Is the Mortgage Industry Racist?

An organization named The Markup released a story near the end of August titled, “The secret bias hidden in mortgage-approval algorithms.” Here are some details—
· Lenders are 40% more likely to deny Latino applicants.
· Lenders are 50% more likely to deny Asian applicants.
· Lenders are 80% more likely to deny Black applicants.
· The Markup did use available national data from HMDA records on conventional loans ONLY and this data did not include credit scores.

So, is the mortgage industry racist? This requires us to consider who is in charge of mortgage lending in our country. Is it BIG banks who set the rules? Is it Wall Street who sets the rules? Is it an individual Loan Officer or an individual underwriter who sets the rules? NO!!! The government sets the rules.
· Fannie and Freddie have many loan level price adjustments (extra costs) for loans with less than 25% down, and Ficos below 740, along with many other factors. These “temporary” loan level price adjustments have now been around for over 10 years. Why? Some of these price adjustments were caused by Congress who is funding other “priorities” on the backs of mortgage borrowers.
· Second, Fannie & Freddie are “Cash Cows” for the Treasury and thus provide additional funds for Congress to spend elsewhere and Congress doesn’t want to stop the “Gravy Train”.
· Next, Fannie, Freddie, FHA, and VA require us as the mortgage industry to use “Classic FICO” that has been around for over 15 years which almost always generates lower credit scores for every borrower, but also does not include data on rental, phone, or utility payment histories, which is very detrimental to people of color because they are more likely to not use traditional credit. The agencies looked at changing to a newer credit scoring model over the last few years; but decided to not make any changes. We as the mortgage lending industry are stuck with using “Classic FICO” even though it keeps minorities from buying a home. Our hands are TIED BY THE GOVERNMENT.
· The government forces us to collect racial and ethnicity of every borrower and that info is included in the loan application. Some people wonder if our underwriting software that the government provides for us is racist in some way? Maybe. Personally, I would prefer that we don’t collect racial and ethnicity of borrowers as I don’t give a DANG on someone’s race or ethnicity.
Earlier this year the Treasury created new rules for Fannie & Freddie on how much risk they can take when approving loans. I have written before about this when it comes to loans on second homes and investment properties. But, there is also a rule that keeps lenders from closing more than 6% of purchase mortgage loans with 2 or more high risk factors—Loan to Value greater than 90%, debt-to- income ratios greater than 45%, and a Fico score less than 680. This rule was created by the Treasury is keeping us from lending to more minorities.