U. of Utah study raises 'red flag' over treatment of Latino mortgage applicants
A new study suggests Hispanics who seek mortgages in Salt Lake County are turned down twice as often as whites and many who do get loans are charged higher interest rates.
But because the University of Utah analysis did not consider some factors that could contribute to different outcomes for aspiring Latinohome buyers, the study stopped short of alleging that lenders knowingly discriminate against non-white mortgage applicants. And a sampling of lenders and Latinos didn't turn up corroborating evidence, though some said the findings are alarming and deserve more study.
"The information that we have tends to show there is a relationship here [between loan approvals, interest rates and ethnicity], but we don't know what is causing the outcome," said James Wood, director of the University of Utah's Bureau of Economic and Business Research, which did the study.
"It certainly puts up a red flag," he said.
The study, said to be the first of its kind undertaken in Salt Lake County, found that the overall mortgage denial rate for Hispanics was 27.4 percent between 2006 and 2011 a period that overlapped both the rise and fall of the housing market. By contrast, only 14.2 percent of white mortgage applicants were turned down.
The gap cut across all income levels. White applicants had approval rates near or above 70 percent for nearly all incomes, while Hispanic approval rates never reached 60 percent even for people with incomes in the top 10 percent of all applicants, the study found.
And while Hispanic applicants received 9.5 percent of all mortgages that were approved during the six-year period, they received a "disproportionate" 22.8 percent of all high-interest loans.
"It appears that there is a tendency here. There might be a problem in terms of racial discrimination, and that is illegal," Wood said.
The study drew on mortgage application data that banks, credit unions and other financial institutions report annually to the federal government. Missing, though, were credit scores, debt-to-income ratios and other information lenders use to judge loan applications. Wood acknowledged those weaknesses, but said the study is still important.
"In other communities, this has been shown to be a problem, and this is the first attempt in Utah to really look at [the issue]. The data that we could analyze at this point suggests there could be a problem with discrimination and loan approvals based on race," Wood said.
Howard Headlee, CEO of the Utah Bankers Association, said discrimination against any applicant, regardless of race or gender, is not tolerated by Utah banks.
"We are more than anxious to lend to anyone that qualifies," Headlee said. "It would be preposterous to think that we would not want to make a mortgage to someone who is a qualified applicant because of their race. It defies any kind of logic in today's world. We are hungry for qualified applicants."
Banks earn fee and interest income by making loans. Beyond that, lenders also sell many of their mortgages to investors, which provides banks more incentive to approve applications, Headlee said. And bank employees who collect demographic data on borrowers are barred from sharing that information with employees who evaluate applications, although he acknowledged the possibility that a Latino name might give away the applicant's ethnicity.
The explanation for the different outcomes, Headlee said, are in the loan applications. "Everyone wants us to focus on the applications, and that's what we do," he said, referring to the widespread vilification that lenders endured after the housing market collapsed in 2007. The implosion has been blamed mainly on risky lending practices that led to huge numbers of foreclosures in Utah and the rest of the U.S.
"The answers are in the mortgage files, not in the statistical data," Headlee said.
Fredy Martinez, a real estate agent with Re/Max Masters in Salt Lake County, said the study is "worrisome" since its findings are based on all income levels, and didn't focus on just Latino applicants with low incomes.
That said, Martinez said hedoesn't believe there is a "conspiracy" among local lenders to deny mortgages to Hispanics. He has found it is difficult for some of his Latino clients to get mortgages, but the reasons were rooted in their personal circumstances that financial institutions must weigh before approving a loan.
"I can tell pretty soon if I ask questions [of a prospective Hispanic home buyer] about income and about documentation and about employment whether somebody is going to be approved or not. I believe they are the main factors. But if somebody has enough time of employment, sufficient income and established credit, I haven't seen problems in people getting approved," said Martinez, who has been an agent in Salt Lake County for 15 years.
Scott Simpson, CEO of the Utah Credit Union Association, said the study is "instructive" and "something for lenders to contemplate." But as far as he knows, credit unions in the county decide all mortgage applications impartially.
"It is a view, and it's instructive, and it ought to be contemplated by lenders," Simpson said, then added that for several years credit unions have been in an environment where demand for loans is weak. Lenders are eager to make loans, he said.
"They want to lend money. I can't imagine that race would be a factor if the underwriting criteria are met. I'd like to think we are beyond that, he said.
In the wake of the housing bust and recession, financial institutions curbed their lending to the relatively few buyers who were still shopping for homes. The volume of applications for loans in Salt Lake County fell 75 percent between 2006 and 2011, according to the U.'s study. The Hispanic share of the applicant pool dropped from 15 percent during the housing boom in 2006 and 2007 to 7 percent in 2009. It later stabilized at 8 percent.
Meanwhile, Hispanic approval rates soared, according to the study. They rose from 36 percent in 2008 to 69 percent in 2010. The increase was driven mostly by a shift from conventional loan applications to applications for non-conventional loans guaranteed by a government agency such as the Veterans Administration or the Federal Housing Administration.
Just 2.7 percent of Hispanic applications in 2006 were for non-conventional loans. By 2009, the rate had risen to 79 percent. But after accounting for only conventional loan applications, the approval rate dropped to 60 percent in 2010.
What mortgage lenders must, must not do:
• Consider public assistance income the same way as other income
• Consider income from part-time employment, Social Security payments, pensions and annuities
• Consider alimony and child support
Must not do
• Reject mortgage applications because of race, color, religion, national origin, sex, marital status or age
• Consider sex, race or national origin, although applicants are asked to disclose this information voluntarily to help federal agencies enforce anti-discrimination laws
• Impose higher interest rates or bigger down payments based on sex, race or other prohibited factors
• Consider the racial composition of the applicant's neighborhood
• Ask about applicants' plans for having a family
• Require a co-signer if the applicant meets the lender's standards
Source: Federal Trade Commission