Posted on October - 07 - 2009

Does Race Play A Role In Getting A Loan?

The results of a study released this week demonstrate some trends in consumer lending that show a correlation between race and loan approvals. The study examined the number of loan applications that were denied for both new mortgages and refinanced mortgages in 2007 and 2008. Although there has historically been a gap between people of different races when it comes to loan approvals, the number of denials for minorities appears to be widening. It’s a disturbing trend that has minorities concerned and has lenders examining their loan approval process.

Let’s examine the trends for some of the races that were exposed in this study.

- Caucasians: Caucasians have historically been approved for the highest percentage of loans of all racial demographics and that trend has continued as the housing bubble has burst. For new home purchases, white buyers were denied for mortgage loans 13.2% of the time in 2007 and 13.6% of the time in 2008, a difference of less than one half of one percent. When it came to applying to refinance existing mortgage loans, Caucasians actually reported an increase in approval rates by 1%, getting approved on nearly 70% of loan applications.

- Asians: The difference in approval rates for Asian Americans between 2007 and 2008 also was fairly insignificant. The denial rate for new mortgages jumped from 17.4% to 18.7% between 2007 and 2008, while the denial rate for refinances improved by more than 2% during the same period of time.

- Hispanics: Two years ago, Hispanics accounted for 12.1% of loans in the mortgage market. In 2008 that percentage fell to 8.5%. Part of the reason for the drop in home ownership is that Hispanic borrowers were more likely to be given adjustable rate mortgages, the types of loans that were the first to fall apart when the subprime mortgage fiasco began. Hispanics were 1.3% more likely to get denied for new mortgage loans in 2008 compared to 2007, and those trying to refinance existing loans were denied over 50% of the time in 2008, compared to just 43% of the time in 2007.

- African Americans: Black Americans accounted for 8.7% of mortgage loans in 2006 and that number has fallen to 6.3% in 2008. Part of the reason for the drop stems from the fact that over 43% of new loans extended to African Americans in 2006 were at rates at least 1.75% higher than prevailing mortgage rates at the time. In other words, African Americans as a group had a higher percentage of “toxic” loans than any other race. During 2008, over 61% of black Americans that tried to refinance these toxic mortgages were denied the opportunity, an increase of almost 10% from a year earlier.

These trends are disturbing for a number of reasons, but none more than the fact that minorities that were finally getting into home ownership for the first time are once again out of the housing market. Leaders of various minority groups continue to work toward helping one another position themselves financially to enjoy the benefits of home ownership, but this study demonstrates that minorities have taken a fairly large step backwards when it comes to mortgages.

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