The Department of Justice (DOJ) announced that it has entered into a settlement with American Bank of Oklahoma (ABOK) to resolve allegations that ABOK engaged in unlawful redlining in Tulsa, Oklahoma. The DOJ opened its investigation of ABOK after receiving a referral from the FDIC.
In its complaint, the DOJ alleged that from 2017 through at least 2021:
All of ABOK’s branches and loan production offices were located in majority-white neighborhoods;
For purposes of the CRA, ABOK designated its Tulsa Metropolitan Services Area (MSA) to exclude all of the majority-Black and Hispanic-census tracts in the MSA;
ABOK did not assign a single loan officer to conduct outreach in majority-Black and Hispanic areas and did not market, advertise, or take steps to generate loans from majority-Black and Hispanic neighborhoods;
ABOK failed to implement effective fair lending compliance management systems;
ABOK significantly underperformed its “peer lenders” in generating home loan applications from majority-Black and Hispanic neighborhoods;
ABOK made a smaller percentage of HMDA-reportable residential mortgage loans in majority-Black and Hispanic neighborhoods compared to its peers; and
ABOK loan officers and executives sent and received emails via their ABOK email accounts containing racial slurs and racist content.
Notably, in addition to alleging that ABOK’s redlining practices violated the Fair Housing Act, the DOJ alleged that such practices violated the Equal Credit Opportunity Act. The question whether the ECOA applies to prospective applicants is currently before the U.S. Court of Appeals for the Seventh Circuit in Townstone Mortgage. The CFPB appealed to the Seventh Circuit from the district court’s decision in the CFPB’s enforcement action against Townstone in which the district court ruled that a redlining claim may not be brought under the ECOA because the statute only applies to applicants and not to prospective applicants.
The actions that ABOK must take under the proposed consent order include:
Hire or designate a full-time director of community lending to oversee the development of ABOK’s mortgage lending in majority-Black and Hispanic census tracts and ABOK’s compliance with the consent order;
Establish a community-oriented loan production office in a majority-Black and Hispanic census tract in Osage, Rogers, Tulsa or Wagoner counties within the Tulsa MSA (Tulsa Lending Area) that has a no-fee ATM for ABOK customers and with lower fees for non-customers than what is available at nearby ATMs for non-customers;
Assign at least two full-time loan officers to solicit mortgage applications primarily in majority-Black and Hispanic census tracts in the Tulsa Lending Area;
Invest at least $950,000 in a loan subsidy fund with the goal of increasing credit for home mortgage loans, home improvement loans, and home refinance loans made in majority-Black and Hispanic neighborhoods in the Tulsa Lending Area (with no more than 25% of the fund to be used for refinances);
Partner with one or more community organizations that provide residents of majority-Black and Hispanic census tracts in the Tulsa Lending Area with services related to credit, financial education, home ownership, and foreclosure prevention and, through these partnerships, spend at least $20,000 per year ($100,000 over the term of the consent order) on professional services to majority-Black and Hispanic census tracts in the Tulsa Lending Area that increase access to residential mortgage credit;
Spend at least $20,000 per year ($100,000 over the term of the consent order) on advertising and outreach directed to residents and prospective residents of majority-Black and Hispanic census tracts in the Tulsa Lending Area;
Advertise its mortgage lending services and products to majority-Black and Hispanic census tracts in the Tulsa Lending Area at least to the same extent that it advertises its mortgage lending services and products to majority-white census tracts in the Tulsa Lending Area; and
Provide at least six financial education events per year, with translation and interpretation services in Spanish, targeted towards residents of majority-Black and Hispanic census tracts in the Tulsa Lending Area.
In its press release about the settlement, the DOJ indicated that it is part of the DOJ’s initiative to combat redlining, which it announced in October 2021. Other redlining cases that have been part of this initiative include settlements with ESSA Bank & Trust and Park National Bank.
In February 2020, Tenisha Tate-Austin and Paul Austin decided to erase all traces of their existence in the Northern California home the Black couple had created for themselves and their children.
They “whitewashed” their home by removing their family photographs and African art displayed around the house. They had a white friend place some of her own family photographs around the home and greet the appraiser as if she were the homeowner.
The couple wanted to see if they’d get a better home appraisal than the one they had received three weeks earlier.
The experiment worked. This time, the appraisal (by a different appraiser from the same appraisal management firm) was almost 50% higher. In three weeks, the value of their Marin City home, 11 miles north of San Francisco, had gone from $995,000 to $1,482,500.
In March, the Austins settled a fair housing lawsuit alleging race discrimination against the licensed real estate appraiser; they’d reached a settlement in October with the appraisal management company.
Sixty years after Martin Luther King Jr. delivered his most iconic speech calling for civil and economic rights and an end to racism, one of the biggest roadblocks to building wealth for Black Americans is still in place: The housing gap has widened from the time it was legal to discriminate based on race.
In 1960, eight years before the Fair Housing Act, which prohibits property owners, financial institutions and landlords from discriminating based on race, the homeownership gap between white (65%) and Black (38%) stood at 27 percentage points. In 2021, or 60 years later, that gap had grown: 73% of white households owned a home compared with Black homeownership at 44%, a difference of 29 percentage points, according to the Urban Institute.
“We missed out on a better interest rate because of the unfair appraisal we received,” Tenisha Tate-Austin said in statement through her lawyer. “Having to erase our identity to get a better appraisal was a wrenching experience. We know of other Black families who either couldn’t get a loan because of a discriminatory appraisal and therefore either lost the opportunity to buy or sell a home, or they had to sell their home because they had an unaffordable loan.”
Explore the series:MLK’s ‘I have a dream’ speech looms large 60 years later
Housing gap:‘We are a broken people’: The importance of Black homeownership and why the wealth gap is widening
King fought racist housing practices in ChicagoThough King knew housing was an important topic when he made his 1963 speech (it included the line “We cannot be satisfied as long as the Negro’s basic mobility is from a smaller ghetto to a larger one,” his focus was ending segregation in the South, said Beryl Satter, professor of history at Rutgers University in New Jersey and author of “Family Properties: Race, Real Estate, and the Exploitation of Black Urban America.”“The speech was about jobs and ending segregation of drinking fountains and restaurants, buses, trains, movie theaters and swimming pools to help pass the Civil Rights Act,” she said. Once that was accomplished, King trained his sights on housing in the North, particularly Chicago, where he focused on enforcing a pre-existing law on open housing, Satter said.The open housing laws in Chicago already forbade real estate agents from steering Black families into Black neighborhoods and dictated that housing should be made available regardless of race.“But like many such open housing laws, it was not enforced,” Satter said.In January 1966, King moved with his family into an apartment in North Lawndale on the West Side of Chicago to bring attention to the poor living conditions of Black families living without water, electricity and heat. He marched with Black and white supporters into segregated white neighborhoods to call for open housing.“And there he was met with the most violence he had ever been met with in any of his civil rights struggles. He said that the violence in Chicago made the whites in Mississippi look good,” Satter said. “He was hit with a stone while marching in Chicago, and he kept going.”Fair Housing Act became law after King’s deathFrom 1966 to 1967, Congress regularly considered a fair-housing bill, but it was ultimately defeated.“It was the first time that a Civil Rights Act had been defeated since the ’50s,” Satter said. “There was massive white resistance to any law or direct action that threatened racial segregation and housing. It was something that whites in the North fought to the death to keep.”After King was assassinated in 1968, President Lyndon Johnson pushed through the national Fair Housing Act as a memorial to King, whose name had become closely associated with the fair housing legislation.The undervaluation of homes in Black neighborhoods, decadeslong housing segregation, a systemic denial of loans or insurance in predominantly minority areas, a persistent income gap, and a historically limited ability of Black parents to leave their families an inheritance have contributed to the nation’s financial disparity, experts say.
During the housing boom of the early 2000s, Black Americans ages 45 to 75 disproportionately held subprime mortgages, loans offered at higher interest rates to borrowers characterized as having tarnished credit histories. Many of these mortgage holders lost their homes and have been unable to return to homeownership.
These trends will affect retirement prospects for Black Americans and their ability to pass down wealth to the next generation, making it not just one generation’s problems but an intergeneration disparity, experts say.
White wealth surpasses Black wealth
In 2016, white families posted the highest median family wealth at $171,000. Black families, in contrast, had a median family wealth of $17,600, according to the Federal Reserve. Homeownership has long been considered the best path to build long-term wealth, so increasing the rate of homeownership can play an important role in closing the wealth gap, experts say.
Over the past decade, the median-priced home in the United States gained $190,000 in value, making the typical homeowner 40 times wealthier than if they had remained a renter, according to a report released in April by the National Association of Realtors.
Some signs of hope emerged during the coronavirus pandemic, when mortgage rates were at historic lows.
During that time, Black homeownership rates increased by 2 percentage points, surpassing the white homeownership rate, which increased just 1 percentage point.
The historically low mortgage rates enabled high-earning, highly educated Black households to boost homeownership rates. Most high-income white households already were homeowners, which explains the smaller magnitude of growth, according to the analysis.
Black homeownership rate saw small improvements
From 2019 to 2021, the homeownership rate for Black households went from 42% to 44%; for white households it went from 72% to 73%.
After experiencing a continuous decline since the Great Recession, the Black homeownership rate finally made gains between 2019 and 2021. The reason was pent-up demand, said Jung Choi, a researcher at the Urban Institute.
“This suggests that affordability really matters,” Choi said. “Now, with the surge in interest rates, we are already seeing a sharp decline in Black homebuyers as well as younger homebuyers.”
Satter said King’s final book, 1967’s “Where Do We Go From Here: Chaos or Community?” cautions against complacency simply because there are laws on the books.
