Do Online Mortgage Lenders Solve the Problem of Lending Discrimination?
For many years, discriminatory lending practices made it difficult for black mortgage applicants to embark on homeownership. Beginning in the 1930s, lenders openly discriminated against people of color, and actions such as redlining (labeling certain neighborhoods as predominantly black and then refusing to grant mortgages to borrowers in those neighborhoods) were never sanctioned. .
The problem is so widespread that as part of his campaign pledge, Joe Biden has pledged to take action to hold financial institutions accountable for discriminatory mortgage lending practices.
According to data from the US Census Bureau, nearly 74% of white households own their homes. By comparison, only 45% of black households are homeowners. This disparity helps explain why black families only own about one-eighth of the net wealth of white families (since owning a home is a good way to increase a household’s equity).
But a trend in the mortgage industry can, surprisingly, help solve the long-standing problem of credit discrimination.
Online lenders equalize the market
As has been the case in many industries, the mortgage industry has evolved more and more online in recent years. Just as there are banks that do not have physical locations, there are also mortgage lenders that operate only online.
Online lending is a convenient way to transact. But it can also help close the homeownership gap between white and black households. It is often said that black borrowers, even when approved for a home loan, often enjoy less favorable mortgage rates than white borrowers. The same goes for Hispanic borrowers. But recent analysis found that among online mortgage lenders, black, Hispanic, and white borrowers receive virtually identical loan terms once approved to take out a home loan.
Just as significantly, online lenders offer more borrowing options and more competition. This, in turn, gives black borrowers more opportunities to get mortgage approval.
There is work to do
Zillow’s research indicates that home values have grown at a faster rate for black households since 2014, and that since then homeownership rates have also risen faster for black and Hispanic households. This is obviously good news, and the growing availability of online mortgages may have contributed to the latter point. But that doesn’t mean the problem of loan discrimination is solved.
As President Biden moves forward with his housing plans, we can hope that more steps will be taken to make lending practices more equitable overall. Owning a home can pave the way for greater financial stability. Homes are the only asset that tends to increase in value over time, and their equity (the part that owners fully own) can be leveraged for increased financial flexibility. And all potential buyers should have an equal chance to finance one.
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