PRIOR TO 1992, DISCUSSIONS of mortgage discrimination often revolved around whether or not discrimination existed. Since then, a series of studies documenting large and systematic disparities in mortgage flows to minorities has changed the terms of the debate. As the industry rolls up its sleeves to increase mortgage flows to minorities and the Clinton administration steps up its monitoring and enforcement efforts, benchmarks of financing and homeownership that reflect the demographic characteristics of each racial group will be needed to assess industry progress and performance.

Raw Data

Preliminary 1993 data reported under the Home Mortgage Disclosure Act (HMDA) show that total mortgage applications, including government and conventional home-purchase, refinance and home-improvement loans, rose by 35 percent in 1993 to 13.5 million applications. The increase reflects the extension of HMDA reporting requirements to more than 700 independent mortgage companies and high refinance volumes. According to HMDA, the refinance share of total mortgage applications rose from 52 to 56 percent in 1993.

The number of mortgage applications from minority groups increased significantly in 1993, particularly for African Americans. In 1992, the growing demand for refinances, which tend to be more prevalent among higher-income borrowers, dampened increases in minority home-purchase application rates. In 1993, however, African-American applications for refinances and home-purchase loans grew by 74 and 38 percent, respectively, the largest gains across racial groups.

African-American and Hispanic applications each accounted for 4 percent of total applications in 1992. Both their shares rose to 5 percent in 1993, while the Asian share dropped from 4 to 3 percent. The white application share also declined slightly, from 85 to 84 percent.

Application approval rates also improved in 1992. Lenders approved about 70 percent of applications for conventional purchase-money mortgages and almost 79 percent of refinance mortgages.

Mortgage application denial rates declined markedly from 1991 to 1993, particularly in the lowest-income groups and for African Americans in all income groups. Minorities within all income groups were denied credit more often than whites, except in the lowest income category; whites in this income group were denied credit more often than Asian Americans in all three years.

Conventional home-purchase originations rose by 25 percent in 1993. African-American originations rose the most of any racial group, up 44 percent over 1992 levels, while the Asian share declined by 1 percent. Economic downturn in California, where many Asians reside, may explain the slight decline in the share of mortgages going to this group in 1993.

In releasing the preliminary 1993 HMDA data, the Federal Financial Institutions Examination Council noted that the recent increase in affordable home-loan programs by originators, Freddie Mac and Fannie Mae may be having an impact on the flow of originations to low- and moderate-income, and minority borrowers and their neighborhoods. Despite these relative gains, the share of minority mortgage originations remains low compared to their representation in the population.

Industry Benchmarks

Freddie Mac analysis of the 1992 HMDA data compared the actual share of originations flowing to minorities to the expected share, based on the size and characteristics of the minority population. We controlled for the effects of racial differences in age, marital status, income and wealth on homeownership rates and the demand for mortgage financing using the homeownership patterns for whites as the underlying standard of comparison. For example, expected homeownership rates for minorities are well below the rate observed for non-Hispanic whites, largely a result of minorities' lower incomes and wealth and other demographic factors. However, the actual homeownership rates fall short of these expected levels by 6 to 9 percentage points.

Using these predicted levels as benchmarks, we found that the share of originations going to minority borrowers--about 14 percent in 1992--was below the expected share of 17 percent. We also found striking differences among minority groups. Figure 1 shows that originations for African Americans were less than half of their expected level and that mortgages to Hispanic borrowers were three-quarters of their expected rate. Asian origination rates actually exceeded expectations. This homeownership "catch up" for Asians is consistent with research suggesting that recent immigrants and their children are more likely to choose homeownership the longer they reside in the United States.

When we gave each group the same rejection rates as whites, the Hispanic share rose to its expected level. However, African-American originations increased only modestly, to about 60 percent of the level that one would expect based on the characteristics of that racial group.

These findings suggest that treating mortgage applicants equally, regardless of race, would overcome the greatest obstacle Hispanics face in achieving a higher homeownership rate. Thus, continued efforts to provide equal access to housing credit will have a major impact on Hispanic homeownership rates. The findings also suggest that treating African Americans fairly once they apply for mortgages is crucial, but it alone will not raise their homeownership rates to the expected levels. A large increase in mortgage applications from African Americans is also needed to bring originations to the expected level.

How To Proceed

Low mortgage application rates among African Americans may reflect a variety of factors, including discrimination at the preapplication stage or in other sectors of the market, the use of alternative financing techniques, informational barriers or differences in demand.

The housing finance industry is engaged in several activities to address this application shortfall. Many lenders now provide outreach and borrower counseling programs or have formed partnerships with community groups, all in an effort to increase the number of minority applications, especially from African Americans. Lending institutions can guard against discriminatory practices by conducting their own testing programs. Self-testing can be used to uncover problems that may exist, to identify the stage of the application process at which those problems occur and to take steps to remedy the situation. Finally, the real-estate community can play a vital role in helping African Americans enter the housing finance process through community outreach and homebuyer education programs.

Author Ann B. Schnare is Freddie Mac's vice president of housing economics.

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