Why does it Cost More to be a Homeowner of Color? Unpacking 2022-2023 Home-Lending Data in California

If California is one of the most racially diverse states in the country, why do home purchase loan origination rates not reflect this diversity? The Greenlining Institute’s latest analysis of home lending data in 2022 and 2023 shows that racial disparities in home lending continue to lock communities of color out of the housing market, perpetuating generational wealth gaps and exacerbating the housing crisis.

Redlining Lives On Through Homeownership Gaps in California and Beyond

Homeownership is a key pathway to building wealth and stability, yet it continues to be out of reach for most families of color in California. A major source of the disparities we see today is the lingering legacy of redlining—the historic practice by financial institutions of intentionally denying communities of color access to financial services and investments. For generations, this form of systemic racism pushed communities of color to the margins by denying them the ability to live comfortably and build wealth through homeownership. While redlining was outlawed in 1968, the impact of decades of disinvestment lives on—and at the same time, new forms of financial discrimination have emerged, further entrenching the racial and economic divides that redlining helped establish. 

The economic repercussions of this historic and ongoing systemic discrimination mean that communities of color face higher barriers to accessing conventional home mortgage loans, and as a result, continue to trail behind white communities in homeownership. Meanwhile, unregulated nonbank lenders have opportunistically emerged as the primary providers of mortgage loans to communities of color. Because nonbank lenders are not obligated to fair lending practices and reinvestment activity, this trend overexposes communities of color to potentially predatory and unsustainable lending patterns—which if unchecked, threaten to replicate the impacts of redlining. One thing that is abundantly clear from our analysis: without intentional action from both policymakers and lenders, we should expect racial disparities in home lending to continue and worsen.

A Note About the Data To understand why communities of color face homeownership disparities, The Greenlining Institute has analyzed California’s annual home lending data reported under the federal Home Mortgage Disclosure Act since 2015. HMDA data remains one of our only tools to analyze demographic trends within home lending data collection. And even with HMDA, demographic data collection is not a requirement, resulting in approximately 20% of responses in the dataset on average identified as “Race Not Available.” The data also does not account for disaggregated Asian communities, where disparities for home mortgage access are particularly prevalent. Other immigrant communities, such as Middle Eastern and North African borrowers, are also not represented among the data, emphasizing the need to accurately collect and disaggregate demographic information within home lending data. In order to develop research and community-based solutions, demographic data collection must be mandated for all financial institutions and available for public access. Additionally, there was a significant drop in home loan originations between 2022 and 2023. According to the Consumer Financial Protection Bureau (CFPB), the total number of originated closed-end loans decreased by about 2.3 million, or 34.5%, between the two respective years. As interest rates normalized, refinancing activities also decreased by 60% in 2023. Many attribute this to decreasing home affordability, as mortgage interest rates shifted from record lows in January 2021 to record highs in 2023, increasing over five percentage points in addition to rising home prices.

Nonbank Lenders Continue to Dominate the California Mortgage Market, Specifically among Borrowers of Color

Our research aligns with the national trend of commercial banks withdrawing from the residential mortgage market. Many attribute this to increased bank regulation following the 2008 recession, and the reality that mortgage lending is not as profitable for commercial banks’ bottom lines.

These conditions have allowed for nonbank mortgage companies to surge in to fill the gap. “Nonbanks” refer to any lender that does not offer traditional banking services such as savings or checking accounts, and often operate as independent mortgage lenders. Nonbank lenders are known for their uniquely automated online approach, enabling potential borrowers to receive a mortgage quote in less than 10 minutes due to their increased technological capacity. These lenders now control over 60% of the mortgage market across the country, including 9 out of the top 15 lenders in California in 2022 and 2023.

Home lending services are rapidly evolving with the emergence of these largely unregulated fintechs and the decreasing presence of physical bank branches in many communities, particularly among formerly redlined communities, low-income communities, and communities of color. Thanks to their digital presence and resulting accessibility, nonbank lenders tend to be more effective than traditional banks at reaching communities of color, low-income, and immigrant communities, all of which are highly vulnerable to predatory lending. Because nonbanks and fintechs are not subject to the Community Reinvestment Act requirements, they don’t have the same legal obligation as traditional banks to meet the credit needs of low-to moderate income borrowers responsibly.

Just last week, the US Department of Justice filed a lawsuit against the second largest mortgage lender in California, Rocket Mortgage, for illegally discriminating against a Black applicant looking to refinance her mortgage. Under their purview, Rocket Mortgage’s contracted appraiser undervalued the applicant’s home by over $200,000, using sales from properties in further-away, redlined neighborhoods with large Black populations instead of closer neighborhoods that were predominantly white. When the homeowner received the appraisal and reached out about her concerns, Rocket Mortgage responded by canceling her refinance application. Rather than rectifying the situation for their blatant discriminatory practice, Rocket Mortgage retaliated against the Black applicant. If we expect nonbank lenders to change their behavior as the primary lenders to our community, we must hold them to a higher standard than they are currently being held to.

