By Nadim Homsany, co-founder and CEO of EarnUp
Home ownership can be a powerful way to build wealth and boost long-term consumer financial health, but bias in lending has traditionally made it more difficult for minorities to secure affordable home financing. Fortunately, a number of studies have shown that digital transformation and fintech tools can help address these deeply rooted biases by making it easier for more diverse individuals to obtain, maintain, and leverage affordable mortgage loans
Communities of color have long been subject to overt mortgage bias, with federal government redlining policies as far back as the 1930s literally marking off neighborhoods deemed too “risky” for investment based on race. Those actions led to long term real estate devaluing in those neighborhoods and cut off many families from home ownership.
While perhaps less overt, those biases and attitudes still persist today with research showing that face-to-face interaction between lenders and applicants can result in more onerous mortgage terms for minority borrowers. A 2019 National Bureau of Economic Research (NBER) study found that Black and Latino borrowers pay, on average, 7.9 basis points more in interest than white borrowers, and 3.6 basis points more in interest when refinancing existing mortgages, when they engage in the face-to-face lending process.
While that may mean hundreds of dollars per family, overall, the disparity costs families approximately $765 million a year.
Similarly, a study conducted by the real estate company Zillow examined loan application data from 2016 to reveal that minority borrowers were turned down at higher rates than white borrowers. According to the findings, approximately 21% of Black and 15% of Hispanic applicants were rejected for conventional mortgage loans compared to 8% of white applicants.
Overturning this bias and creating a more viable path to home ownership is even more critical now given the most recent U.S. Financial Health Pulse from the Financial Health Network. Early 2021 findings show that the pandemic has caused the financial gap between predominantly white households and people of color to continue widening. Affordable mortgage lending could be one long-term way to help close this gap.
The same NBER study does offer some good news, finding that racial discrimination in lending declined from 2009 to 2015. This decline mirrors the increase in online and fintech mortgage advances.
Recent studies show us that technology can help us solve deeply rooted social problems in the housing market. It turns out that the rise in online mortgages has helped to reduce discrimination in the home buying process.
Online lending typically allows potential borrowers to skip face-to-face meetings that may lead to implicit or explicit bias in decision-making processes. Further, borrowers can more easily shop around for the financial product that best fits their needs.
For lenders, the use of algorithmic models relies on hard data like the applicant’s previous credit history and financial health rather than making much more subjective decisions based on a bank employee’s intuition. This enables them to score more people more accurately.
For minority homebuyers, this can mean lower loan costs, higher loan acceptance rates, and more opportunities to achieve the dream of homeownership. Of course, algorithmic lending has some ways to go in eliminating bias altogether; but it has provided an important foundation upon which to build.
Fintech companies help families achieve homeownership in other ways as well. The 2019 study FinTech Innovation in the Home Purchase and Financing Market by Urban Institute says that fintech companies, in addition to making getting a mortgage easier, can also help families save for the home buying journey.
The report found that fintech services can effectively help consumers build credit and save for a down payment – actions that increase their likelihood of getting approved for a mortgage.
Mortgage lenders and servicers that embrace digital transformation can also help homeowners remain in their home, even amidst challenging financial times. Providers with real time visibility into borrower metrics can predict dips in income, a lack of cash for payments, or other debts that will impair mortgage repayment. This look-ahead capability can help providers offer workarounds or other modifications to head off forbearance or default.
Digital, real-time visibility can also enable providers to reward creditworthy homeowners by proactively identifying opportunities to refinance. By helping minority homeowners capitalize on a history of good repayment with the chance to refinance into lower terms or even tap the equity in their home for other needs, providers can help advance overall financial health and improve long-term financial prospects.
Ultimately, online practices and digital transformation in the mortgage industry have the potential to reverse decades of bias in home ownership. This is both a responsibility and opportunity for providers as it helps to address an egregious social wrong, improve individual and community financial health, and enhance business unit performance.
Nadim Homsany is the co-founder and CEO of EarnUp, a financial technology company committed to helping people pay off debt faster and maximize home ownership possibilities