BLOG VIEW: Homeownership continues to be one of the primary wealth builders in our country. Yet, strong barriers to homeownership for minority consumers and marginalized groups remain.
According to a recent Zillow analysis of data from the Home Mortgage Disclosure Act (HMDA), Black Americans are continuing to be shut out of this opportunity due to segregation policies, further strengthening the racial generational wealth gap.
According to this recent research, Black applicants are denied a mortgage at a rate 84% higher than white applicants. This is a significant jump from 2019, when the disparity was 74%.
While the Black homeownership rate had increased before the pandemic, it has recently started to fall again, in large part because of a widening mortgage approval gap between Black and white applicants.
In the U.S. in 2020, 19.8% of Black applicants are denied a mortgage, which is the highest among all races.
Research has shown that communities with a high rate of homeownership tend to flourish and be more economically resilient, with children and families more likely to thrive and
build generational wealth.
However, the Black community continues to face challenges with securing a traditional mortgage, given their financial situation and the current credit data available.
According to the Consumer Financial Protection Bureau (CFPB), 26 million Americans are “credit invisible,” meaning they have no established credit history or are living with subprime credit (scores below 668). Another 19 million are “thin file” consumers, with too little data to produce a traditional credit score.
The CFPB‘s data show that Black consumers are considerably more likely to be credit invisible, or have un-scored credit records, compared with White consumers. About 15% of Black consumers are currently classified as credit invisible, compared with 9% of White consumers. Additionally, 13% of Black consumers have unscorable records compared with 7% of White consumers.
The limited availability of traditional financial services in Black communities is a large contributor to this problem. Historically, Black communities have a higher number of nontraditional services, such as payday lenders, which helps contribute to poor credit health. Insufficient credit remained the most common reason for Black mortgage denials in 2020.
To help alleviate this problem, the mortgage industry, including the GSEs, mortgage collaboratives, lenders and mortgage technology providers, is working to bring greater inclusion and insight to the mortgage lending process.
The key is providing access to data and specific programs tailored to these groups. While credit reports remain a strong indicator of credit history and past financial reliability, Fair Credit Reporting Act (FCRA) compliant information that is not included in traditional credit report data has the potential to help responsibly expand consumer access to credit and support a more inclusive economy.
Access to this alternative data, such as rental payment history, utility payment information and even cell phone and cable bill data, can provide additional insight for a more complete financial picture of the borrower. This data could have a big impact, as roughly 92% of Black adults are cell phone owners.
Rent payments, which are currently not reflected in traditional credit reports or credit scores, are often one of the largest, most consistent bills that millions of consumers pay. With more than 42.9 million households currently renting in the U.S, and 20.3% of those being Black families, including rental payment data could help credit-invisible and first-time home buyers in this marginalized community.
The challenge lies in actually reporting this data in an accurate and standardized way. Nearly 50% of rental properties are managed by large and/or national property management companies, the other 50% of rental properties are managed by individual property owners or local property management companies, and there is currently no standardized process for them to feasibly report this data.
While it can be tough to access and compile, rent aggregators that take the time to contribute rental payment data to consumer credit reporting agencies are helping create financial wellness for communities, while also providing individuals with the opportunity to establish and build a credit history based on something they already do – pay their rent on time. Showing a positive and consistent rent payment history can not only demonstrate a consumer’s ability to make timely future mortgage payments but help that consumer gain access to credit that they ultimately deserve.
Reworking the existing credit system to be more equitable and include alternative data and insights not currently included in credit scores could help Black applicants and marginalized communities benefit from home ownership and wealth building. With the advancements the industry is already capable of extending, more and more Americans will have the opportunity to contribute to the engine of our national economy and enjoy financial security.
Jennifer Henry is managing director and group executive for government credit, capital markets and mortgage and housing Strategy at Equifax.