Conventional vs Non-conventional Home Mortgage Loans

Before we break down the data, let’s clarify the difference between a conventional versus a non-conventional home mortgage loan.

Conventional loans are issued by a financial institution directly without government backing, while non-conventional or government-subsidized loans are guaranteed by the government. Conventional loans typically carry fewer fees and greater flexibility than non-conventional loans, but have stricter eligibility requirements, such as higher minimum credit scores and lower debt-to-income ratios.

Non-conventional home mortgage loans, sometimes referred to as “government subsidized,” include loans guaranteed by the Federal Housing Administration, Veteran Affairs, Rural Housing Service, or Farm Service Agency. Non-conventional loans are typically easier to qualify for than conventional loans because government backing against default increases lenders’ comfort levels. Lenders are often more willing to take a risk with government-backed products. Non-conventional loans exist as a tool to capture disadvantaged homeowners who would otherwise be shut out of the market, with the federal government taking on the risk of borrowers that traditional banks would rather avoid. While these loans are more accessible, they are typically more costly and not as attractive to sellers. Surveys have shown that only 30% of sellers would be likely to accept an offer from a buyer using a non-conventional loan, compared to 89% of sellers who would be likely to accept an offer from a buyer with a conventional loan.

Black and Latino Borrowers Trail Behind White Borrowers in Accessing Conventional Home Mortgage Loans

Over the last two years, white and Asian (excluding disaggregated Asian demographic) households were significantly overrepresented in conventional home purchase originations relative to their share of the population in California. Black and Latino households were underrepresented in the conventional home lending market by over 50% relative to their share of the population. 

• Black households originated less than 2.5% of conventional home loans despite making up over 5% of the population
• Latino households originated roughly 15% of conventional home loans despite making up over 40% of the population

Notably, nonbank lenders in the Top 15 provided a slightly higher share of conventional home loan originations to Black, Latino, Pacific Islander, and Native American communities in California compared to the overall Top 15 market share. 

The conventional home lending product disparities between Black and Latino communities relative to their share of the population is concerning, but not surprising. Conventional mortgage products offered by traditional financial institutions must become more accessible to borrowers of color by easing eligibility requirements. Financial institutions should also offer alternative forms of establishing creditworthiness, such as through Special Purpose Credit Programs, to create viable pathways to creditworthiness for formerly redlined communities that have been economically disadvantaged compared to white peers. Targeted programs for communities of color are necessary to combat racial disparities and expand opportunities for Black and Latino borrowers to build generational wealth through homeownership.

Borrowers of Color Pay More to Become Homeowners: Nonbanks Overwhelmingly Provide Non-Conventional Loans

Our research shows that communities of color are adequately, and sometimes over-represented among non-conventional home loans, and thus, pay more to become homeowners. But, why? 

For both 2022 and 2023, it is clear that borrowers of color were more adequately represented among non-conventional mortgage loan originations than they were among conventional loan originations in 2022 and 2023. Alternatively, white and Asian (non-disaggregated) households were much less likely to originate a non-conventional home loan.

• Black households accessed 6-7.5% of non-conventional home loans relative to their 5% population size
• Latino households accessed roughly 34-37% of conventional home loans relative to their 40% share of the population

Compare the numbers above to the tables in the previous section, which show the conventional home loan origination breakdown. Borrowers of color are grossly underrepresented among conventional home loan originations, and are adequately represented among non-conventional home loan originations. Notably, nonbanks made a vast majority of the non-conventional home loan originations in California.

In 2022, nonbank lenders underwrote 90% of all Federal Housing Administration (FHA) mortgages nation-wide. Because eligibility requirements are lower for non-conventional, or government subsidized, loans, borrowers of these loans tend to have lower income and lower credit scores. They also tend to be people of color due to a history of economic exclusion and exploitation.u

What isn’t shown in the data, is that homebuyers pay hundreds more on average if they borrow from nonbank lenders instead of traditional banks. According to a Bloomberg News analysis of more than 38 million mortgage originations from 2018-2022, homebuyers with comparable incomes and loan sizes paid about $300 more when taking out a loan from a nonbank lender versus a traditional bank. The disparities did not stop there: Latino homebuyers who originated a mortgage from nonbanks paid $230 more on average than comparable white nonbank borrowers, and Black borrowers paid $150 more, the analysis found.

A Note About Denial Rates Part of our research included the racial demographic breakdown of home purchase denial rates found in 2022 and 2023 HMDA data. After crunching the numbers, our most salient findings are as follows: – Among Black borrowers, the rate of non-conventional mortgage applications was double the rate of conventional mortgage applications – Black borrowers were over 10% of total home purchase denials in 2022 and roughly 8.5% of total home purchase denials in 2023 for non- conventional loans, relative to their 5% share of the population The data points above show a saturation of Black borrower applications and denials among non-conventional home purchase loans. This data supports our research on the increase of non-conventional home mortgage originations among borrowers of color, which are largely offered by nonbank financial institutions.  The higher prevalence of non-conventional loan applications among communities of color, or rather the lack of conventional loan applications in communities of color, raises concerns of ongoing mortgage redlining and discriminatory loan steering. It may indicate that lenders are illegally steering applicants of color who could qualify for conventional loans into non-conventional loans, which have more restrictive uses and rigid structures.