“He really understood that having a law in books was the beginning, not the end. Today we have the Fair Housing Act of 1968, and there are ongoing local, state and national laws that are supposed to stop housing discrimination,” Satter said. “I think King would have predicted that they would not be effective if there wasn’t a larger public will to enforce it and a strong political organization pushing to enforce it.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
The agencies intend to tackle two challenges evident during the Covid-years refi boom: higher costs due to appraiser shortages and concerns regarding bias in home valuations.
In their letter, MBA and CBA said that AVMs and technologies like them can alleviate appraiser shortages, reduce transaction costs, and safeguard against individual appraisal bias. Ultimately, a robust regulatory framework continues to be a critical imperative to achieve these outcomes.
However, any regulation should consider the practicalities of model risk management and its potential unintended consequences.
For example, the associations said the proposed rule includes Fannie Mae and Freddie Mac to the new standards, which creates a level playing field in the market. But the trade groups are worried about the impact of quality control standards on the GSEs’ alternative valuation methods, such as desktop appraisal, since these tools are essential in times of high demand.
“MBA and CBA suggest that the agencies consult with the GSEs to ensure that application of the quality control standards would not create adverse effects on the availability of alternative valuation methods,” the letter states.
In addition, regulators should be aware of any unbalanced market effects of AVMs regulations, conflicting interpretations of the legal framework, and the lack of established methodologies in examining systemic bias in the U.S., the trade groups state.
The agencies involved include the Federal Housing Finance Agency; the Consumer Financial Protection Bureau; the National Credit Union Administration; the Federal Deposit Insurance Corporation; the U.S. Department of the Treasury; and the Federal Reserve System.
Per the proposed rules, each institution using AVMs will adopt and maintain its practices, procedures, and control systems, reducing the burden on smaller institutions. But the trade groups request the agencies to include a small lender/servicer exemption from the standards, as these companies are likely to rely on larger outside service providers subject to a thorough review by regulators or larger clients.
Regarding third-party providers, the associations suggest that the CFPB expand its Compliance Bulletin 2016-02, Service Providers to outline expectations and potential recourse “for quality control and fair lending oversight” of third-parties providing AVMs services. In addition, MBA and CBA said that creditors should not be liable for violating nondiscrimination law when relying on third-party AVMs, disagreeing with the agencies’ interpretation of the Fair Housing Act.
The MBA and the CBA requested an adequate implementation timeline of at least 12 months.
The White House supports a new rule for AVMs, which follows goals set out by the president in addressing issues of racial bias that have exacerbated homeownership and wealth gaps. When announcing the proposed rule, Vice President Kamala Harris weighed in.
“Today, I’m proud to announce we are developing a rule that will require that financial institutions ensure that their appraisal algorithms are not biased, for example, that they do not produce lower valuations for homes owned by people of color,” Harris said. “We are also releasing the guidance to make it easier for consumers to appeal what they suspect to be unbiased valuation.”
Another trade group weighed in on the newly proposed rule.
The National Association of Mortgage Brokers (NAMB) said it supports new federal regulatory proposals governing the use of AVMs.
“The reality is the systems and structures are themselves, in some cases, problematic,” said NAMB President Ernest Jones in a statement. “Even when appraisers follow the intended approach, it may result in an outcome that disenfranchises people. They could be doing everything in a way they feel is consistent with the approaches they’ve learned and for which they’re certified, but there are some underlying issues that need to be addressed.”
Two advocacy groups are pushing for a state version of the federal Community Reinvestment Act to ensure more equitable treatment of people of color by home lenders.
In Maryland, Black and Latino applicants were denied home loans at a rate 1.6 times higher than white applicants, according to data from the National Community Reinvestment Coalition from 2018 to 2020. In the city of Baltimore, Black applicants were rejected 2.1 times more than white applicants.
Only half of the top 10 mortgage lenders in Maryland were required to meet CRA guidelines, according to the coalition and Economic Action Maryland.
The federal CRA focused on the credit needs of low- and moderate-income communities, but it does not require many lenders to reinvest in communities of color. And, according to the Consumer Financial Protection Bureau, 60 to 70% of mortgages originated with institutions not covered by the federal law, including credit unions and home mortgage companies.
This significantly affects a city like Baltimore, where 33% of loans went to African American borrowers despite the city being 62% Black, according to the coalition.
“Credit unions have a significantly higher denial rate for borrowers of color than the financial institutions that are covered by CRA like banks and the non-mortgage lenders,” said Marceline White, executive director of the program.
“In a state like Maryland where we know Prince George’s County is one of the wealthiest majority-Black counties in the country, it’s disturbing to see these kinds of denial rates across the state,” White added.
Advocates say a state-level CRA would complement the federal law by assessing performance in individual counties and addressing underserved communities.
A Maryland CRA would apply to banks and credit unions with about $46 billion in assets and cover mortgage companies that made more than 68,000 loans over three years, according to the National Community Reinvestment Coalition.
“The reason why you want this is because not all banks and credit unions are doing a great job in serving underserved communities,” said Josh Silver, a senior fellow with the coalition. “So you want to encourage the ones that are behind to do better.”
President Jimmy Carter signed the CRA into law in 1977, nine years after Congress passed the Fair Housing Act, which outlawed the discriminatory practice known as redlining. The CRA focused on the credit needs of low- and moderate-income communities, as well as curbing discriminatory bank lending through loans, investments, products and services.
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“The banking industry has changed dramatically since 1977 and emerging technologies as well as the growth of non-bank lenders means there is a need to modernize, expand, and strengthen CRA to meet the needs of our communities and marketplace today,” Economic Action Maryland said in its position paper.
And data shows that “race is a more significant predictor of denial than income or creditworthiness,” the group said.
Lenders subject to the CRA are overseen by the Federal Deposit Insurance Corp., the Federal Reserve Board and the Office of the Comptroller of the Currency. These regulators provide information on the banks they oversee, as well as the banks’ CRA ratings and performance evaluations.
On a federal level, banks pass their exams around 98% of the time even as “bank lending patterns continue to exacerbate existing racial inequalities,” according to Economic Action Maryland.
The advocacy group has called for establishing CRA requirements for mortgage companies and credit unions, expanding grading requirements to include “assessments of lending in distressed or underserved communities or populations,” examining performance by county, and creating stronger enforcement mechanisms.
“The banks that are doing better are required by law to make sure that they are trying to reduce these kind of lending disparities,” White said. “If they want to grow and merge with another organization, having a poor record could affect their ability to do so.”
Maryland would not be the first state to enact a state-level CRA. Connecticut, Massachusetts, New York and Illinois have extended their own regulations to non-banks and credit unions. Massachusetts was the first to do so.
After the enactment of the Massachusetts CRA, the number of both Black and Hispanic credit union applicants rose significantly from 2019 to 2020, according to the Massachusetts government.
With Democratic Gov. Wes Moore’s swearing in this year, there is hope among advocates that Maryland will join the list of states with a state-level CRA in the next year or two.
“We’re working with Economic Action Maryland and the state legislature for introducing a bill, hopefully in the next session,” Silver said of the coalition. “Obviously, we hope the legislature passes it and Governor Moore signs it.”
Moore’s office did not respond to a request for comment.
Bank of America (BofA) prevailed in a court case brought against it by Cook County, Illinois, which sued the bank alleging predatory mortgage loans to Black and Hispanic borrowers in the Chicago area. The news was first reported by Bloomberg Law.
Cook County initially sued BofA and other banks in 2014, alleging that the company had violated the Fair Housing Act in making credit too easily available to borrowers in the Chicagoland area with mortgages the county described as “unchecked or improper.”
When the borrowers could not repay these mortgages, the county alleged that it was hurt as a result of vacant properties and lost taxes and fees.
When the District Court of Northern Illinois sided with Bank of America in the 2014 case, Cook County appealed to the Court of Appeals for the Seventh Circuit. This week, that court affirmed the lower court’s decision and sided with BofA, finding that Cook County was “at best a tertiary loser” — with its injury deriving from the injuries to the borrowers and banks —and not the proper plaintiff.
The Fair Housing Act only provides relief for more immediate injuries, according to Judge Frank H. Easterbrook in his decision cited by Bloomberg Law. Cook County, the judge said, was too far removed from the alleged predatory lending scheme to be considered the proper plaintiff.
“The banks are secondary losers, for they did not collect the interest payments that the borrowers promised to make and often did not recover even the principal of the loans in foreclosure sales,” Easterbrook wrote in his published opinion.
Circuit Judge Kenneth F. Ripple wrote in a concurring opinion that the dismissal should be affirmed due to an exclusion of testimonies from two expert witnesses called by Cook County. Without them, two of the three county claims against BofA had less merit, but the lower court was appropriate in its exclusionary discretion because it found the statements of the witnesses unreliable Ripple wrote.
The presence of an alleged scheme was also not supported, he said.
“As the district court explained, the record does not support the County’s suggestion that the defendants engaged in a coordinate scheme to target minority borrowers for loans that they could not afford in order to provoke defaults and foreclosures,” Ripple wrote.
The median price of a home in Los Angeles will soon cross a startling threshold: $1 million. The median price of a home in California, meanwhile, is approaching $750,000, according to Zillow. That is more than double the national median and more than triple the figure in Ohio.
This is the definition of housing unaffordability.
Homeownership is becoming farther and farther out of reach for more and more Californians. As of 2019, only 55% of Californians, and just 36% of Black Calfornians, owned a home. The American Dream is increasingly living up to its name — by being no more than a dream — in California.
This isn’t just about homeownership. Renters face proportionate price increases. For the first time, the median monthly rent in the United States rose above $2,000 in the last year, and it’s closing in on $3,000 in California. Many people can’t afford to buy or rent a home here.
