FHLBank San Francisco and Urban Institute Collaborate on Research Examining Ways to Advance Racial Equity in Homeownership and Wealth Creation
SAN FRANCISCO and WASHINGTON, Oct. 17, 2022 (GLOBE NEWSWIRE) — More Black renters could become homeowners if the housing finance industry more fully embraces the use of rental history and other alternative data in underwriting mortgage loans.
The technologies and developments needed to make this a reality, however, are only just beginning to emerge. Transparent, large-scale pilots are needed to ensure data is used appropriately and effectively, and many housing finance actors will need to show commitment to ensure changes are equitable.
A comprehensive new report from the Racial Equity Accelerator for Homeownership – a collaboration of the Federal Home Loan Bank of San Francisco (FHLBank San Francisco) and the Urban Institute – examines the current mortgage landscape and analyzes how Black households could benefit from the adoption of alternative data, in particular the history of lease payments, without increasing the risk that lenders take.
“Communities of color face structural and systemic barriers that exclude many people from homeownership in America,” said Teresa Bryce Bazemore, President and CEO of FHLBank San Francisco. “A better understanding of these barriers is critical to addressing them, and this Urban Institute research represents a roadmap to closing the knowledge gap while pushing the mortgage finance industry to adopt tangible solutions that ensure equity in buying a home. »
Closing the Black-White Homeownership Gap Through Underwriting Innovations: The Potential Impact of Alternative Data on Mortgage Underwriting reports that there is a 30 percentage point gap in homeownership between black and white households in the United States. The gulf is wider now than it was in 1960, before federal law explicitly prohibited racial discrimination in housing.
“Our analysis shows that the black-white gap in homeownership will persist, if not widen, unless stakeholders design and implement intentional innovations in lending. mortgages,” said Janneke Ratcliffe, vice president of Urban’s Housing Finance Policy Center. “The data suggests that Black households are disproportionately harmed by current underwriting models, but they could reap disproportionate benefits from including other data in mortgage underwriting, if these innovations are done right.”
A significant hurdle faced by potential black home buyers is credit score. But about 53 million people cannot be reliably scored on the most common scoring model used in mortgage underwriting, Classic FICO. Black households are disproportionately likely to lack traditional credit data to derive a FICO score and are more likely to have FICO scores below 620, which is the typical threshold for mortgage approval.
The report claims that a heavy reliance on credit score and automated credit history data that underpins the system “discriminates against people of color through process, not just assessment. The automated process strongly favors applicants with strong, easily documentable credit records, while those whose credit history could be confirmed with more effort and documentation are generally excluded.”
Mortgage underwriting could be safely extended by including information that was once used to assess applications – such as rent and utility payments and cash flow data – but not typically captured in models current automation. This information could be fed into automated scoring models, or it could be assessed as a separate step from underwriting. In their analysis of 2020 mortgage data, the report’s authors determined that 18.6% of Black applicants and 18.1% of Hispanic applicants who were denied a first mortgage could be approved if 12 months of mortgage payments time rent were included in the underwriting process.
As this approach gains momentum, further study is needed to ensure data is collected securely, standardized across systems, and strong consumer protections are in place.
The most influential factors determining access to mortgages reflect a long history of racial discrimination by American public and private institutions. Continuing to rely on current lending criteria reinforces and perpetuates the disparities created by discrimination.
“Structural racism has prevented people of color, and black people in particular, from having equal access to educational opportunities, well-paying jobs and intergenerational wealth,” the report notes. Incorporating alternative data into underwriting is an important step – one of many needed – in efforts to achieve racial equity and increase Black home ownership.
The report is the first in a series of four developed through a two-year, $1.5 million collaboration between Urban Institute and FHLBank San Francisco. Each examines advances in mortgage finance that can facilitate and support more equitable homeownership. Future research will focus on using new technologies to overcome historical biases, student loan debt, and new product structures that can better support homeowners experiencing temporary financial difficulties.
About Federal Home Loan Bank of San Francisco
The Federal Home Loan Bank of San Francisco is a member-driven cooperative that helps local lenders in Arizona, California and Nevada build strong communities, create opportunity and change lives for the better. The tools and resources we provide to our member financial institutions (commercial banks, credit unions, industrial loan companies, savings banks, insurance companies and community development financial institutions) promote home ownership, expand access to quality housing, start or support small businesses, and revitalize entire neighborhoods. Together with our members and other partners, we make the communities we serve more vibrant and resilient.
About the Urban Institute
The nonprofit Urban Institute is a leading research organization dedicated to developing evidence-based ideas that improve people’s lives and strengthen communities. For 50 years, Urban has been the trusted source for rigorous analysis of complex social and economic issues; strategic advice to policy makers, philanthropists and practitioners; and promising new ideas that expand opportunities for all. Our work inspires effective decisions that advance equity and improve the well-being of people and places.