Racial Gap on Mortgages Mystifies Experts

THE racial gap in housing loans is not new. But why this gap persists mystifies experts and applicants alike.

One in nine blacks - as well as other minorities applying for mortgages nationwide - is inexplicably rejected by lenders, according to joint studies by Cornell University in Ithaca, N.Y., and the Federal Reserve Bank of Cleveland. The studies, which took into account such factors as loan applicants' income level, neighborhood status, and credit history, were released last month.

Experts agree that banks do not set policies that intentionally discriminate against minorities. ``We can't from this data say whether it's discrimination or left-out variables,'' says Robert Avery, a professor of consumer economics and housing at Cornell and an author of the report. ``It's not our place to do that.''

Yet ``a substantial, persistent variation exists between particularly blacks and whites, but also Hispanics and whites, Indians and whites, [and] Asians and whites'' in the housing finance system, says Mr. Avery, who is also an economist with the Federal Reserve Bank of Cleveland.

The problem of high denial rates for minorities in home-mortgage lending has been highlighted in recent years, as more information has become available through amendments to the 1976 Home Mortgage Disclosure Act. Since 1990, lenders have been required to disclose an applicant's race, gender, income, loan amount, and neighborhood status. The lender's race also must be disclosed under HMDA.

HMDA data for 1992 indicated that home purchase loans were denied to about 36 percent of black applicants, 27 percent of Hispanic applicants, 15 percent of Asian applicants, and 16 percent of white applicants.

Many analysts explain these differences by the lower income, poor credit history, and more frequent employment disruptions of many minority households.

The Cornell study, which analyzed 1990-92 HMDA data, found that minorities have a 5 to 16 percent higher rejection rate when applying for home-mortgage loans than whites. The same conclusion is reached when the study focused specifically on neighborhoods, certain cities, or various types of lending institutions.

Some analysts contend that denial rates are not the best variable to determine discrepancy. ``I don't think we really know enough about the reasons for the discrepancy at this point,'' says Paul Calem, an economic adviser for the Philadelphia Federal Reserve Bank. ``The denial rates can be misleading, because sometimes banks that make the most efforts to bring in marginal applicants and give them a fair evaluation end up with high [minority] denial rates.''

``The better indicator is really how many loans are going to minorities,'' Mr. Calem adds. ``That largely reflects how many applications are coming in and the efforts banks make to get applications and review them.''

As for who or what is to blame for the gap, Avery says: ``The black/white differential is not so much being caused by high-qualified blacks being turned down.'' Rather, marginal whites are getting loans because loan officers - the majority of whom are white - are more willing to help whites, Avery says.

``I don't know that [the racial gap is due to] a lack of programs,'' Avery says. ``I don't know that it's really a lack of money.'' Currently, $4 trillion in mortgages is outstanding, he says. ``It's connecting with the buyer - it's lining up people that will be able to line up borrowers with the programs that already exist.'' And it is diversifying the banking industry, he adds.

Minority-owned banks have a better record of lending money to minorities than other commercial banks, the Cornell study shows. ``If you look at just minority banks, once you control the fact that they are typically dealing with lower-income clientele ... the treatment of blacks and whites is the same,'' Avery says.

``A lot of people don't believe that you can make loans and do traditional banking in these areas,'' says Ronald Homer, chairman of Boston Bank of Commerce. ``They tend to think of investments in minority communities as social welfare.''

BBOC, New England's only African American owned-and-operated, full-service commercial bank, has made more housing loans to minorities ($18 million in 1991) than any other bank in Massachusetts. ``Part of the business of banking is managing risks, and in order to manage risks you have to have good information ... like character ... [and] a person's past performance,'' Mr. Homer says. ``We should be able to exercise [better] judgment more often because the decisionmakers are closer to the customer.''

Analysts agree that financial institutions are taking the issue seriously. The Federal National Mortgage Association (Fannie Mae), the nation's largest source of home-mortgage funds, announced that it will commit $1 trillion between now and the end of the decade to help finance more than 10 million homes for families with incomes at or below the median for their communities. The money will also be available to city residents, minorities, new immigrants, and other under-served areas. The $1 trillion is the largest commitment ever made by a public or private corporation.

``If people have been discriminated against because of their race, then ... tens of thousands of families who are economically well-qualified to own a home ... don't [own a home],'' says David Jeffers, vice president of corporate relations for Fannie Mae.

``This is good profitable business,'' he adds, ``but it has to be developed by reaching out to potential customers who have not been welcomed into the system so far.''

He says the primary impediments to home ownership are lack of information and an intimidating process. This supports a Cornell study finding that minorities apply for mortgages at lower rates than others.