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The cost of housing is high for many reasons, including the cost of labor and materials and myriad environmental regulations and mandates, many of them important. But chief among the reasons are supply restrictions. As with any other commodity, if you restrict the supply of housing, you can charge more for it.
This is essentially what zoning and other restrictive land-use regulations do. So it’s no wonder that a wealth of empirical evidence has shown that restrictive zoning makes housing more expensive.
The Los Angeles region has been a prolific producer of such restrictions. A study I led last year found that 78% of residential land in the Greater Los Angeles region and 74% in the city of Los Angeles itself was zoned exclusively for single-family homes, prohibiting apartment buildings and other multifamily developments.
We also found that home prices were correlated with the degree of stringent and exclusionary zoning in every community in the region. So were racial diversity and segregation.
UC Berkeley’s Terner Center modeled six different housing policies for Los Angeles and found that the single intervention with the biggest impact on supply growth was loosening density restrictions.
Yes, California has eased single-family zoning, the ultimate density restriction, by allowing more “accessory dwelling units” — backyard cottages, in-law units and the like — and through “plex” reforms, which allow homeowners to subdivide and redevelop parcels for duplexes and four-plexes. But these measures are too modest to bend this wicked cost curve.
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What we need is deeper density, more multifamily housing and “missing middle” developments that provide a variety of designs suitable to different incomes. We need localities to allow it, and we need the state to mandate it.
What’s at stake is nothing less than the old notion that people born on the lower rungs of the income and wealth ladder can climb higher, the only limit being their ambition and effort. Since World War II, a prominent pillar of this widespread belief has been homeownership. New-Deal-era laws, financial institutions and the GI Bill created the 30-year mortgage, and suburban developers sold homeownership to tens of millions of (mostly white) Americans.
It worked. In 1940, just 44% of Americans owned their own home. By 1950, that figure had reached 55%, and it steadily climbed in every subsequent decade until the subprime mortgage crisis of 2007. By 2000, 67% of Americans owned their own home.
These figures, however, mask enormous disparities. In 2020, white homeownership reached a postwar peak of 75%, while Black homeownership lagged far behind at 44%, only slightly higher than it was in 1970, the year the Fair Housing Act took effect.
Huge generational disparities also persist. Older Americans are far more likely to own their homes; younger generations are struggling to catch up.
One major obstacle to closing these gaps is that the cost of homeownership has soared relative to incomes. According to data from the Federal Housing Finance Agency, the price of housing in the United States rose an average of 4.6% per year from 1975 through 2022, outpacing economic growth and wages. The rate in California was an astonishing 6.7% a year, higher than in any other state.
While it’s true that housing appreciation hasn’t matched the stock market — the S&P 500 rose almost 12% annually on average during the same period — this also underscores the problem. Housing and shelter are a human necessity; stocks are not. And yet housing in the United States and particularly California has become an investment vehicle available to far fewer of us.
For many Americans fortunate enough to own a home, it’s their largest investment — a nest egg for retirement or an asset to borrow against to raise cash for an emergency or a child’s college education. Many homeowners therefore place a premium on maximizing not just the present value of their asset but also its future appreciation.
This is why homeowners not only upgrade kitchens, cabinets and bathrooms, but also fight against multifamily housing, affordable housing and homeless shelters in their neighborhoods and communities in an effort to protect their investments. These “homevoters” will fight to the hilt to prevent any loosening of zoning restrictions.
Overcoming this impulse and undoing restrictive zoning won’t make housing affordable or revive the American Dream on its own. If we don’t, however, the dream will become an impossibility for most of us.
Stephen Menendian is the assistant director and director of research at UC Berkeley’s Othering and Belonging Institute.
HSBC’s U.S. division is under federal investigation for potentially engaging in discrimination against minority borrowers in six metropolitan areas.
The U.S. Department of Housing and Urban Development is reviewing the bank’s lending practices in majority Black and Hispanic neighborhoods within the six regions, HSBC disclosed in a regulatory filing Tuesday.
The geographic areas where HSBC is facing scrutiny include New York, Seattle and four parts of California — Los Angeles, San Francisco, Oakland and Orange County — according to the National Community Reinvestment Coalition, which filed a complaint that prompted the HUD investigation.
After the NCRC filed the complaint, HUD has been investigating whether HSBC violated federal law by engaging in discriminatory lending practices between 2018 and 2021, the bank’s filing states.
Alan Pyke, an NCRC spokesperson, said in an email that his organization, which advocates for community groups nationwide on financial and investment issues, filed the complaint earlier this year.
“Lending redlining is a violation of the Fair Housing Act,” Pyke said. The NCRC based its complaint on data suggesting “unfair treatment of disenfranchised communities and individuals,” he said.
The nonprofit group is focused on working with government agencies to “pursue any remedies they deem appropriate,” Pyke said.
A spokesperson for HSBC USA declined to comment. HUD did not respond to a request for comment.
HSBC’s U.S. arm has previously faced scrutiny in connection with fair-lending laws.
In 2016, the London-based bank agreed to a $601 million settlement with 49 U.S. states and numerous federal agencies — including HUD, the Department of Justice, the Consumer Financial Protection Bureau and the Federal Reserve — over allegations related to discriminatory mortgage lending and foreclosure practices.
In 2021, Attorney General Merrick Garland launched an interagency initiative to combat redlining.
Earlier this year, City National Bank, a unit of Royal Bank of Canada, agreed to pay a $31 million fine in the largest redlining settlement in U.S. history. The Department of Justice alleged that City National discouraged Black and Hispanic customers from applying for home loans.
In March, Park National Bank agreed to a $9 million settlement over redlining allegations in Columbus, Ohio. And last month, the DOJ announced that ESSA Bank & Trust will pay over $3 million to resolve similar allegations in the Philadelphia metro market.
In 2022, HSBC sold 10 California branch locations, along with loans and deposits associated with its West Coast consumer banking business, to Cathay General Bancorp.
The sale was part of HSBC’s broader pullback in U.S. retail banking, which also included the sale of 80 branches, mostly in the New York metropolitan area, to Citizens Financial Group.
The Jefferson Avenue commercial district in Buffalo, New York, is anchored by a supermarket.
There are dozens of other businesses and services along the 12-block corridor — a couple of bank branches, a library, a coffee shop, gas stations, a small plaza with a dollar store and a primary care clinic and a business incubator for entrepreneurs of color.
But Tops Friendly Markets, the only grocery store on Buffalo’s vast East Side, is the center of activity. More than just a place to buy food, pick up medications and use an ATM, the store is a communal gathering space in a predominantly Black neighborhood that, for generations, has been segregated, isolated and disenfranchised from the wealthier — and whiter — parts of the city.
Which explains how it came to be the site of a mass shooting on a spring day in May of last year. On that Saturday, a gunman, who lived 200 miles away in another part of the state, drove to Jefferson Avenue and went into Tops, and in just a few minutes killed 10 people, injured three and inflicted mass trauma across the community.
It is a scenario that has sadly, and repeatedly, played out in other parts of the country that have experienced mass shootings. But this one came with a twist: The gunman’s intention was to kill as many Black people as possible.
To achieve that, he specifically targeted a ZIP code with one of the highest percentages of Black residents in New York state. All 10 who died that day were Black.
“The mere fact that someone can research, ‘Where will the greatest number of Black people be … on a Saturday morning,’ that’s not by chance,” said Franchelle Parker, a community organizer and executive director of Open Buffalo, a nonprofit focused on racial, economic and ecological justice. “That’s not a mistake. It’s a community that’s been deeply segregated for decades.”
The day of the shooting, Parker, who grew up in nearby Niagara Falls, was driving to Tops, where she planned to buy a donut and an unsweetened iced tea before heading into the Open Buffalo office, which is located a block away from Tops. The mother of two had intended to complete the mundane task of cleaning up her desk — “old coffee cups and stuff” — after a busy week.
She saw the news on Twitter and didn’t know if she should keep driving to Jefferson Avenue or turn around and go back home. She eventually picked the latter.
When she showed up the next day, there were thousands of people grieving in the streets. “The only way that I could explain my feeling, it was almost like watching an old war movie when a bomb had gone off and someone’s in, like, shell shock. That’s how it felt,” said Parker, vividly recounting the community’s collective trauma in a meeting room tucked inside of Open Buffalo’s second-story office on Jefferson Avenue.
Almost immediately following the May 14, 2022, massacre, which was the second-deadliest mass shooting in the United States last year, conversations locally and nationally turned to the harsh realities of the East Side and how long-standing factors that affect the daily life of residents — racism, poverty and inequity — made the community an ideal target for a white supremacist.
Now, more than a year after the tragedy, there is growing concern that not enough is being done fast enough to begin to dismantle those factors. And amid those conversations, there are mounting calls for the banking industry — whose historical policies and practices helped cement the racial segregation and disinvestment that ultimately shaped the East Side — to leverage its collective power and influence to band together in an effort to create systemic change.
The ideas about how banks should support the East Side and better embed themselves in the neighborhood vary by people and organizations. But the basic argument is the same: Banks, in their role as financiers and because of the industry’s history of lending discrimination, are obligated to bring forth economic prosperity in disinvested communities like the East Side.
I know banks are often looked upon sort of like a panacea, but I don’t particularly see it that way. I think others have a role to play in all of this.
Chiwuike Owunwanne, corporate responsibility officer at KeyBank
“Banks have been very good at providing charitable contributions to the Black community. They get an ‘A’ for that,” said The Rev. George Nicholas, an East Side pastor who is also CEO of the Buffalo Center for Health Equity, a four-year-old enterprise focused on racial, geographic and economic health disparities. “But doing the things that banks can do in terms of being a catalyst for revitalization and investment in this community, they have not done that.”
