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Are Conventional Mortgages Drying Up in Minority Communities?

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Is mortgage redlining still plaguing communities of color?

A new report from seven housing and policy agencies suggests evidence of a two-tiered mortgage market in which borrowers and communities of color are increasingly cut off from prime conventional financing.

Origination data from seven cities in 2010 show that borrowers in diverse communities receive government-backed loans (FHA and VA) significantly more often than borrowers in predominantly white communities. Researchers analyzed Home Mortgage Disclosure Act (HMDA) data and compared lending statistics based on race, ethnicity and neighborhood composition.

Cities included in the study were Boston, Charlotte, Chicago, Cleveland, Los Angeles, New York City and Rochester, N.Y. The data were part of the sixth edition of the "Paying More for the American Dream" series produced by seven community housing agencies and advocacy groups spread across the country.

Organization leaders claim the disparities raise red flags regarding fair lending. Alternatively, the report also says that government loans are often the best option for prospective borrowers:

"As lenders continue to cut back on conventional lending in communities of color, government-backed loans, particularly FHA loans, have become the primary home-purchase mortgage product for many. FHA loans can offer certain advantages. Borrowers with lower credit scores, for example, can qualify for FHA loans, which also typically require smaller down payments than conventional loans. Indeed, government-backed loans may be the only viable loan option for many borrowers. FHA loans can also present drawbacks, however. They are typically more expensive, for example, and can take longer to be approved than conventional loans."

Government Loans Becoming the Gateway

The new report -- "Paying More for the American Dream VI: Racial Disparities in FHA/VA Lending" -- details interesting data:

  • Government-backed loans made up two-thirds of all purchase loans and nearly a third of all refinance loans in communities of color.
  • Homebuyers in communities of color purchased with a government-backed loan twice as often as borrowers in predominantly white communities
  • Homeowners in diverse communities utilized VA and FHA refinance loans three times as often as homeowners in more homogenous communities
  • Black borrowers represented 3 of every 4 government-backed purchase loans, while 2 of every 3 purchase loans that went to Latino borrowers were either FHA or VA.

Policy Prescriptions and Enforcement

"These patterns are symptoms of a deeper problem: the lack of access to prime conventional loans by borrowers and neighborhoods of color -- in other words, ongoing redlining," said Spencer Cowan of the Woodstock Institute, a nonprofit research and policy organization and one of the report's sponsors.

The report's authors recommended a handful of economic, enforcement and policy changes, including an updated Community Reinvestment Act and requiring banks to adequately maintain REO properties.

This series examining racial and economic disparities in the mortgage market began in 2007. It's a joint project of the California Reinvestment Coalition, Empire Justice Center, Massachusetts Affordable Housing Alliance, Neighborhood Economic Development Advocacy Project, Ohio Fair Lending Coalition, Reinvestment Partners and the Woodstock Institute.

This post appeared originally at OurBroker.com.

Chris Birk is director of communications for the VA Mortgage Center, which specializes in VA loans for veterans and active duty service members.