(Photo via facebook.com/PeoplesEmergencyCenter)
Two weeks ago, Reveal, a publication of the Center for Investigative Reporting, released the findings from its yearlong investigation into the American conventional home loan market.
Isolating income, race, loan size and other data from its analysis of over 31 million conventional home loans reported through the Home Mortgage Disclosure Act (HMDA), Reveal learned that African-American and Latinx borrowers are more likely to be denied a conventional home loan in 61 American cities.
Reveal’s reporting focused on Philadelphia as one the largest metro areas where this trend was observed. In Philadelphia, it reported, borrowers of color were 2.7 times more likely to be turned down for a conventional loan than their white counterparts.
Nationwide the homeownership rate for white households was 72%, while it was less than 42% for Black households and 46% for Latinx households in 2016.
Nationwide the homeownership rate for white households was 72 percent, while it was less than 42 percent for Black households and 46 percent for Latinx households in 2016. This is particularly troubling considering American cultural norms center homeownership as the primary means of household and intergenerational wealth development and preservation.
While the reporting centered on mortgage loans for new homebuyers, Reveal also looked at the needs of existing homeowners trying to access home improvement loans and found similar patterns of inequity in that market.
Neighborhood preservation survives when there are tools that incentivize both prospective homebuyers and existing homeowners alike. This is especially true when you consider the demography of the complex neighborhoods in the two profiled areas of Philadelphia: West and South, namely Point Breeze.
In response to this reporting, Philadelphia City Council passed an unanimous resolution to investigate lending practices and the Pennsylvania attorney general and state treasurer have committed to conduct their own reviews to determine any necessary policy action.
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At Clarifi, we work to equip consumers for the trials and tribulations of their financial journeys. From our work on the Philadelphia Financial Empowerment Centers in 2013 to 2016, we helped 11,983 Philadelphians save $1.3 million, cut household debt by $11.6 million, open 424 safe bank accounts and increase credit scores by 43 points, on average.
Neighborhood preservation survives when there are tools that incentivize both prospective homebuyers and existing homeowners alike.
In 2017, 1,338 clients participated in Clarifi’s pre-purchase education and counseling services in Philadelphia, with the goal of becoming homeowners. We saw 461 seniors who sought more information on reverse mortgages, which should be fully understood to promote aging in place. For homeowners seeking a home equity line of credit or loan, we help them understand and evaluate a product’s affordability.
In some cases, clients who come in with homeownership as their goal ultimately decide that owning is not the best choice for them. We view that outcome to be just as successful as a home purchase because our mission is to produce educated, prepared consumers who can make the best choices for themselves and their families.
The majority of Clarifi clients reside in Philadelphia and 68 percent earn low-incomes. A slim majority of our clients (56 percent) were people of color in 2017. As we work to support our clients in their goals of securing assets for their financial future, we focus on three key principles.
In light of the Reveal report, these guidelines feel especially important to reiterate:
1. Join the 700 Club.
While conventional loans are typically available at a credit score of 640, the most competitive (and affordable) home loans are available to people with a FICO credit score of at least a 700.
According to Prosperity Now, a leading public advocacy and research group, 51 percent of Americans have prime FICO credit scores, or those above 720. Moreover, research from the Aspen Institute indicates that some millennials inaccurately believe that credit scores are assigned at birth.
In 2017 in Philadelphia, of the 7,468 total clients we counseled, white Clarifi clients had a median credit score of 609 while our black clients held median scores at 579. Both of these scores are subprime, which means that neither of these households would be able to access the conventional mortgages that Reveal investigated.
If these subprime clients increase their credit scores to at least 700 with robust credit counseling and education, not only will they receive more affordable terms, but also more financing options from which to choose.
2. Shop for a mortgage.
It is important for anyone to carefully shop for financial products like a mortgage or home equity loan. This is even truer for prospective homebuyers of color given Reveal’s investigation.
Research from the National Bureau of Economic Research also found that African-American and Latinx homebuyers with favorable credit scores are 105 percent and 78 percent more likely, respectively, to receive a higher cost loan than their white counterparts.
Clarifi’s HUD-certified housing counselors and educators encourage our clients to prepare for the mortgage application process. In fact, the Clarifi Boot Camp program, Addressing the Racial Wealth Gap, newly offered a lender fair to help our clients of color appreciate the necessity to shop for multiple mortgage offers.
We routinely work with clients to improve their credit score and to evaluate no fewer than three mortgage offers, thereby positioning themselves at the front of the pack with the best possible financing terms.
3. Consider the differences between an FHA and a conventional loan.
It is critical to understand the difference between these two home loan types. FHA loans sometimes offer a lower down payment than a conventional loan but may require mortgage insurance, which can cost the borrower more money over the life of the loan.
Sometimes FHA is the right way to go, but it is important to know all your options. With this perspective, in fact, one of our Boot Camp graduates was able to successfully apply for a conventional loan despite the fact that a FHA loan was the first option offered by her lender.
If you have the knowledge and know the right questions to ask, you can advocate on your own behalf to ensure you are getting the best possible offer. This is essential to making homeownership more sustainable and affordable in the long-term.
As the largest certified housing counseling agency in our region, helping people pursue homeownership is a central element of our work.
We believe that neighborhoods and communities thrive when single millennials and Gen Xers with young families can find affordable housing options alongside retired grandparents who plan to leverage their hard-fought home equity into expensive repairs.
We want to work toward a future where disparities and discrimination in lending are eliminated and all our clients have the ability to pursue their aspirations and dreams.
On the ground, we continue to address the knowledge gap so that people become empowered to improve their financial health of their families and of their communities.
Equitable access for all creditworthy borrowers who endeavor to secure their own assets is key to keeping Philadelphia a thriving, diverse city.-30-
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