To be sure, banks’ ability to reverse the course of the community isn’t guaranteed — and there is no formula to determine how much accountability they should hold to fix deeply entrenched problems like racism. Several Buffalo-area bankers said that while the Tops shooting heightened the urgency to help the East Side, the industry itself cannot be the sole driver of change.
“There are a lot of institutions … that can certainly play a part in reversing the challenges that we see today,” said Chiwuike “Chi-Chi” Owunwanne, a corporate responsibility officer at KeyBank, the second-largest bank by deposits in Buffalo. “I know banks are often looked upon sort of like a panacea, but I don’t particularly see it that way. I think others have a role to play in all of this.”
A long history of segregation
How the East Side — and the Tops store on Jefferson Avenue — became the destination for a racially motivated mass murderer is a story about racism, segregation and disinvestment.
Even as it bears the nickname “the city of good neighbors,” Buffalo has long been one of the most racially segregated cities in the United States. Of the 114,965 residents who live on the East Side, 59% are Black, according to data from the 2021 U.S. Census American Community Survey. The percentage is even higher in the 14208 ZIP code, where the Tops store is located. In that ZIP code, among 11,029 total residents, nearly 76% are Black, the census data shows.
The city’s path toward racial segregation started in the early 20th century when a small number of job-seeking Black Americans migrated north to Buffalo, a former steel and auto manufacturing hub at the far northwestern end of New York state. Initially, they moved into the same neighborhoods as many of the city’s poorer immigrants and lived just east of what is today the city’s downtown district. As the number of Blacks arriving in Buffalo swelled in the 1940s, they were increasingly confronted with various housing challenges, including racist zoning laws and restrictive deed covenants that kept them from buying homes in more affluent white areas.
Black Buffalonians also faced housing discrimination in the form of redlining, the practice of restricting the flow of capital into minority communities. In 1933, as the Great Depression roiled the economy, a temporary federal agency known as the Home Owners’ Loan Corporation used government bonds to buy out and refinance mortgages of properties that were facing or already in foreclosure. The point was to try to stabilize the nation’s real estate market.
As part of its program, HOLC created maps of American cities, including Buffalo, that used a color coding scheme — green, blue, yellow and red — to convey the perceived riskiness of making loans in certain neighborhoods. Green was considered minimally risky; other areas that were largely populated by immigrant, Black or Latino residents were labeled red and thus determined to be “hazardous.”
“The goal was to free up mortgage capital by going to cities and giving banks a way to unload mortgages, so they could turn around and make more mortgage loans,” said Jason Richardson, senior director of research at the National Community Reinvestment Coalition, an association of more than 750 community-based organizations that advocates for fair lending. “It was kind of a radical concept and it has evolved over the decades into our modern mortgage finance system.”
The Federal Housing Administration, which was established as a permanent agency in 1934, used similar methods to map urban areas and labeled neighborhoods from “A” to “D,” with “A” considered to be the most financially stable and “D” considered the least. Neighborhoods that were largely Black, even relatively stable ones, were put in the “D” category.
The result was that banks, which wanted to be able to sell mortgage loans to the FHA, were largely dissuaded from making loans in “risky” areas. And Buffalo’s East Side, where the majority of Blacks were settling, was deemed risky. Unable to get loans, Blacks couldn’t buy homes, start businesses or build equity. At the same time, large industrial factories on the East Side were closing or moving away, limiting job opportunities and contributing to rising poverty levels.
“Today what we’re left with is the residue of this process where we’ve enshrined … a pattern of economic segregation that favors neighborhoods that had fewer Black people in them and generally ignores neighborhoods that had African Americans living in them,” Richardson said.
Case in point: Research by the National Community Reinvestment Coalition shows that three-quarters of neighborhoods that were once redlined are low- to moderate-income neighborhoods today, and two-thirds of them are majority minority communities.
Adding to the division between Blacks and whites in Buffalo was the construction of a highway called the Kensington Expressway. Built during the 1960s, the below-grade, limited-access highway proved to be a speedy way for suburban workers to get to their downtown jobs. But its construction cut off the already-segregated East Side even more from other parts of the city, displacing residents, devaluing houses and destroying neighborhoods and small businesses.
As a result of those factors and more, many Black residents have become “trapped” on the East Side, according to Dr. Henry Louis Taylor Jr., a professor of urban and regional planning at the University at Buffalo. In 1987, Taylor founded the UB Center for Urban Studies, a research, neighborhood planning and community development institute that works on eliminating inequality in cities and metropolitan regions. In September 2021, eight months before the Tops shooting, the Center for Urban Studies published a report that compared the state of Black Buffalo in 1990 to present-day conditions. The conclusion: Nothing had changed for Blacks over 31 years.
As of 2019, the Black unemployment rate was 11%, the average household income was $42,000 and about 35% of Blacks had incomes that fell below the poverty line, the report said. It also noted that just 32% of Blacks own their homes and that most Blacks in the area live on the East Side.
“Those figures remain virtually unchanged while the actual, physical conditions that existed inside of the community worsened,” Taylor told American Banker in an interview in his sun-filled office at the center, located on the University at Buffalo’s city campus. “When we looked upstream to see what was causing it, it was clear: It was systemic, structural racism.”
Banks’ moral obligations
As the East Side struggled over the decades with rampant poverty, dilapidated housing, vacant lots and disintegrating infrastructure, banks kept a physical presence in the community, albeit a shrinking one. In mid-2000, there were at least 20 bank branches scattered across the East Side, but by mid-2022, the number had fallen to around 14, according to the Federal Deposit Insurance Corp.’s deposit market share data. The 14 include four new branches that have opened since early 2019 — Northwest Bank, KeyBank, Evans Bank and BankOnBuffalo.
The first two branches, operated by Northwest in Columbus, Ohio, and KeyBank, the banking subsidiary of KeyCorp in Cleveland, were requirements of community benefits agreements negotiated between each bank and the National Community Reinvestment Coalition. In both cases, Northwest and KeyBank agreed to open an office in an underserved community.
Evans Bank opened its first East Side branch in the fall of 2021. The office is located in the basement of an $84 million affordable senior housing building that was financed by Evans, a $2.1 billion-asset community bank headquartered south of Buffalo in Angola, New York.
Banks have been very good at providing charitable contributions to the Black community. They get an ‘A’ for that. But doing the things that banks can do in terms of being a catalyst for revitalization and investment in this community, they have not done that.
The Rev. George Nicholas, an East Side pastor who is also CEO of the Buffalo Center for Health Equity
On the community and economic development front, banks have had varying levels of participation. Buffalo-based M&T Bank, which holds a whopping 64% of all deposits in the Buffalo market and is one of the largest private employers in the region, has made consistent investments in the East Side by supporting Westminster Community Charter School, a kindergarten through eighth-grade school, and the Buffalo Promise Neighborhood, a nonprofit organization focused on improving access to education in the city’s 14215 ZIP code.
Currently, Buffalo Promise Neighborhood operates four schools. In addition to Westminster, it runs Highgate Heights Elementary, also K-8, as well as two academies that serve children ages six weeks through pre-kindergarten. Twelve M&T employees are dedicated to the program, according to the Buffalo Promise Neighborhood website. The bank has invested $31.5 million into the program since its 2010 launch, a spokesperson said.
Other banks are making contributions in other ways. In addition to the Jefferson Avenue branch and as part of its community benefits plan, Northwest Bank, a $14.2 billion-asset bank, supports a financial education center through a partnership with Belmont Housing Resources of Western New York. Meanwhile, the $198 billion-asset KeyBank gave $30 million for bridge and construction financing for Northland Workforce Training Center, a $100 million redevelopment project at a former manufacturing complex on the East Side that was partially funded by the state.
BankOnBuffalo’s East Side branch is located inside the center, which offers KeyBank training in advanced manufacturing and clean energy technology careers. A subsidiary of $5.6 billion-asset CNB Financial in Clearfield, Pennsylvania, BankOnBuffalo’s office opened a month after the shooting. The timing was coincidental, but important, said Michael Noah, president of BankOnBuffalo.
“I think it just cemented the point that this is a place we need to be, to be able to be part of these communities and this community specifically, and be able to build this community up,” Noah said.
In terms of public-private collaboration, some banks have been involved in a deeper way. In 2019, New York state, which had already been pouring $1 billion into Buffalo to help revitalize the economy, announced a $65 million economic development fund for the East Side. The initiative is focused on stabilizing neighborhoods, increasing homeownership, redeveloping commercial corridors including Jefferson Avenue, improving historical assets, expanding workforce training and development and supporting small businesses and entrepreneurship.
In conjunction with the funding, a public-private partnership called East Side Avenues was created to provide capital and organizational support to the projects happening along four East Side commercial corridors. Six banks — Charlotte, North Carolina-based Bank of America, the second-largest bank in the nation with $2.5 trillion of assets; M&T, which has $203 billion of assets; KeyBank; Warsaw, New York-based Five Star Bank, which has about $6 billion of assets; Northwest and Evans — are among the 14 private and philanthropic organizations that pledged a combined $8.4 million to pay for five years’ worth of operational support, governance and finance, fundraising and technical assistance to support the nonprofits doing the work.
Laura Quebral, director of the University at Buffalo Regional Institute, which is managing East Side Avenues, said the banks were the first corporations to step up to the request for help, and since then have provided loans and other products and education to keep the program moving.
Their participation “is a signal to the community that banks cared and were invested and were willing to collaborate around something,” Quebral said. “Being at the table was so meaningful.”
Richard Hamister is Northwest’s New York regional president and former co-chair of East Side Avenues. Hamister, who is based in Buffalo, said banks are a “community asset” that have a responsibility to lift up all communities, including those where conditions have arisen that allow it to be a target of racism like the East Side.
“We operate under federal charters, so we have an obligation to the community to not only provide products and services they need but also support when you go through a tragedy like that,” Hamister said. “We also have a moral obligation to try to help when things are broken … and to do what we can. We can’t fix everything, but we’ve got to fix our piece and try to help where we can.”
