Can Online Mortgage Lenders Reduce Discrimination against Black Home Buyers?



The housing market is hot. IN Federal Agency for Housing Finance house price index rose 12% last year due to low inventories and strong demand. Redfin, a popular real estate website, reports that almost 40% of homes were sold in the last month at a price higher than the asking price. AND National Association of Realtors reported that for the first time in a generation, house prices climbed in each of 181 metro areas it is being tracked late last year. Yet the benefits of widespread price increases are not shared equally due to housing discrimination.

One analysis of US Census Bureau data extrapolated the breadth of racial inequality in home ownership and found that nearly 74% of white families own their own homes, compared with only 45% of black families. Differences in net worth account for a large part of the wealth gap: black families have only about one-eighth of the net wealth of white families.

The roots of racial inequality in the housing and mortgage markets go deep. The government-backed New Deal programs of the 1930s openly discriminated against minority borrowers and neighborhoods. Historically institutionalized discrimination against government includes actions such as “Red line”, where Federal Housing Authority refuses to insure mortgages in and around the Blacks.

Unfortunately, todaySome traditional lenders have been punished for continuing to treat minority borrowers differently. Since 2010, Bank of America, Wells Fargo, and JPMorgan Chase all paid multimillion-dollar payments in response to U.S. Department of Justice accusations violations of fair credit

However, prospects for bridging the gap and making progress against housing discrimination exist as the previously stable mortgage market is undergoing an underestimated revolution. As with many other industries, the mortgage market is increasingly online. As part of this trend, the share of loans issued by the so-called “financial technology” – lenders who issue mortgage loans almost exclusively online – has sharply increased. Many borrowers cite the convenience and speed of transition to FinTech lenders from personal mortgage borrowing.

But there is much more than mere convenience at play here: Minority homebuyers are capitalizing on the growth of this new type of borrowing and the increased competition it brings. IN new researchI am researching this issue using new borrower data as well as publicly available data published by FHFA and Consumer Financial Protection Bureau… Like many previous researchers, I have found that black and Hispanic borrowers receive less attractive rates from traditional individual lenders than do white borrowers. These differences are statistically and economically significant and can amount to hundreds of millions of dollars per year in interest payments. However, these differences disappear when looking at borrowers from FinTech lenders. Mapped analysis of similar Black, Hispanic and White Borrowers these lenders show that they receive nearly identical terms. Black and Hispanic FinTech clients receive the same Annual Percentage Rate (APR) when buying a new home and when refinancing.

In fact, there is strong evidence that increased exposure fintech competition can also reduce housing discrimination among traditional lenders. It is important to note that FinTech lending now accounts for a significant proportion of mortgages in some rural areas where minority borrowers used to have few options.

These findings are supported by other scholars comparing racial differences between traditional lenders and fintech lenders. While researchers have raised concerns about technology’s ability to root inequalities, it is encouraging that innovation is reducing this critical issue. Indeed, researchers at Zillow found that home value for black households grew faster since 2014, which coincided with the growth of the financial technology market share. Likewise, the share of homeowners in black and Hispanic households grew faster during this period.

A hopeful trend should not be mistaken for a solution. Despite some progress in narrowing the digital divide, many potential borrowers are still worried about the prospect of buying loans online. What’s more, powerful research has shown that lenders often don’t spend enough time comparing lenders and often leave money on the table. There is much that politicians, lenders and real estate agents can do to ensure that borrowers get the best possible deals and terms, regardless of race. Online lenders also have a critical role to play in efforts to achieve far-reaching and tangible results in overcoming existing housing inequalities.

Daniel Schoag is Associate Professor of Economics at the Weatherhead School of Management at Case Western Reserve University.

This column does not necessarily reflect the views of the HousingWire editorial team and their owners. To contact the author of this story: Daniel Shoag on… To contact the editor responsible for this article: James Kleimann at


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