Addressing Homeownership Gaps for Borrowers of Color: Our Recommendations for Greenlining California Homeownership

Home lending data highlights that lending conditions for borrowers of color continue to be impacted by the legacy of redlining. Borrowers of color are not accessing conventional home purchase loans at rates comparable to white communities due to unattainable eligibility criteria and bank branch closures in their communities. As a result, borrowers of color are more likely to access loans through largely unregulated nonbanks which charge them higher rates and fees, making homeownership more costly and difficult to achieve in the long run.

The mortgage market is evolving. Nonbank lenders can provide important competition to traditional banks and serve customers who currently fall through the cracks, but inadequate regulation of these lenders remains a concern. Under existing regulatory frameworks, it is incumbent upon these nonbank lenders, which are not regulated by the Community Reinvestment Act, to proactively support California’s communities of color and demonstrate their commitment to closing the racial wealth gap through equitable, safe and affordable products. To-date, we have not seen nonbank lenders take meaningful action towards these goals.

Greenlining’s Key Recommendations:

• The state must create a California Community Reinvestment Act in order to close the homeownership gap among communities of color. Unlike traditional banks, nonbank lenders are not covered by the federal Community Reinvestment Act, despite the similarity in their loan products and services. As such, nonbank lenders should have the same mandate to fairly serve low- to moderate-income communities as traditional banks, and this mandate can be applied state-wide. A state-level California CRA could:
  • Incentivize relationships between nonbank lenders and nonprofit organizations that serve LMI communities and communities of color.
  • Rebuild and significantly increase investments in low-to moderate income communities that do not have access to physical banks in their communities.
  • Require lenders to offer the best possible mortgage products to clients.
  • Ensure corporate accountability for financial institutions.
  • Test for fair lending to all racial and ethnic groups, in comparison to peer lenders.

• Traditional lenders should provide more loan products with alternative forms of creditworthiness tailored to low-to-moderate income borrowers of color. Our research has shown the dominance of non-conventional mortgage applications and originations among communities of color in California, likely due to stricter eligibility requirements among conventional loan products, such as higher minimum credit scores and lower debt-to-income ratios. Financial institutions should increase mortgage originations to communities of color through alternative products to non-conventional loans, such as Special Purpose Credit Programs (SPCP). Targeted programs for borrowers of color are necessary to combat racial disparities and expand opportunities for Black and Latino borrowers to build generational wealth through homeownership.
• The Federal Government should strengthen the Home Mortgage Disclosure Act. The need for racial demographic information within home lending data is stronger than it’s ever been. HMDA should be made stronger, more accessible, and with easier-to-access data that is disaggregated by different racial and ethnic communities. At the state level, California regulators should help to lead this discussion with respect to nonbank lenders licensed by the state.

Homeownership forms the bedrock of wealth building, and home lending to communities of color must increase to establish financial stability for future generations. Our communities, who have been intentionally impoverished for decades and centuries, deserve better.

Methodology

We reviewed the loans reported in the 2022 and 2023 Home Mortgage Disclosure Act datasets. The study was limited to home purchase and refinance loans for single family or manufactured homes.

This study only reflects loan originations of home purchase loans and refinancing loans, and does not address purchased loans, which are a major source of income for many lenders and can outnumber loan originations for some lenders.

Data was controlled for conventional and non-conventional, or “government subsidized,” loan product types. Conventional loan products include first and subordinate lien conventional loans. The Consumer Financial Protection Bureau defines conventional loans as those not insured or guaranteed by the Federal Housing Administration, Veteran Affairs, Rural Housing Service, or Farm Service Agency. Non-conventional loan products in this report include first and subordinate (where applicable) lien FHA, VA and FSA/RHS loans.

This report identifies race and ethnicity in the following manner: If the ethnicity was indicated as Hispanic, we identified the borrower as Hispanic (we use the term Latino in this report) regardless of the race selected. If the ethnicity is non-Hispanic, the borrower is then identified by the primary or first race they selected. Asian in this report refers to Asian Americans, excluding Pacific Islander communities, which are classified separately. Multirace responses are extremely rare in the dataset and as such are not addressed as a separate racial group.

Unfortunately, approximately 20% of responses in the dataset on average were identified as “Race Not Available” and were not included in the calculations of loans to households of color but were counted toward the total loan number. As we noted, this is a serious issue with HMDA data collection, and lenders should take greater care to ensure that race is collected for all borrowers.

This report uses population demographic data from 2022 provided by the American Community Survey.