category, and the bar on the right represents those who are Hispanic/Latinx within the racial category. As stated previously, the grouping of all Hispanic/Latinx homebuyers or households in a single category without accounting for race can significantly mischaracterize underlying patterns. In other words, racial differences matter more than those based on ethnicity alone. For example, in the case of FHA, in 2018 Black non-Hispanic borrowers paid an average of 5.52 percent while Black Latinx borrowers were charged an average of 4.87 percent. White Latinx borrowers paid an average of 4.91 for an FHA loan, compared to 4.83 for White non-Latinx borrowers. Rates for conventional mortgages were lower due to differences in the FHA fee structure, and the rate differentials were much smaller. For conventional loans, Black Non-Latinx borrowers and White Latinx borrowers paid higher rates than White non-Latinx Borrowers.
Loans insured by FHA and conventional, conforming loans are subject to loan limits by statute. For example, FHA’s 2019 loan limit (‘floor’) of $314,827 is set at 65 percent of the conforming loan limit for conventional loans, which was $484,350. In areas designated as ‘high cost’, which are 70 metropolitan areas and counties where the median home price is more than 115 percent of the loan limit, the FHA loan limit is set at 150% of the national conforming limit, and was $726,525 in 2019. Based on changes in house prices in the prior year, FHFA increased these loan limits by 5.38 percent in 2020. As a result, we would expect FHA loan amounts to be on average, lower than conventional loan sizes.
However, for Black borrowers, there was insignificant variation in loan sizes for FHA compared to conventional loans. Figure 2.7 shows the average single-family home purchase loan amount for Black borrowers was $209,000 and $213,000 Black Hispanic borrowers in 2018 for FHA, and $236,000 and $221,000, respectively for conventional originations. By contrast, White FHA homebuyers borrowed on average $193,000 in FHA loans, and $276,000 in conventional loans. Loan amounts for the Other Race category include loans made to Asian borrowers and are significantly higher than loans to Black and White borrowers, due in part to differences in geographic concentration in high-cost areas, such as California. In addition, racial disparities in income and other financial characteristics, as discussed elsewhere in this report, have a direct impact on the size of loan for which borrowers can qualify.
Mortgage Underwriting Criteria
Mortgage underwriting models rely on traditional measures of credit reputation, capacity, and collateral, which due to cumulative disadvantage and systemic inequality, suppress opportunities for Black homeownership. Below, we highlight key characteristics of Black homebuyers that affect access to and costs of mortgage credit.
Since incomes for Black families and households are lower on average than they are for White families and households, these same disparities play out in the housing market. In addition, patterns based on racial differences are distinct from differences based on ethnicity. As presented in Figure 2.8, in 2018, Black, Hispanic/Latinx FHA borrowers had an average annual income of $149,000 and Black non-Hispanic FHA borrowers had an annual income of $103,000. White non-Hispanic FHA borrowers had an average income of $140,000, while White Hispanic FHA borrowers’ incomes were $167,000. Average incomes for Other non-Hispanic races were significantly higher than Other Races of Hispanic ethnicity. Incomes were similar for Black and White borrowers if they were of Hispanic ethnicity.
Not surprisingly, conventional borrower incomes were generally higher than those of FHA borrowers, and Black borrowers had lower incomes than White or Other Races. Black borrowers of Hispanic/Latinx origin also had significantly lower incomes than White Hispanic/Latinx borrowers. Perhaps the most striking takeaway from this chart is the stark difference between FHA and Conventional borrowers’ income profiles. These are clearly two distinct market segments. The average income for a Black FHA loan borrower was $113,000, versus $215,000 for the average Black conventional borrower.
Table 2.1 - Black homebuyers and owners have lower incomes than their White counterparts.
|New home buyers – HMDA 2018
|All homeowners – ACS 2018
Down Payments and Loan-to-Value Ratios
Black homebuyers, due to savings and net worth differentials, tend to make lower down payments, and as such, start off with less equity than members of other groups and pay more in mortgage insurance premiums. For example, the median downpayment amount for Black homebuyers is 3.5 percent-- which reflects the fact that approximately 53 percent of mortgages made to Black borrowers are FHA- or VA-insured. In contrast, the median downpayment amount for White homebuyers in 2018 was 10 percent.
