Twice as many Chicago home buyers in communities of color were issued government-backed loans in 2010 compared to borrowers in white communities, a new report from the Woodstock Institute reveals.
In the report, “Paying more for the American dream VI: Racial Disparities in FHA/VA lending,” the nonprofit research institute, which aims to increase economic security for lower-wealth persons and communities of color, suggests borrowers eligible for conventional options could have been steered toward the government-backed loans.
Although the government-backed loans from the Federal Housing Administration and a handful of others may be the only viable option for some borrowers, “they are typically more expensive and can take longer to be approved than conventional loans,” according to the report.
Government-backed loans, which protect lenders against defaults on payments, accounted for three out of every four mortgage loans made to African-American borrowers in 2010 and two out of every three loans made to Latino borrowers, according to the report, which also looked at lending patterns in six other cities.
In comparison, about one out of every three loans made to white borrowers were government-backed.
In Austin and on the West Side, about 65 percent of home mortgage loans were government-backed by either the Federal Housing Administration or the Department of Veterans Affairs, the Woodstock Institute found.
One finance expert at DePaul University’s Driehaus College of Business said government-backed loans are becoming the “new” sub-prime mortgages.
Finance professor Rebel Cole said sub-prime mortgages dried up, and now people are turning to government-backed loans.
For a FHA-backed loan, a borrower needs to put down about 3.5 percent. In comparison, a down payment for a typical mortgage is about 20 percent.
“We know from numerous surveys that minority households typically only have about one-tenth of the wealth that white households have,” Cole said. “They don’t have money to put down on a traditional mortgage.”
But Cole said the report should have considered the average income, wealth and credit scores of borrowers in communities of color. Without that information, it’s not clear whether loan steering took place, he said.
Cole said other government surveys show that income and wealth is lower and credit scores are higher in minority households.
And those three factors, along with current underwriting standards, make it harder for an individual to obtain a traditional mortgage, he said.
“You’re not going to see more conventional mortgages in those neighborhoods,” Cole said.
The report includes a heat map of government-backed loans in the city. A darker green shade represents the most government-backed loans, and light green represents the least.
The South and West Sides are predominately dark green, while the Downtown area and most of the North Side is a lighter shade of green.
Cole said he’s not ruling out discrimination and illegal loan-steering practices, but the Woodstock Institute’s report “fans the frame of animosity” without doing the necessary “homework to make its case.”
“(The Woodstock Institute) does a good service, but I say it’s a bit irresponsible to cry fire in a crowded theater like that,” Cole said.
A Woodstock Institute spokeswoman said the institute would like to look at credit scores – and other fields that go into underwriting – but the public data set it analyzed does not include those variables.
Information in the report came from the analysis of the 2010 Home Mortgage Disclosure Act Loan Application Register data.
Katie Buitrago, policy and communications associate at the Woodstock Institute, said the organization puts out a report every year, and this report is the sixth in the series.
Buitrago said the Woodstock Institute hasn’t decided yet what “particular angle” it will take for it’s next report.
“We are going to emphasize to regulators that is something to be continued and to be investigated.”
Mortgage experts like Joe Jozwiak, http://www.joejozwiak.com. with Wintrust Mortgage, explain that lenders look at 3 crucial sets of data: 1. FICO score 2. Income 3. income to debt ratios. The Woodstock Institute is not using the correct data to assess the reality of the situation. FICO scores are so important these days, and can be fixed with some time and diligence. Joe offers the following pointers on how to raise one’s FICO score:
1. Keep credit card balances below 50% of their maximum limit.
2. Don’t cancel old credit cards.
3. Use credit regularly showing that you can manage it correctly by paying off balances on time and every month.
4. If payment is late, make sure it is less than 30 days late, and it won’t effect your FICO.
5. When planning on making a major purchase using credit (ie: car, home) avoid applying for credit or opening checking or savings accounts within 90 days of said purchase.
Know your FICO score!!!