In the wake of a tragedy
After the massacre, there was a flurry of activity within banks and other organizations, local and out-of-town, to respond to the immediate needs of East Side residents. With the community’s only supermarket closed indefinitely, much of the response centered around food collection and distribution. Three of M&T’s five East Side branches, including the Jefferson Avenue branch across the street from Tops, became food distribution sites for weeks after the shooting. On two consecutive Fridays, Northwest provided around 200 free lunches to the community, using a neighborhood caterer who is also the bank’s customer. And BankOnBuffalo collected employee donations that amounted to more than 20 boxes of toiletries and other items that were distributed to a nonprofit.
At the same time, M&T, KeyBank and other banks began financial donations to organizations that could support the immediate needs of the community. KeyBank provided a van that delivered food and took people to nearby grocery stores. Providence, Rhode Island-based Citizens Financial Group, whose ATM inside Tops was inaccessible during the store’s temporary closure, installed a fee-free ATM near a community center located about a half-mile north of Tops, and later put a permanent ATM inside the center that remains there today. And M&T rolled out a short-term loan program to provide capital to East Side small-business owners.
One of the funds that benefited from banks’ support was the Buffalo Together Community Response Fund, which has raised $6.2 million to address the long-term needs of the East Side.
Bank of America and Evans Bank each donated $100,000 to the fund, whose list of major sponsors includes four other banks — JPMorgan Chase, Citigroup, M&T and KeyBank. Thomas Beauford Jr., a former banker who is co-chair of the response fund, said banks, by and large, directed their resources into organizations where the dollars would have an immediate impact.
“Banks said, ‘Hey, you know … it doesn’t make sense for us to try to build something right now. … We will fund you in the work you’re doing,'” said Beauford, who has been president and CEO of the Buffalo Urban League since the fall of 2020. “I would say banks showed up in a big way.”
Fourteen months later, banks say they are committed to playing a positive role on the East Side. For the second year, KeyBank is sponsoring a farmers’ market on the East Side, an attempt to help fill the food desert in the community. Last fall, BankOnBuffalo launched a mobile “bank on wheels” truck that’s stationed on the East Side every Wednesday. The 34-foot-long truck, which is staffed by two people and includes an ATM and a printer to make debit cards, was in the works before the shooting, and will eventually make four stops per week around the Buffalo area.
Evans has partnered with the city of Buffalo to construct seven market-rate single family homes on vacant lots on the East Side. The relationship with the city is an example of how banks can pair up with other entities to create something meaningful and lasting, more than they might be able to do on their own, said Evans President and CEO David Nasca.
The bank has “picked areas” where it can use its resources to make a difference, Nasca said.
“I don’t think the root causes can be ameliorated” by banks alone, he said. “We can’t just grant money. It has to be within our construct of a financial institution that invests and supports the public-private partnership. … All the oars [need to be] pulling together or this doesn’t work.”
‘Little or no engagement with minorities’
All of these efforts are, of course, welcomed by the community, but there is still criticism that banks haven’t done enough to make up for their past contributions to segregating the city. And perhaps more importantly, some of that criticism centers on banks failing to do their most basic function in society — provide credit.
In 2021, the New York State Department of Financial Services issued a report about redlining in Buffalo. The regulator looked at banks and nonbank lenders and found that loans made to minorities in the Buffalo metro area made up 9.74% of total loans in Buffalo. Overall, Black residents comprise about 33% of Buffalo’s total population of more than 276,000, census data shows.
The department said its investigation showed the lower percentage was not due to “excessive denials of loan applications based on race or ethnicity,” but rather that “these companies had little or no engagement with minorities and generally made scant effort to do so.”
“The unsurprising result of this has been that few minority customers or individuals seeking homes in majority-minority neighborhoods have made loan applications … in the first instance.”
Furthermore, accusations of redlining persist today, even though the practice of discriminating in housing based on race was outlawed by the Fair Housing Act of 1968.
In 2014, Evans was accused of redlining by the New York State Attorney General, which said the community bank was specifically avoiding making mortgage loans on the East Side. The bank, which at the time had $874 million of assets, agreed to pay $825,000 to settle the case, but Nasca maintains that the charges were unfounded. He points to the fact that the bank never had a fair lending or fair housing violation, no specific incidents were ever claimed and that the bank’s Community Reinvestment Act exam never found evidence of discriminatory or illegal credit practices.
The bank has a greater presence on the East Side today, but that’s because it has grown in size, not because it is trying to make up for previous accusations of redlining, he said.
“Ten years ago, our involvement [on the East Side] certainly wasn’t what you’re seeing today,” Nasca said. “We were looking to participate more, but we were participating within our means and our reach. As we have grown, we have built more resources to be able to do more.”
Shortly after accusations were made against Evans, Five Star Bank, the banking arm of Financial Institutions in Warsaw, New York, was also accused of redlining by the state Attorney General. Five Star, which has been growing its presence in the Buffalo market for several years, wound up settling the charges for $900,000 and agreeing to open two branches in the city of Rochester.
KeyBank is currently being accused of redlining by the National Community Reinvestment Coalition. In a 2022 report, the group said that KeyBank is engaging in systemic redlining by making very few home purchase loans in certain neighborhoods where the majority of residents are Black. Buffalo is one of several cities where the bank’s mortgage lending “effectively wall[ed] out Black neighborhoods,” especially parts of the East Side, the report said.
KeyBank denied the allegations. In March, the coalition asked regulators to investigate the bank’s mortgage lending practices.
Beyond providing more credit, some community members believe that banks should be playing a larger role in addressing other needs on the East Side. And the list of needs runs the gamut from more grocery stores to safe, affordable housing to infrastructure improvements such as street and sidewalk repairs.
Alexander Wright is founder of the African Heritage Food Co-op, an initiative launched in 2016 to address the dearth of grocery store options on the East Side, where he grew up. Wright said that while banks’ philanthropic efforts are important, banks in general “need to be in a place of remediation” to fix underlying issues that the industry, as a whole, helped create. (After publication of this story, Wright left his job as CEO of the African Heritage Food Co-Op.)
Aside from charitable donations, banks should be finding more ways to work directly with East Side business owners and entrepreneurs, helping them with capital-building support along the way, Wright said. One place to start would be technical assistance by way of bank volunteers.
“Banks are always looking to volunteer. ‘Hey, want to come out and paint a fence? Want to come out and do a garden?'” Wright said. “No. Come out here and help Keshia with bookkeeping. Come out here and do QuickBooks classes for folks. Bring out tax experts. Because these are things that befuddle a lot of small businesses. Who is your marketing person? Bring that person out here. Because those are the things that are going to build the business to self-sufficiency.
“Anything short of the capacity-building … that will allow folks to rise to the occasion and be self-sufficient I think is almost a waste,” Wright added. “We don’t need them to lead the plan. What we need them to do is be in the community and [be] hearing the plan and supporting it.”
Parker, of Open Buffalo, has similar thoughts about the role that banks should play. One day, soon after the massacre, an ATM appeared down the street from Tops, next to the library that sits across the street from Parker’s office. Soon after the ATM was installed, Parker began fielding questions from area residents who were skeptical of the machine and wanted to know if it was legitimate. But Parker didn’t have any information to share with them. “There was no outreach. There was no community engagement. So I’m like, ‘Let me investigate,'” she said. “I think that’s a symptom of how investment is done in Black communities, even though it may be well-intentioned.”
As it turns out, the temporary ATM belonged to JPMorgan Chase. The megabank has had a commercial banking presence in Buffalo for years, but it didn’t operate a retail branch in the region until last year. Today it has four branches in operation and plans to open another two by the end of the year, a spokesperson said.
After the Tops shooting, the governor’s office reached out to Chase asking if the bank could help in some way, the spokesperson said in response to the skepticism. The spokesperson said that while the Chase retail brand is new to the Buffalo region, the company has been active in the market for decades by way of commercial banking, private banking, credit card lending, home lending and other businesses.
In addition to the ATM, the bank provided funding to local organizations including FeedMore Western New York, which distributes food throughout the region.
“We are committed to continuing our support for Buffalo and helping the community increase access to opportunities that build wealth and economic empowerment,” the spokesperson said in an email.
In the year since the massacre, there has been some progress by banks in terms of their interest in listening to the East Side community and learning about its needs, said Nicholas. But he hasn’t felt an air of urgency from the banking community to tackle the issues right now.
“I do experience banks being a little more open to figuring out what their role is, but it’s slow. It’s slow,” said Nicholas. The senior pastor of the Lincoln Memorial United Methodist Church, located about a mile north from Tops, Nicholas is part of a 13-member local advisory committee for the New York arm of Local Initiatives Support Coalition, or LISC. The group is focused on mobilizing resources, including banks, to address affordable housing in Western New York, specifically in the inner city, as well as training minority developers and connecting them to potential investors, Nicholas said.
Of the 13 members, seven are from banks — one each from M&T, Bank of America, BankOnBuffalo, Evans and KeyBank, and two members from Citizens Financial Group. One of the priorities of LISC NY is health equity, and the fact that banks are becoming more engaged in looking at health disparities is promising, Nicholas said. Still, they have more work to do, he said.
“I need them to think more on how to strengthen and build the economy on the East Side and provide leadership around that, not only to provide charitable things, but using sound business and banking and community development principles to say, ‘OK, if we’re going to invest in this community, these are the types of things that need to happen in this community,’ and then encourage their partners and other people they work with … to come fully in on the East Side.”
Some bankers agree with the community activists.
“Putting a branch in is great. Having a bank on wheels is great,” said Noah of BankOnBuffalo. “But if you’re not embedded in the community, listening to the community and trying to improve it, you’re not creating that wealth and creating a better lifestyle for everyone.”
