Race is one of the factors that play a role in the determination of the credit worthiness of a person. A study conducted by the Federal Reserve Bank of Boston showed that minorities were more likely to be denied mortgages compared to the whites. Credit plays an important role in the lives of the minorities because it enables them to improve or escape their poor living conditions (Munnell, Tootell, Browne and McEneaney 25). The lack of credit would mean that the minorities will continue being poor. As a result, the Home Mortgage Disclosure Act (HMDA) was enacted so as to observe the availability of mortgages to the minorities.
The HMDA collects data that displays the gender, race, income, and the status of the application. The data showed that Hispanic and Black applicants were denied mortgages twice or thrice as much as the white applicants (Munnell et al. 25). The data showed that low-income whites were more likely to be awarded mortgages while the reverse was true for the high-income blacks. The data collected in 1991, 1992, and 1993 showed similar results.
The results of the data raised a debate concerning the level of discrimination involved in mortgage lending. Some people are of the opinion that these results show that the lending institutions use discrimination while giving out mortgages. Other people argue that the results of HMDA are inconclusive because the data does not involve other factors such as debt burdens, credit histories, and loan to value ratios. These people say that the mortgage denial rates among the minorities can be better explained by the missing information. The limitations of the HDMA data led to the decision of seeking additional information so as to properly determine whether discrimination is involved in mortgage lending. The Federal Reserve Bank of Boston in collaboration with other federal agencies collected data and additional information from the lending institutions (Munnell et al. 25). The additional information was based on property, finance, and employment.
The objective of the research is to determine whether race plays a role in mortgage lending; to determine whether there is discrimination in mortgage lending; and to determine whether the limitations of the HDMA data has significant impact on the results of the research.
The data that was used include employment status; property owned by the applicants; finances of the applicant; gender; race; credit history; obligation ratios; neighborhood characteristics; mortgage insurance; the applicant’s marital status; the applicant’s number of dependants; and the characteristics of the loan such as repayment period. The additional data was collected so as to take care of the limitations involved in the HDMA data.
The methodology that was used in the research was a survey on the applicants. The survey was conducted on 1,200 Hispanics and blacks who had applied for mortgages in the year 1990 (Munnell et al. 30). That was the entire number of minorities who applied for mortgages in that year. A random sample of 3,300 white applicants was chosen. Regression analysis was used to analyze the collected data. The techniques used involved both the binomial and least squares techniques.
The findings showed that the Hispanics and blacks had less income, less liquid assets, and less wealth compared to the white applicants. The blacks and Hispanics also had lower credit histories compared to the whites. The findings also showed that the Hispanics and blacks made lower down payments compared to the whites. The obligation ratios were also higher among the minorities compared to the whites. These results show that the arguments made in reference to economic factors are valid.
In conclusion, the study showed that the HDMA data had limitations that neglected some areas that influence the decision of lending institutions. The inclusion of these areas showed that a large number of the minorities could not qualify for the mortgages. However, the study also shows that the low economic situation of the minorities is influenced by the discrimination they face in the labor markets or education. The minorities interested in mortgages were also limited to neighborhoods made for the minorities. Therefore, they ended up in old and congested neighborhoods that further limited their ability to borrow loans. There is no hard evidence that suggests that race is linked to the performance of a loan. Therefore, there could be a big problem when it comes to mortgage lending. The regulators, lenders, and community groups should work together to ensure that the minorities receive fair treatment when trying to access mortgages.
Works Cited
Munnell, Alicia H., Geoffrey M. B. Tootell, Lynn E. Browne, and James McEneaney. Mortgage Lending in Boston: Interpreting HMDA Data. The American Economic Review, Volume 86, Issue 1. (1996): 25-53. Web. 13 Apr. 2000.
