Yes, the Mortgage Industry Is As Discriminatory As We Thought

For decades, critics of the home mortgage industry argued its lending practices have routinely discriminated against people of color. Defenders of the sector counter that such assumptions aren’t necessarily the case — blaming disparities on factors like lower incomes or poorer credit scores, fairly typical reasons for someone to be denied a home loan. 

Not so fast, say researchers at Morgan Stanley.

A team of four Morgan Stanley professionals poured over Home Mortgage Disclosure Act data from 2010 to 2019. They found that Black home loan applicants with a minimum income of $150,000 were more than twice as likely to be denied mortgages as white applicants. The denial rate for Latino borrowers was also high when compared to that of whites. Further, the percentage of Black and Latino borrowers denied a home equity loan was also much higher than that for whites.

And, to confirm this decades-long practice, the gaps are even wider when comparing people of middle- and lower-incomes. 

The study also concluded that the average mortgage rate spread for white borrowers was about 0.5 percent, while Black and Latino borrowers who scored the same loans had a rate spread almost five times as high. As a result, years of such practices taken by the mortgage industry has made home ownership far more expensive for Black and Latino borrowers, which Morgan Stanley says can get in the way of long-term wealth creation, one factor that explains the massive wealth gap between whites and people of color in the U.S. Even more disturbingly, in states with a higher Black population, Black borrowers are even more likely to be denied loans, according to the report. 

In any event, the home ownership gap between Black and white families is wider now than it was 50 years ago.

This research from Morgan Stanley is yet another example of the systemic racism that has long been part and parcel of many lives in the U.S. And as much as it is a source of frustration for communities of color, this latest survey, say its authors, is also problematic for investors who are determined to eliminate any evidence of inequalities within their assets.

So, how can the mortgage industry curb this harmful practice and gain the trust and confidence of their investors that they are truly doing the right thing? According to Morgan Stanley's team, much can be achieved through more transparency. “If [Fannie Mae, Freddy Mac and Ginnie Mae] collected and disclosed the lending patterns of mortgage originators in an aggregated report collected quarterly, for instance, it would help investors to make informed decisions based on racial equality considerations,” the report reads.

In other words, if investors were able to see which financial companies were applying fairness to their lending practices as well as their competitors who were falling short, the resulting pressure could lead to more banks changing how they approach home mortgage loans. And in an industry that amounts to a $7 trillion market, such transparency would force lenders to review their loan practices — or else risk that investors begin to shun them and shed such equities from their portfolios.

Events of the past several weeks suggest that banks and the wider financial sector need to turn the corner, finally, on what at a minimum has been a half-century of discriminatory practices. Whether it’s through the transparency in the mortgage industry that Morgan Stanley suggests or taking a hard and close look internally, the sand is already beginning to shift under financial companies’ feet. BlackRock, for example, announced earlier this month it would undertake a third-party racial audit to gauge its own role in systemic exclusion and division.

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