What could make a substantial difference in terms of banks’ impact on the community is a combination of collaboration and leadership, said Taylor. He supports the idea of banks leading the charge on the creation of a comprehensive redevelopment and reinvestment plan for the East Side, and then investing accordingly and collaboratively through their charitable foundations.
“All of them have these foundations,” Taylor said. “You can either spend that money in a strategic and intentional way designed to develop a community for the existing population, or you can spend that money alone in piecemeal, siloed, sectorial fashion that will look good on an annual report, but won’t generate transformational and generational changes inside a community.”
Banks might be incentivized to work together because it could mean two things for them, according to Taylor: First, they’d have an opportunity to spend money in a way that would have maximum impact on the East Side, and second, if done right, the city and the banks could become a model of the way to create high levels of diversity, equity and inclusion in an urban area.
“If you prove how to do that, all that does is open up other markets of consumption all over the country because people want to figure out how to do that same thing,” Taylor said.
Some of that is already happening, at least on a bank-by-bank case, said KeyBank’s Owunwanne. Through the KeyBank Foundation, the company is able to leverage different relationships that connect nonprofits to other entities and corporations that can provide help.
“I see this as an opportunity for us to make not just incremental changes, but monumental changes … as part of a larger group,” Owunwanne said “Again, I say that not to absolve the bank of any responsibility, but just as a larger group.”
Downstairs from Parker’s office, Golden Cup Coffee, a roastery and cafe run by a husband and wife team, and some other Jefferson Avenue businesses are trying to build up a business association for existing and potential Jefferson-area businesses. Parker imagined what the group could accomplish if one of the banks could provide someone on a part-time basis to facilitate conversations, provide administrative support and coordinate marketing efforts.
“In the grand scheme of things, when we’re talking about a multimillion dollar [bank], a part-time employee specifically dedicated to relationship-building and building out coalitions, it sounds like a small thing,” Parker said. “But that’s transformational.”
Mortgages are essential financial tools that create a pathway to homeownership for millions of Americans each year. In recent years, however, many homebuyers have struggled to obtain small mortgages to purchase low-cost homes, those priced under $150,000.1 This problem has garnered the attention of federal regulators, including the Federal Housing Administration (FHA) and the Consumer Financial Protection Bureau (CFPB), who view small mortgages as important tools to increase wealth-building and homeownership opportunities in financially undeserved communities.2
Research has explored mortgage access at different loan amounts, such as below $100,000 or $70,000, and found that small mortgages are scarce relative to larger home loans. Those analyses show that applications for small mortgages are more likely to be denied than those for larger loans, even when applicants have similar credit scores.3 Although the existing research has identified several possible contributing factors to the shortage of small mortgages, the full spectrum of causes and their relative influence are not well understood.4
The Pew Charitable Trusts set out to fill that gap by examining the availability of small mortgages nationwide, the factors that impede small mortgage lending, and the options available to borrowers who cannot access these loans. Pew researchers compared real estate transaction and mortgage origination data from 2018 to 2021 in 1,440 counties across the U.S.; looked at homeownership statistics; and reviewed the results from Pew’s 2022 survey of homebuyers who have used alternative financing methods, such as land contracts and rent-to-own agreements.5 (See the separate appendices document for more details.) This examination found that:
Small mortgages became less common from 2004 to 2021. Nationally, much of the decline in small mortgage lending is the result of home price appreciation, which continually pushes properties above the price threshold at which small mortgages could finance them. However, even after accounting for price changes, small mortgages are less available nationwide than they were two decades ago, although the decline varies by geography.
Most low-cost home purchases do not involve a mortgage. Despite rising prices, sales of low-cost homesremain common nationwide, accounting for more than a quarter of total sales from 2018 to 2021. However, just 26% of properties that sold for less than $150,000 were financed using a mortgage, compared with 71% of higher-cost homes.
Borrowers who cannot access small mortgages typically experience one of three undesirable outcomes. Some households cannot achieve homeownership, which deprives them of one of this nation’s key wealth-building opportunities. Others pay for their home purchase using cash, though this option is challenging for all but the most well-resourced households and is almost never available to first-time homebuyers. And, finally, some resort to alternative financing arrangements, which tend to be riskier and costlier than mortgages, because in most states they are poorly defined and not subject to robust—or sometimes any—consumer protections.
Structural and regulatory barriers limit the profitability of small mortgage lending. The most significant of these barriers is that the fixed costs of originating a mortgage are disproportionally high for smaller loans. Federal policymakers can help address these challenges by identifying opportunities to modernize certain regulations in ways that reduce lenders’ costs without compromising borrower protections.
Mortgages are the main pathway to homeownership
In the United States, homeownership remains a priority for most families: In one nationally representative survey, 74% of respondents said owning a home is an integral part of the American Dream.6 Some Americans value homeownership for personal reasons, citing it as a better option for their family, their sense of safety and security, and their privacy.7 Still others emphasized homeownership’s financial benefits, noting that owning makes more economic sense than renting, enables them to take advantage of their home’s resale value, and can provide substantial tax benefits.8
But regardless of their reasons for buying homes, most American families rely on mortgages to gain access to homeownership because they cannot afford to purchase a home with cash. According to a survey conducted from July 2021 to June 2022, 78% of homebuyers financed their purchases with mortgages, most of which were fixed-rate loans. Mortgages are even more prevalent among first-time homebuyers: 97% used a mortgage to purchase their starter home.9 Given the predominance of mortgages, it is no surprise that changes in mortgage availability have closely correlated with shifts in the nation’s homeownership rate over the past two decades.10 (See Figure 1.)
Mortgages not only enable homeownership, but they also enhance its financial benefits. In most cases, these loans help borrowers purchase larger or more valuable homes than they could otherwise afford. Fixed-rate mortgages also serve as a hedge against inflation and offer borrowers housing cost certainty in the form of a predictable schedule of payments for the duration of the loan.
In addition, mortgages are subject to robust consumer protections. Most mortgages include inspection and appraisal contingencies, which ensure that homes meet minimum habitability standards and that the sale price reflects the home’s true market value, respectively.11 Further, real estate transactions involving mortgages typically include a clear process for transferring the property’s title from seller to buyer, which is a crucial step in guaranteeing that borrowers can demonstrate ownership of their property. And in the event of default, CFPB rules contain clear foreclosure and delinquency processes that give mortgage borrowers an opportunity to make any missed payments and retain their homes.12
Because of these advantages, financing a home purchase with a mortgage is almost always in buyers’ best interest. However, homebuyers seeking loans under $150,000 are often unable to find a mortgage and so are deprived of the benefits of homeownership, of mortgages, or both.
Small mortgages are scarce
Small mortgages are less common today than they were before the Great Recession, when lenders issued small and large mortgages in roughly equal measure. In 2004, for example, lenders originated 2.7 million mortgages for less than $150,000 (in 2004 dollars) and 2.9 million large mortgages—those of $150,000 or more. But Pew estimates that from 2004 to 2021, small mortgage lending fell by nearly 70% to 830,000 loans a year, while large mortgage lending grew by 52% to 4.4 million loans annually. The decline was more acute in certain parts of the country. For instance, the Federal Reserve Bank of Philadelphia found that small mortgages declined by only 28% in Pennsylvania and Delaware from 2019 to 2021 but fell by 43% in New Jersey over the same span.13
Some of the decrease in small mortgage lending can be explained by rising home prices. As homes become more expensive, fewer properties can be purchased using a small mortgage. And the issue of housing affordability has grown more acute over the past two decades. According to the Zillow Home Value Index, single-family home prices rose faster than the rate of inflation from 2004 to 2021. Furthermore, those increases were largest among lower-priced homes.14 Still, home price appreciation does not fully account for the decline in small mortgage lending. (See Figure 2.)
Although low-cost properties are scarcer than they once were, they continue to be bought and sold in large numbers across the country. But the share of those homes purchased with a mortgage is far lower than that for higher-priced properties. From 2018 to 2021, the 1,440 counties Pew studied collectively recorded about 20 million home sales, of which 5.3 million were for less than $150,000. Although the share of low-cost properties varied based on local market conditions, every county in this analysis recorded at least one low-cost sale. During the same period, lenders originated about 12.1 million mortgages in the counties Pew studied, including roughly 1.4 million for purchases under $150,000.15 Based on these mortgage origination and home sale figures, Pew estimates that about 71% of homes priced at $150,000 or more were financed using a mortgage, compared with just 26% of lower-cost homes. (See Figure 3.) This amounts to a financing gap of 44 percentage points, or about 560,000 home purchases that were not financed with small mortgages.
Importantly, however, this analysis probably overstates the magnitude of the financing gap for two key reasons. First, Pew is unable to observe the physical quality of the homes purchased in the studied counties. Evidence suggests that low-cost homes are more likely than higher-cost homes to have structural deficiencies that disqualify them from mortgage financing. Second, even if small mortgages are readily available, many sellers, and probably some buyers, are likely to prefer cash transactions. (See “Cash purchases” below for more details.) Still, these factors do not fully account for the gap in small mortgage financing.
What happens when people cannot get a small mortgage?
When prospective buyers of low-cost homes cannot access a small mortgage, they typically have three options: turn to alternative forms of financing such as land contracts, lease-purchases, or personal property loans; purchase their home using cash; or forgo owning a home and instead rent or live with family or friends. Each of these outcomes has significant disadvantages relative to buying a home using a small mortgage.
