The recent Urban Institute study showing that African-Americans and Latinos with similar credit profiles as non-Hispanic white applicants experience much higher rejection rates when applying for mortgages is but the latest reminder that blacks and Hispanics do not have equal access to mortgage credit. And disparate access to mortgage credit is the single most important reason for the enormous wealth gap between people of color and non-Hispanic whites.
Today, African-Americans and Latinos hold only 6 cents and 7 cents, respectively, for every dollar of wealth held by whites, according to an analysis of the latest census data by the Center for Global Policy Solutions.
Mel Watt, the new director of the Federal Housing Finance Administration, has the authority to address unequal access to mortgage credit for people of color. Fortunately, his first public remarks made it clear that access to affordable, safe, and sustainable mortgage credit ranks among his highest priorities.
This focus for the FHFA comes none too soon. When compared with mortgage lending activity a decade ago, the number of loans made to African-Americans is down 55 percent, and those made to Latinos are down 45 percent.
Given the fact that the equity in owner-occupied homes is the largest source of savings for the typical American household, difficulty obtaining a mortgage severely constrains wealth-building. In fact, home equity accounts for 92 percent of personal net worth for the typical African-American household and 67 percent for Latino households.
And lack of access to housing equity further financially marginalizes excluded households by denying them the ability to leverage the equity in their homes to start a business, fund college educations, finance retirements, or cover the costs of unplanned financial emergencies.
Interestingly, the Urban Institute report mirrors the research findings of the Boston Federal Reserve Bank in 1992. That analysis found that lenders rejected black and Latino applicants 56 percent more often than otherwise identical white applicants.
In short, African-Americans and Latinos have gone full circle — from a lack of access to safe, affordable, and sustainable mortgage loans due to lending discrimination through the mid-1990s, to excessive access to high-cost and unsustainable predatory-subprime loans up to 2007. Now, blacks and Latinos once again face unequal access to safe, affordable, and sustainable home loans.
Failure to improve access to quality mortgages for people of color will increasingly create damaging ripple effects in the housing market and economy. A few key pieces of data tell us why. People of color will constitute seven of 10 net new households formed over the next decade.
In fact, the significant exclusion of blacks and Latinos from the mortgage market has already helped mortgage lending plummet to a 17-year low this year. And investment in residential property now comprises a smaller share of gross domestic product than at any time since World War II.
For more than 70 years, homeownership was a cornerstone of the American Dream and the most important source of savings for the typical American family. But at no time in that period have people of color had equal access affordable, safe and sustainable mortgage credit.
The time is now to fix the nation's housing finance system to ensure that the wealth-building potential of homeownership is shared as widely as possible.
Jim Carr is a senior fellow with the Center for American Progress and a distinguished scholar with the Opportunity Agenda. He is also a former executive with Fannie Mae and the National Community Reinvestment Coalition, and assistant director for tax policy and federal credit with the Senate Budget Committee.
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This article is from the archive of our partner National Journal.