Table 2.2 - Black homebuyers have higher LTVs on average, consistent with a higher proportion of FHA lending.
|New home buyers - HMDA 2018
Figure 2.9 shows current LTVs by racial/ethnic group. Over a quarter of Black homebuyers have CLTVs of 100 percent or more, which means they enter homeownership with no equity. High LTVs in turn result in higher rates via loan-level price adjustments (LLPAs).
Previous studies have found that Black borrowers pay higher costs for credit and higher transaction costs than similarly situated Whites. Because of cumulative disadvantage, lower, and less stable incomes, and lower levels of home equity available to offset income shocks, Black borrowers tend to have fewer resources for payments, and therefore will be more likely to make delinquent payments. As a result, Black borrowers have a lower median FICO score of 626; the median FICO score for White borrowers is 751. Scores that fall below 700 may be charged higher interest rates on mortgages, as well as credit cards and other forms of credit. A FICO score of below 670 is considered ‘subprime,’ which lenders consider the highest risk category. Loan applications with a subprime FICO score are significantly more likely to be rejected. At best, even if approved, ‘risk-based’ pricing, a standard industry practice, requires these borrowers pay a significant premium.
Table 2.3 - Median FICO scores are lower for Black people with credit files due to economic disadvantage over time.
Median FICO Score
Another important consideration is that 21 percent of the Black population has no credit score, compared to 12 percent of Whites. This is the case because Blacks are less likely to have files in the traditional credit system which are used as the basis for credit scores.2
Mortgage lending criteria include debt-to-income (DTI) ratio requirements, which are limits on the proportion of a borrower’s monthly income that is needed to cover payments to creditors. Due to federal regulations and longstanding mortgage industry rules-of-thumb, mortgage lending standards have historically required that household debt, including expected mortgage, auto loan, student loan, credit card, and other loan payments, fall below 43 percent of monthly income, although recent regulatory changes have relaxed these restrictions.
Because of lower income profiles and debt obligations, Black and Hispanic homebuyers have higher DTI ratios on average than White homebuyers. For example, Black homebuyers pay an average of 41 % of monthly income to creditors compared to 37 percent for White homebuyers. While these differences may seem small, it is important to keep in mind that income levels matter-- having to pay $1,260 out of an income of approximately $3,000 a month is a very different set of financial circumstances in practice than paying $1,940 out of a monthly income of $5,250.3
Table 2.4 - DTI ratios are higher for Black homebuyers.
The DTI standard was codified in the Qualified Mortgage (QM) the "ability to repay" anti-predatory lending provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The QM rule, issued in 2014, was designed to protect consumers from risky loans, and required that lenders document that a borrower have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43 percent. Fannie Mae, Freddie Mac, and FHA were not bound to this requirement, under a provision known as the ‘QM Patch’. Under the QM Patch, loans sold to Fannie Mae or Freddie Mac, and loans insured by FHA, are allowed to exceed to the 43% DTI ratio, in principle, because of their standardized algorithms that rely on multiple additional factors to assess credit risk. Still, the business justification for DTI restrictions has been questioned by researchers and policymakers because the extent to which DTI, when used as part of a multivariate model, is predictive of default varies depending on macroeconomic conditions, borrower equity, and credit score.4 When used as a single-factor overlay on top of a multivariate credit model, studies have shown DTI has little if any additional predictive value and profound discriminatory effect. In June of this year, the CFPB proposed amendments to these rules that would remove DTI as a factor in mortgage underwriting models and allow the QM patch to expire. These changes, if adopted, should enhance access to mortgage credit for Black homebuyers.
COVID-19 and the Mortgage Market
The onset of the COVID-19 pandemic crisis has caused lenders and investors to tighten mortgage lending requirements in anticipation of increased defaults. In an effort to reduce risk exposure, many have increased the minimum allowable credit score and down payments. These trends are likely to exacerbate the challenges that already work against expanding Black homeownership.5
In this section, we have provided a detailed overview of the state of the mortgage market for Black homebuyers. We presented a profile of the average Black homebuyer in the FHA and conventional markets, a comparison of financial characteristics of these borrowers, and a detailed analysis of the implications of mortgage underwriting criteria for Black borrowers. Based on the state of homeownership and the state of the mortgage market described in the previous sections, we discuss implications for public policy and recommended directions for the industry.