New Zillow Study Highlights Minority Discrimination in Home Finance

The road to home ownership has become very different for people depending on the color of their skin.

Jan 21, 2014 at 11:09AM

In the early 1960s, John F. Kennedy pledged to end housing discrimination ‟with the stroke of the pen." Naturally, activists deluged his office with thousands of pens as a sign of encouragement.

Half a century later, a study conducted by the online real estate database Zillow (NASDAQ:ZG) reveals that the experiences of minorities in the housing market still differ greatly from those of whites. This inequity is holding back positive economic growth in minority communities and may also present a threat to the health of the entire U.S. housing market.

The report, titled ‟A House Divided: How Race Colors the Path to Homeownership" and released on Thursday, is based on data gathered from Zillow's internal Home Value Index and the Home Mortgage Disclosure Act, as well as responses to a randomly administered online survey of adults who had applied for a mortgage in the past year. The report found that not only do far fewer African Americans and Hispanics apply for conventional private mortgages than do whites, but when they do apply, their applications are turned down at a much higher rate.

‟Although Hispanics and blacks make up 17% and 12% the U.S. population, respectively, they represented only 5% and 2% of the conventional mortgage application pool," the report reads. "Blacks experience the highest loan application denial rates -- 1 in 4 blacks will be denied their conventional loan application, as opposed to 1 in 10 whites."


This disparity in access to mortgages manifests itself in home ownership rates that are far lower among minorities. Nearly 74% of whites own a home; but rates for Asians, Hispanics and blacks are 61%, 51%, and 46%, respectively.

Zillow Chief Economist Dr. Stan Humphries explained that the largest factor contributing to the lower mortgage application rate among minorities is that people from those groups tend to have lower incomes. While the study wasn't able to look at the amount of savings held by the applicants, Humphries speculated that the lower incomes also translated to lower levels of savings. Combined with credit scores, which a 2007 Federal Reserve study found vary ‟substantially" by race, these three elements are crucial in determining whether someone will be approved for a mortgage.

Humphries worried that the lack of access to private mortgages has long-term economic implications for minority communities. "Home ownership is a pathway into the middle class because it is a mechanism for forced saving with homeowners continually putting equity into the maintenance of their homes," he said. "In the rental market, getting any American to save money is a difficult proposition."

"Unfortunately, the report reflects a long history of unfair lending practices targeted at minorities," insisted Alan Jenkins, executive director of the Washington, D.C.-based housing advocacy nonprofit The Opportunity Agenda.

Jenkins charged that the roots of the problem run deeper than simply being an outgrowth of larger economic disparities between different racial and ethnic groups. "Even when you control for other factors, you see higher income families of color experiencing discrimination when it comes to housing," he said. ‟It's not just about income, there's a real racial bias in the system."

While the Zillow report found that many minorities have had difficultly obtaining mortgages though the private market, it noted that they both applied and were approved for loans through the Federal Housing Administration (FHA) at much more representative rates.

David Stevens, the president of the Mortgage Bankers Association who ran the FHA from 2009 to 2011, explained how recent years have seen an increased reliance by minorities on FHA loans as a pathway to home ownership. He said that, over the past year, three-quarters of African Americans who purchased homes did so with an FHA loan—a massive swing toward the public sector in the years since the start of the recession, prior to which most minorities received mortgages though private firms.

The problem, Stevens explained, is largely that the secondary market for home loans is dominated by Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC). "If you have to sell your loans to Fannie and Freddie, you have to abide by their rules, which now strongly penalize borrowers with low savings and low credit scores."

Unlike private loans, which set down-payments based on the risk of the individual borrower, many of the parameters for FHA loans are set at a flat rate. This option can be more attractive to households without a glut of money in the bank. An inability to afford the down-payment is often the biggest roadblock to home ownership, especially for people in communities without high rates of savings.

"[During the housing bubble], we created an unsustainable environment where we were pushing loans on absolutely everyone," Stevens explained. ‟The pendulum can swing too far in either direction. But now we've over-corrected and wealthy white guys are going to get all the loans they want and there are too many people being swept out with no access."

The decreasing minority access to home loans may be a leading indicator of a broader dysfunction within the entire private mortgage industry. For one, interest rates on conventional 30-year mortgages are at historic lows, well under 5%. It's likely that many financial institutions feel they could get a better return on investment elsewhere. In a recent article published on American Banker, bank advisor Joe Garrett urged those in the industry to think long and hard about getting out of mortgage banking entirely due not only to increased compliance costs and the possibility of low earnings, but also because offering home loans to customers doesn't have the same significance it once did.

"One of the great myths of our industry is that a mortgage is the foundational product for consumer relationships," Garrett writes. "With many people having their mortgage payment automatically taken from their checking account, a significant number of borrowers don't even know who their mortgage lender is. And mortgage borrowers are much more interested in getting the lowest rate than in getting a mortgage from their primary bank."

As a result of attitudes like Garrett's, mortgage lending is consolidating into a grips of a handful of megabanks—most notably Wells Fargo (NYSE:WFC). Its mortgage lending in the fourth quarter of 2013 is down 60% from the prior year, with the loans it did issue largely going to the safest possible candidates. "The people being left out right now are those whose credit scores are average," said Julia Gordon, a director at the Center for American Progress in an interview with the New York Times. "It's just your typical American family with a credit score in the high 600s or low 700s."

For his part, Humphries worries about the long-term implications for a two-tiered system. "The conventional market is very risk-averse right now, requiring larger down-payments that many minorities can't afford, and the FHA is seen as picking up some of that slack by accepting riskier mortgages," he explained. "That additional risk is ultimately borne by the taxpayers."

Humphries said he would like to see the two mortgage markets converge a bit, with private lenders becoming more willing to take on additional risk from minority communities. This would allow the FHA, which is tasked with expanding access to housing to groups under-served by the private market, to get some of the resulting risk off of its balance sheet.

The next step
Want to figure out how to profit on business analysis like this? The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you what you need to get started, and even gives you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.

Fool contributor Aaron Sankin has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo and Zillow. The Motley Fool owns shares of Wells Fargo and Zillow. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers