The Role of Credit in the Black Homeownership Gap

Black hand holding keys to a house

For 246 years, the damaging institution of slavery categorized Black men, women and children as property and wealth, not people. More than a century and a half after being granted their freedom, Black people are struggling to build wealth as homeowners. 

Blacks have the lowest homeownership rates of all ethnic groups. 

At its high in 2004, Black homeownership peaked at 49.7%, trailing well behind the record 76.2% homeownership rate for white people. The gap in rates between Black and white families is wider now than in 1960 when housing discrimination was legal. 

Credit disparities across generations have been one of the barriers contributing to the Black homeownership gap.

“We know the outputs of lower credit scores, missing credit scores, fewer financial resources and lower incomes,” says Michael Neal, principal research associate in the Housing Finance Policy Center at the Urban Institute. “A part of that is economics, but what informs it is partly due to structural racism and discrimination.” 

From Slavery to Sharecropping 

Today’s racial wealth gap is a legacy of unequal wealth for Black and white Americans following the Civil War. 

After emancipation, 4 million slaves were freed with no money, education or means of survival. Reparations were paid to slaveholders, not slaves and the ‘40 Acres and a Mule’ proposal to grant former slaves land never materialized. Credit and its impact on wealth-building for Black families began with a system known as sharecropping, a form of indentured servitude. 

Poor and in need of income, most freed Blacks were forced into sharecropping, renting and farming a portion of landowners’ property in return for a crop’s share. Landowners extended credit to the sharecroppers to purchase materials like seeds and fertilizer from them. Sharecroppers also relied on short-term credit from local merchants to pay for essentials like food and clothing.

Landowners and merchants often charged higher prices and interest rates for goods bought on credit. When it was time to sell the crop, Black farmers were often cheated. Sharecropping created a cycle of poverty and debt, preventing Blacks from being property owners and accumulating wealth.

Redlining Destroys Black Wealth

Redlining is the discriminatory practice of denying loans to creditworthy borrowers because of their race or where they live. 

“An example of this is in the 1930s following the Great Depression,” says Nikitra Bailey, Executive VP of the National Fair Housing Alliance. “The New Deal’s Federal Home Owners Loan Corporation developed one of the most harmful policy decisions in housing and financial services markets by creating a system that included race as a fundamental factor in determining the desirability and value of neighborhoods.”

Neighborhoods with high Black and immigrant populations were shaded red or considered high risk. That was a signal to lenders to avoid providing loans in these areas. 

“It wasn’t based on whether a person could afford a loan,” says Bailey.

Redlining prevented Black families from participating in the homeownership boom of the 1950s and 1960s. While the Fair Housing Act of 1968 made redlining illegal, the economic impact of the discriminatory practice is still felt today. 

A report from the National Community Reinvestment Coalition (NCRC) says over 8 million people living in formerly redlined areas experience lower home values, higher rates of poverty, greater vacancy and abandonment and poor health outcomes.

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The Subprime Mortgage Crisis 

During the housing boom of the 2000s, some lenders approved high-risk mortgages to borrowers with weak credit histories. 

African American borrowers were more likely to receive subprime purchase and refinance loans than comparable white borrowers, according to The Center for Responsible Lending’s research of 2004 Home Mortgage Disclosure Act data.

When the Great Recession took hold between 2007 and 2009, the housing market collapsed, job losses accelerated and interest rates began to rise. Borrowers were unable to pay their mortgages, resulting in foreclosures.

“Families living in those communities, not the people who experienced foreclosure itself, but people who lived in proximity to the foreclosure lost a trillion dollars in wealth in Black and Latino communities,” says Bailey. “Black and Latino families were disproportionately targeted in subprime loans despite data showing many qualified for homeownership on safer and more affordable terms.”

The subprime crisis had an immediate impact on Black homeownership rates. In 2010, fewer than half of African American and Hispanic families owned homes. When they do own homes, Black families buy them at least eight years later, delaying their ability to accumulate wealth. 

Black Homeownership and the Racial Wealth Gap 

A home is the biggest asset many will own in their lifetime. Black people being locked out of homeownership has eroded their wealth across generations. 

The median white family had $184,000 in wealth in 2019 compared to $23,000 for the median Black family. 

“Credit is seen as a prerequisite to homeownership,” says Megan Haberle, Senior Director of Policy at the NCRC. “Because of the lack of intergenerational wealth and other kinds of persisting economic injustice, there’s a very skewed challenge facing many Black households in building strong credit and credit scores within our existing credit system.”

Black applicants are more likely than white borrowers to be denied a mortgage, with credit history cited as the most common reason. Black individuals are more likely to have thin credit histories or be credit invisible. Black people with a credit profile have an average credit score over 40 points lower than white applicants. 

“About one-third of Black adults do not have a FICO score and another one-third of Black households have FICO scores under 620,” says Jung Hyun Choi, Senior Research Associate at the Urban Institute. “It makes it difficult for Black households to access a mortgage. If they access it and become homeowners, they still have to pay higher mortgage costs.”

Learn More with DiversityInc Best Practices: Can Labor Unions Shrink the Racial Wealth Gap?

Special Credit Purpose Programs 

Slavery and segregation, racism and redlining — these exclusionary policies and practices were implemented for decades, creating significant disadvantages for Black families. 

Special Purpose Credit Programs (SPCPs) are one way of responding to those inequities. SPCPs are lending products designed to meet the credit needs of underserved groups subjected to discrimination. 

In 2022, Wells Fargo (No. 29 on DiversityInc’s 2022 Top 50 companies for Diversity list) announced an SPCP to help minority homeowners whose mortgages are currently serviced by Wells Fargo refinance their mortgages. The company recently broadened its initial $150 million investment to include purchase loans. 

“Systemic inequities in the United States have prevented too many minority families from achieving their homeownership and wealth-building goals for too long,” says Kristy Fercho, Head of Home Lending and head of Diverse Segments, Representation and Inclusion at Wells Fargo. 

Also in 2022, TD Bank (No. 13 on DiversityInc’s 2022 Top 50 companies for Diversity list) introduced TD Home Access Mortgage, a new mortgage loan product designed to improve homeownership opportunities in Black and Hispanic communities. 

“Our program was designed to provide a $5,000 lender credit, more flexible debt-to-income ratios and credit score requirements,” says Michael Innis-Thompson, Senior Vice President, Head of Community Lending & Development & Fair Lending Center of Excellence at TD Bank. “We’ll go as low as 620 FICO scores. It addresses the issue that Blacks and Hispanics are more likely to have credit scores below 660.”

Improving Access to Homeownership 

Experts say enforcing fair housing laws is essential to improving Black homeownership and the racial wealth gap. 

“Even when prospective homebuyers have qualifying credit scores, they may be excluded from homeownership based on the neighborhood that they live in. That is illegal in the face of the Fair Housing Act and the Equal Credit Opportunity Act,” says Haberle. “This enforcement is important to complement policy reforms that target the credit score models themselves.”

Implementation of alternative credit data  — payment history for everyday bills like utilities or cell phones — has been cited as one way to help Black people enter the credit system and shrink the Black homeownership gap. Fannie Mae and Freddie Mac have begun allowing lenders to consider up to 12 months of rent payment history for loan applicants. 

“Rental payment is underreported in the credit bureau system,” says Choi. “It will take time for that to make an impact, but those are the things happening to help households of color without good credit scores or with low credit scores have a better opportunity in accessing homeownership.” 

Community Development Financial Institutions or CDFIs can also be crucial in expanding mortgage credit in Black communities. CDFIs are financial institutions that provide financial services to under-resourced and low-income communities that need access to financing. 

“Part of their mission focus, which is critical, is the relationship banking method they often employ to expand access to credit,” says Neal. “It’s not just we’re gonna look at your credit score, your debt to income, some of the traditional measures associated with mortgage lending. They’re going to work to build a relationship and develop a product that fits the needs of their clients a little better.”

Neal says that shrinking the Black homeownership gap would represent great philosophical and economic progress.

“There’s something philosophical about what it means to be an American. In my mind, that’s tied closely with homeownership,” he says. “In the economic sense, the hope is that we have been able to extend the promise of homeownership to everyone who wants it. The flip side of that is — even if you own a home — if the benefits that homeownership promises do not accrue to you, then we can’t raise the flag of victory.”

READ: Addressing the Wealth Gap: Study Shows the Movement Toward Equity Has a Long Way to Go


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