By BreAnna Bell, Howard University News Service
They go into the lender’s office looking for a mortgage, and they get one—only it’s going to be much more expensive than it could be, and they may not be able to pay it off before it goes into default. But the lender won’t mind, because the lender will make more money all along the way.
The reason why is easy to see: the borrowers are black or Latino. That shouldn’t be, according to the federal Fair Housing Act. Yet it happened again and again in two of the wealthiest suburbs of the nation’s capital, according to lawsuits filed late last month in U.S. District Court.
And it happens similarly and often elsewhere, too. Researchers at the University of California at Berkeley said the same predatory lending practices that have plagued black and brown in-person loan applicants are taking place online because of the algorithms used to evaluate borrowers.
“Even if the people writing the algorithms intend to create a fair system, their programming is having a disparate impact on minority borrowers,” Adair Morse, a finance professor at the university and a co-author of the study, told The Washington Post.
In the lawsuit filed in federal courts, Montgomery and Prince George’s counties in Maryland accused Wells Fargo and Bank of America of selling black and brown homebuyers higher-cost subprime mortgage loans that they knew would fail or were not in the best interest of the borrowers.
“The discriminatory equity stripping housing practices engaged in by the banks and their affiliates greatly damaged our communities,” Montgomery County Executive Isiah Leggett (D) told Patch.com.
“We cannot allow this to continue to harm the finances of the county and shift the costs that the defendants are responsible for onto our taxpayers,” Leggett added.
Leggett said that both counties had incurred additional municipal services costs because of the “increased numbers of home vacancies and foreclosures’” stemming from the lending practices of the two banks.
The two counties also claimed financial damages through what Leggett described as “erosion of the tax base, the loss of property tax and other revenue, and from the resources they have had to shift to address urban blight and the racially segregative effect on their respective communities and neighborhoods.”
Lending practices like those alleged in the suit also have an impact on black and Latino families to close the net worth gap between themselves and whites.
Data released by the Federal Reserve in 2017 found that median net worth for whites was tenfold greater than that of blacks, and one of every five black families had no net worth at all.
Home ownership is a principal reason for the disparity. Nearly three of every four white families own their own homes, compared to not quite two over every four among blacks and Latinos, the data showed. And white families also had higher levels of equity in their homes.
Over the years, homeownership has been the most important route for building generational wealth among black people, because it was the best way to establish a predictable expenditure for living quarters during life, and upon death, could easily be passed on to children as an asset.
Before the recession, the ready availability of subprime loans lured large numbers of black folks into buying new homes. The teaser rates on those loans rose after two or three years, however, and a disproportionate number of black and brown homeowners found themselves struggling to avoid delinquency and foreclosure on properties suddenly loosely referred to as being ‘underwater.’
Jesse Van Tol, president, and CEO of the National Community Reinvestment Coalition, said during a recent interview that such hardships are no reason for black families to change course.
“Home ownership is the foundation of wealth building in America,” he said. “Without it, the racial wealth gap is growing.”
The University of California researchers looked at 30-year, fixed-rate home loans made between 2008 and 2015 and found that blacks and Latinos were charged 5.6 to 8.6 points higher than other borrowers with similar credit histories.
The study also said that black and Latino borrowers also received higher rates because lenders factored in the racial makeup of the neighborhood into which they were buying.
One result of such higher rates in a place like Montgomery County is that the total payout over the life of the average mortgage could be as much as twice the value of the mortgage itself, according to one local lending officer.
The researchers found that mortgages in census tracts with high foreclosure rates “have a substantially higher chance of defaulting, and that home purchase mortgages in predominantly black neighborhoods have a substantially higher chance of defaulting regardless of the borrower’s race.”
Samuel Taylor, a loan officer at the historically black Industrial Bank of Washington, played down the relevance of neighborhoods to the creditworthiness of loan applicants. “Big banks have hurt people of color because they deem you live in a bad neighborhood,” he said in an interview.
A Brookings Institution study released last month asserted that “anti-black bias” contributed to “under evaluation of housing in black neighborhoods.”
“If properties in black neighborhoods were priced equally as those in white neighborhoods,” researchers said, “black children coming of age in the 1990s and 2000s would have had much more wealth to draw upon to pay for things like private schooling, tutoring, travel, and educational experiences, as well as higher education and greater access to higher scoring schools in the suburbs.”
Concern about black wealth surfaced recently following the death in August of singer Aretha Franklin, whose net worth was estimated at around $80 million but who died without a will. The dispersal of her assets among her four sons was not expected to be problematic, however, as often can be the case.
Franklin apparently also had not established any trusts, which some financial planners say is an even better way to pass on wealth because the parceling out process is more private, and fewer court costs are involved.
Nevertheless, many consider home ownership to be the most reliable way for black families to close the wealth gap.
Research indicates that “for every hundred dollars every white family has in savings, every black family has seven or eight dollars,” Van Tol of the National Community Reinvestment Coalition said. “Home ownership was, and still is, the way out for many minority families.”