Alternative financing
Many alternative financing arrangements are made directly between a seller and a buyer to finance the sale of a home and are generally costlier and riskier than mortgages.16 For example, personal property loans—an alternative arrangement that finances manufactured homes exclusive of the land beneath them—have median interest rates that are nearly 4 percentage points higher than the typical mortgage issued for a manufactured home purchase.17 Further, research in six Midwestern states found that interest rates for land contracts—arrangements in which the buyer pays regular installments to the seller, often for an agreed upon period of time—ranged from zero to 50%, with most above the prime mortgage rate.18 And unlike mortgages, which are subject to a robust set of federal regulations, alternative arrangements are governed by a weak patchwork of state and federal laws that vary widely in their definitions and protections.19
But despite the risks, millions of homebuyers continue to turn to alternative financing. Pew’s first-of-its-kind survey, fielded in 2021, found that 36 million people use or have used some type of alternative home financing arrangement.20 And a 2022 follow-up survey on homebuyers’ experiences with alternative financing found that these arrangements are particularly prevalent among buyers of low-cost homes. From 2000 to 2022, 50% of borrowers who used these arrangements purchased homes under $150,000. (See the separate appendices document for survey toplines.)
Further, the 2022 survey found that about half of alternative financing borrowers applied—and most reported being approved or preapproved—for a mortgage before entering into an alternative arrangement. Pew’s surveys of borrowers, interviews with legal aid experts, and review of research on alternative financing shed some light on the advantages of alternative financing—despite its added costs and risks—compared with mortgages for some homebuyers:
Convenience. Alternative financing borrowers do not have to submit or sign as many documents as they would for a mortgage, and in some instances, the purchase might close more quickly.21 For example, Pew’s 2022 survey found that just 67% of respondents said they had to provide their lender with bank statements, pay stubs, or other income verification and only 60% had to furnish a credit report, credit score, or other credit check, all of which are standard requirements for mortgage transactions.
Upfront costs. Some alternative financing arrangements have lower down payment requirements than do traditional mortgages.22 Borrowers who are unable to afford a substantial down payment or who want small monthly payments may find alternative financing more appealing than mortgages, even if those arrangements cost more over the long term. For example, in Pew’s 2022 survey, 23% of respondents said they did not pay a down payment, deposit, or option fee. And among those who did have a down payment, 75% put down less than 20% of the home price, compared with 59% of mortgage borrowers in 2021.23
Specifics of a home. Borrowers who prioritize the location or amenities of a specific home over the type, convenience, and cost of financing they use might agree to an alternative arrangement if the seller insists on it, rather than forgo purchasing the home.
Familiarity with seller. Borrowers buying a home from family or friends might agree to a transaction that is preferable to the seller because they trust that family or friends will give them a fair deal, perhaps one that is even better than they would get from a mortgage lender.
However, regardless of a borrower’s reasons, the use of alternative financing is cause for concern because it is disproportionately used—and thus the risks and costs are inequitably borne—by racial and ethnic minorities, low-income households, and owners of manufactured homes. Among Americans who have financed a home purchase, 34% of Hispanic and 23% of Black households have used alternative financing at least once, compared with just 19% of White borrowers. (See Figure 4.) Further, families earning less than $50,000 are seven times more likely to use alternative financing than those earning more than $50,000. And nearly half of surveyed manufactured home owners reported using a personal property loan.24 In all of these cases, expanding access to small mortgages could help reduce historically underserved communities’ reliance on risky alternative financing arrangements.
Cash purchases
Other homebuyers who fail to obtain a small mortgage instead choose to pay cash for their homes. In 2021, about a quarter of all home sales were cash purchases, and that share grew in 2022 amid an increasingly competitive housing market.25 The share of cash purchases is larger among low-cost than higher-cost property sales, which may partly be a consequence of the lack of small mortgages.26 However, although cash purchases are appealing to some homebuyers and offer some structural advantages, especially in competitive markets, they are not economically viable for the vast majority of first-time homebuyers, 97% of whom use mortgages.27
Purchasing a house with cash gives buyers a competitive advantage, compared with using a mortgage. Sellers often prefer to work with cash buyers over those with financing because payment is guaranteed, and the buyer does not need time to secure a mortgage. Cash purchases also enable simpler, faster, and cheaper sales compared with financed purchases by avoiding lender requirements such as home inspections and appraisals. In essence, cash sales eliminate “financing risk” for sellers by removing the uncertainties and delays that can accompany mortgage-financed sales. Indeed, as the housing supply has tightened and competition for the few available homes has increased, purchase offers with financing contingencies have become less attractive to sellers. As a result, some financing companies have stepped in to make cash offers on behalf of buyers, enabling those borrowers to be more competitive but often saddling them with additional costs and fees.
However, most Americans do not have the financial resources to pay cash for a home. In 2019, the median home price was $258,000, but the median U.S. renter had just $15,750 in total assets—far less than would be necessary to buy a house.28 Even households with cash on hand may be financially destabilized by a cash purchase because investing a substantial sum of money into a home could severely limit the amount of money they have available for other needs, such as emergencies or everyday expenses. Perhaps because of the financial challenges, homes purchased with cash tend to be smaller and cheaper than homes bought using a mortgage.29
These challenging economic factors limit the types of homebuyers who pursue cash purchases. Investors—both individual and institutional—make up a large share of the cash-purchase market, and are more likely than other buyers to purchase low-cost homes and then return the homes to the market as rental units.30
Researchers have questioned whether cash purchases are truly an alternative to mortgage financing or whether they fundamentally change the composition of homebuyers. One study conducted in 2016 determined that tight credit standards enacted in the aftermath of the 2008 housing market crash resulted in a large uptick in cash purchases, mostly by investor-buyers.31 More recent evidence from 2020 through 2021 suggests that investor purchases are more common in areas with elevated mortgage denial rates, low home values, and below-average homeownership rates.32 In each of these cases, a lack of mortgage access tended to benefit investors, possibly at the expense of homeowners.
No homeownership
Some prospective homebuyers who are unable to access a small mortgage simply forgo homeownership entirely. Instead of buying, these families may choose to rent or live with friends or family. And although these are not necessarily bad outcomes, they lack the financial advantages of homeownership.
On average, homeowners have a net worth that is more than 40 times that of renters, largely because of the equity they accrue from paying down their mortgage balances and from their homes’ appreciation over time.33 In 2019, the median homeowner had $225,000 of equity, accounting for almost 90% of their overall net worth.34
Further, in rental markets with few vacancies and commensurately high costs, owning a home can cost less per month than renting. Recent evidence suggests that, particularly when mortgage interest rates are low, a mortgage payment for a three-bedroom house can be cheaper than the monthly rent for a three-bedroom apartment.35 Likewise, some evidence suggests that buying an inexpensive starter home costs less than renting in some metropolitan areas in the South and Midwest.36
Importantly, the financial benefits of homeownership are not shared equally throughout the country. Historical patterns of discrimination in mortgage lending and government policy have prevented Black, Hispanic, and Indigenous households from accessing homeownership at the same rate as White households. And many of those structural barriers persist, as evidenced by the Black-White homeownership gap, which was wider in 2020 than it was in 1970.37
Mortgage Denials Play a Small Role in Low Access to Credit
Lenders deny applications for small mortgages more often than those for larger loans. From 2018 to 2021, lenders received about 700,000 small mortgage applications per year for site-built single-family homes, of which they denied 11.8%. In contrast, lenders denied just 7.8% of the roughly 3.6 million applications submitted annually for larger mortgages during the same period.
These differences do not entirely reflect applicants’ creditworthiness, as measured by debt-to-income ratio (a person’s monthly debt divided by their income), loan-to-value ratio (dollar amount of a mortgage as a share of the subject property’s appraised value), or credit scores. Research demonstrates that, even for applicants with similar credit profiles, denial rates are much higher for small mortgages than large ones.38 Pew’s analysis confirms these findings. Lenders denied small mortgage applicants with low debt-to-income ratios (36% and below) 8.8% of the time, compared with 4.7% of the time for larger loan applicants with a similar profile. Likewise, applicants with loan-to-value ratios under 80% were more likely to be denied for a small mortgage than a large one.
However, mortgage denials are not the primary cause of the small mortgage shortage. Pew’s analysis found that if lenders denied applications for small mortgages at the same rate as those for larger mortgages, they would originate about 31,000 more small mortgages each year. Although thousands of borrowers would benefit from lower small mortgage denial rates, those additional loans would increase the share of low-cost properties financed with a mortgage by only about 3 percentage points. These findings suggest that lowering the denial rate is not sufficient to increase access to safe and affordable mortgage financing and that regulators need to do more to improve incentives for lenders to originate small mortgages and boost awareness among borrowers.
Small mortgage lending is not profitable for lenders
Policymakers, consumer advocates, and industry agree that increasing the supply of small mortgages could boost homeownership—especially in underserved, low-cost communities.39 But many mortgage lenders simply do not offer small home loans to borrowers. Of the more than 5,000 lenders that originated mortgages from 2018 to 2021, 38% did not issue a single small mortgage.40
In conversations with Pew, lenders, consumer advocates, and government officials identified several potential structural and regulatory obstacles to small mortgage lending. These include the high fixed cost of origination, commission-based compensation for loan officers, the poor physical quality of many low-cost housing units, and various rules and regulations that help protect consumers but may add cost or complexity to the origination process and could be updated to maintain safety at lower cost to lenders.
Structural barriers
Lenders have repeatedly identified the high fixed cost of mortgage originations as a barrier to small mortgage lending because origination costs are roughly constant regardless of loan amount, but revenue varies by loan size. As a result, small mortgages cost lenders about as much to originate as large ones but produce much less revenue, making them unprofitable. Further, lenders have reported an increase in mortgage origination costs in recent years: $8,243 in 2020, $8,664 in 2021, and $10,624 in 2022.41 In conversations with Pew, lenders indicated that many of these costs stem from factors that do not vary based on loan size, including staff salaries, technology, compliance, and appraisal fees.
