Study Shows Unequal Treatment of Twin Cities Communities of Color in Mortgage Lending Continues
APRIL 9, 2014—A new study by the Institute on Metropolitan Opportunity (IMO) at the University of Minnesota Law School shows that lack of access to credit continues to plague communities of color and low-income areas in the Twin Cities. Income differences alone do not explain the lending disparities. If the home loan portfolios of the region's banks simply reflected the actual distribution of homeowners and household incomes, more than 13,300 additional loans would have been made to diverse and majority non-white neighborhoods over the four years from 2009 to 2012 (a 55% increase). Nearly one-fourth of this shortfall is attributable to the region's largest lender, Wells Fargo Bank.
A 2009 study by IMO (formerly the Institute on Race and Poverty) showed that, before the housing crisis, toxic subprime loans were deeply embedded in the Twin Cities mortgage market and were highly targeted towards communities of color. These loans contributed eventually to the foreclosure crisis and the staggering drops in housing values that disproportionately affected people of color, stripping many moderate- and low-income communities of enormous amounts of housing wealth.
A new update of the 2009 study shows that, while subprime lending is much less common today, access to credit for communities of color still lags significantly behind predominantly white areas. In 2004-06 subprime loans (which are more costly than prime loans) were the major problem—very high income black and Hispanic applicants were much more likely to get subprime loans than very low income white applicants. More recently, the subprime market has largely disappeared but it is still true that very high income black loan applicants are more likely to be denied a loan than low income whites. In addition, racially diverse and majority non-white neighborhoods are still dramatically underserved in the mortgage market, even after controlling for income differences.
In short, high subprime lending rates in racially diverse and predominantly nonwhite communities in the past contributed greatly to subsequent high foreclosure rates which, in turn, created the economic woes now used to justify disproportionately low lending rates in the very same neighborhoods.
More specifically, the new study showed:
Subprime lending in the region was most concentrated in majority non-white and racially diverse census tracts (more than 30% people of color) in the inner cities and in a few inner ring suburbs. Majority non-white and racially diverse tracts had subprime lending rates 1.8 to 2.6 times greater than predominately white tracts.
- Both whites and people of color were affected, regardless of their income. Even high and very high income whites were 1.8 to 2.9 times more likely to receive a subprime loan in majority non-white areas than those in predominately white areas.
- In Minneapolis, the Near North and Camden neighborhoods were most dramatically affected.
- Financial institutions continue to fail to provide a fair share of mortgage loans for communities of color—loans that today are almost exclusively for prime mortgages.
- Between 2009 and 2012, diverse and majority non-white neighborhoods received 23% fewer home purchase loans and 66% fewer refinance loans than the number implied by the number of homeowners in those areas and their incomes. The large shortfall of refinance loans was particularly damaging, preventing homeowners from refinancing the more costly subprime loans so prevalent in these neighborhoods into fair and sustainable home mortgages.
- Even middle and high income households were much more likely to be denied loans in predominantly nonwhite areas. Denial rates were one and a half times as high for middle/high income white households and twice as high for middle/high income people of color in predominantly nonwhite neighborhoods as in predominantly white areas.
- Reflecting earlier subprime lending patterns, the Near North and Camden neighborhoods were among the neighborhoods most dramatically affected in Minneapolis (along with the Northeast and Phillips neighborhoods).
- Although most mortgage lenders of every size in the Twin Cities have a poor track record of lending to communities of color, disparities with the largest lenders have had the greatest impact region-wide. The region's largest lender (Wells Fargo) accounted by itself for about a fourth of the lending shortfalls in the region's racially diverse and predominantly nonwhite neighborhoods.
"The banking system has not served the region's racially diverse neighborhoods at all equitably. High-cost loans and poor access to prime finance exacerbated the housing crisis in these areas. More equitable treatment now could make an enormous contribution to rejuvenating housing markets decimated by the foreclosure crisis." said Myron Orfield, Director of the Institute on Metropolitan Opportunity.
For more information about the report, contact Myron Orfield at (612) 625-7976 (firstname.lastname@example.org) or Thomas Luce at (612) 625-5344 (email@example.com). The report is available at: www.law.umn.edu/metro.