Lenders typically charge mortgage borrowers an origination fee of 0.5% to 1.0% of the total loan balance as well as closing costs of roughly 3% to 6% of the home purchase price.42 Therefore, more expensive homes—and the larger loans usually used to purchase them—produce higher revenue for lenders than do small mortgages for low-cost homes.
In addition, standard industry compensation practices for loan officers may limit the availability of small mortgages. Lenders typically employ loan officers to help borrowers choose a loan product, collect relevant financial documents, and submit mortgage applications—and pay them wholly or partly on commission.43 And because larger loans yield greater compensation, loan officers may focus on originating larger loans at the expense of smaller ones, reducing the availability of small mortgages.
Finally, lenders must contend with an aging and deteriorating stock of low-cost homes, many of which need extensive repairs. Data from the American Housing Survey shows that 6.7% of homes valued under $150,000 (1.1 million properties) do not meet the Department of Housing and Urban Development’s definition of “adequacy,” compared with just 2.6% of homes valued at $150,000 or more (1.7 million properties).44 The Federal Reserve Bank of Philadelphia estimates that, despite some improvement in housing quality overall, the total cost of remediating physical deficiencies in the nation’s housing stock nevertheless increased from $126.2 billion in 2018 to $149.3 billion in 2022.45
The poor physical quality of many low-cost properties can limit lenders’ ability to originate small mortgages for the purchase of those homes. For instance, physical deficiencies threaten a home’s present and future value, which makes the property less likely to qualify as loan collateral. And poor housing quality can render many low-cost homes ineligible for federal loan programs because the properties cannot meet those programs’ strict habitability standards.
Regulatory barriers
Regulations enacted in the wake of the Great Recession vastly improved the safety of mortgage lending for borrowers and lenders. But despite this success, some stakeholders have called for streamlining of regulations that affect the cost of mortgage origination to make small mortgages more viable. The most commonly cited of these are certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Qualified Mortgage rule (QM rule), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and parts of the CFPB’s Loan Originator Compensation rule.46
The Dodd-Frank Act requires creditors to make a reasonable, good-faith determination of a consumer’s ability to repay a mortgage. This provision has significantly increased the safety of the mortgage market and protected borrowers from unfair and abusive loan terms—such as unnecessarily high interest rates and fees—as well as terms that could strip borrowers of their equity. Lenders can meet Dodd-Frank’s requirements by originating a “qualified mortgage” (QM), which is a loan that meets the CFPB’s minimum borrower safety standards, including limits on the points, fees, and annual percentage rate (APR) the lender can charge.47 In return for originating mortgages under this provision, known as the QM rule, the act provides protection for lenders from any claims by borrowers that they failed to verify the borrower’s ability to repay and so are liable for monetary damages in the event that the borrower defaults and loses the home.
Some lenders and researchers have suggested that the QM rule has increased the cost of mortgage origination because lenders had to establish new processes to verify borrowers’ ability to repay and adhere to stricter compliance requirements.48 In addition, lenders who cannot keep their charges within the QM rule limits often have to offer credits to lower the borrower-facing fees, which can result in lenders originating the loan at a loss.49 And although 2020 revisions to the QM rule gave lenders more flexibility in calculating a borrower’s ability to repay, the extent to which those changes help lenders keep origination costs in check remains unclear.
Another regulation that lenders and researchers have cited as possibly raising the cost of origination is the CFPB’s Loan Originator Compensation rule. The rule protects consumers by reducing loan officers’ incentives to steer borrowers into products with excessively high interest rates and fees. However, lenders say that by prohibiting compensation adjustments based on a loan’s terms or conditions, the rule prevents them from lowering costs for small mortgages, especially in underserved markets. For example, when making small, discounted, or reduced-interest rate products for the benefit of consumers, lenders earn less revenue than they do from other mortgages, but because the rule entitles loan officers to still receive full compensation, those smaller loans become relatively more expensive for lenders to originate. Lenders have suggested that more flexibility in the rule would allow them to reduce loan officer compensation in such cases.50 However, regulators and researchers should closely examine the effects of this adjustment on lender and borrower costs and credit availability. Although such changes would lower lenders’ costs to originate small mortgages for underserved borrowers, they also could further disincline loan officers from serving this segment of the market and so potentially do little to address the small mortgage shortage.
Lastly, some lenders have identified HOEPA as another deterrent to small mortgage lending. The law, enacted in 1994, protects consumers by establishing limits on the APR, points and fees, and prepayment penalties that lenders can charge borrowers on a wide range of loans. Any mortgage that exceeds a HOEPA threshold is deemed a “high-cost mortgage,” which requires lenders to make additional disclosures to the borrower, use prescribed methods to assess the borrower’s ability to repay, and avoid certain loan terms. Changes to the HOEPA rule made in 2013 strengthened the APR and points and fees standards, further protecting consumers but also limiting lenders’ ability to earn revenue on many types of loans. Additionally, the 2013 revision increased the high-cost mortgage thresholds, revised disclosure requirements, restricted certain loan terms for high-cost mortgages, and imposed homeownership counseling requirements.
Many lenders say the 2013 changes to HOEPA increased their costs and compliance obligations and exposed them to legal and reputational risk. However, research has shown that the changes did not significantly affect the overall loan supply but have been effective in discouraging lenders from originating loans that fall above the high-cost thresholds.51 More research is needed to understand how the rule affects small mortgages.
Regulators and lenders have taken some action to expand access to small mortgages
A diverse array of stakeholders, including regulators, consumer advocates, lenders, and researchers, support policy changes to safely encourage more small mortgage lending.52 And policymakers have begun looking at various regulations to identify any that may inadvertently limit borrowers’ access to credit, especially small mortgages, and to address those issues without compromising consumer protections.
Some regulators have already introduced changes that could benefit the small mortgage market by reducing the cost of mortgage origination. For example, in 2022, the Federal Housing Finance Agency (FHFA) announced that to promote sustainable and equitable access to housing, it would eliminate guarantee fees (G-fees)—annual fees that Fannie Mae and Freddie Mac charge lenders when purchasing mortgages—for loans issued to certain first-time, low-income, and otherwise underserved homebuyers.53 Researchers, advocates, and the mortgage industry have long expressed concern about the effect of G-fees on the cost of mortgages for borrowers, and FHFA’s change may lower costs for buyers who are most likely to use small mortgages.54
Similarly, FHFA’s decision to expand the use of desktop appraisals, in which a professional appraiser uses publicly available data instead of a site visit to determine a property’s value, has probably cut the amount of time it takes to close a mortgage as well as appraisal costs for certain loans, which in turn should reduce the cost of originating small loans without materially increasing the risk of defaults.55
At the same time, some lenders have been exploring the use of special purpose credit programs (SPCPs) to increase access to mortgage financing for low-cost homebuyers from historically disadvantaged communities.56 SPCPs allow lenders to design loan products that address the unique needs of borrowers of color, manufactured home buyers, and residents of areas where alternative financing is prevalent, all of whom have typically been underserved by the mortgage industry.
Other entities, such as nonprofit organizations and community development financial institutions (CDFIs), are also developing and offering small mortgage products that use simpler, more flexible underwriting methods than other mortgages, thus reducing origination costs.57 Where these products are available, they have increased access to small mortgages and homeownership, especially for low-income families and homebuyers of color.
Although these initiatives are encouraging, high fixed costs are likely to continue making small mortgage origination difficult, and the extent to which regulations governing loan origination affect—or might be safely modified to lower—these costs is uncertain. Unless policymakers address the major challenges—high fixed costs and their drivers—lenders and regulators will have difficulty bringing innovative solutions to scale to improve access to small mortgages. Future research should continue to explore ways to reduce costs for lenders and borrowers and align regulations with a streamlined mortgage origination process, all while protecting borrowers and maintaining market stability.
Solutions to small mortgage challenges in underserved communities
Structural barriers such as high fixed origination costs, rising home prices, and poor home quality partly explain the shortage of small mortgages. But borrowers also face other obstacles, such as high denial rates, difficulty making down payments, and competition in housing markets flooded with investors and other cash purchasers. And although small mortgages have been declining overall, the lack of credit access affects some communities more than others, driving certain buyers into riskier alternative financing arrangements or excluding them from homeownership entirely.
To better support communities where small mortgages are scarce, policymakers should keep the needs of the most underserved populations in mind when designing and implementing policies to increase access to credit and homeownership. No single policy can improve small mortgage access in every community, but Pew’s work suggests that structural barriers are a primary driver of the small mortgage shortage and that federal policymakers can target a few key areas to make a meaningful impact:
Drivers of mortgage origination costs. Policymakers should evaluate federal government compliance requirements to determine how they affect costs and identify ways to streamline those mandates without increasing risk, particularly through new financial technology. As FHFA Director Sandra L. Thompson stated in April 2023: “Over the past decade, mortgage origination costs have doubled, while delivery times have remained largely unchanged. When used responsibly, technology has the potential to improve borrowers’ experiences by reducing barriers, increasing efficiencies, and lowering costs.”58
Incentives that encourage origination of larger rather than smaller mortgages. Policymakers can look for ways to discourage compensation structures that drive loan officers to prioritize larger-balance loans, such as calculating loan officers’ commissions based on individual loan values or total lending volume.
The balance between systemic risk and access to credit. Although advocates and industry stakeholders agree that regulators should continue to protect borrowers from the types of irresponsible lending practices that contributed to the collapse of the housing market from 2005 to 2007, underwriting standards today prevent too many customers from accessing mortgages.59 A more risk-tolerant stance from the federal government could unlock access to small mortgages and homeownership for more Americans. For example, the decision by Fannie Mae and Freddie Mac (known collectively as the Government Sponsored Enterprises, or GSEs) and FHA to include a positive rent payment record—as well as Freddie Mac’s move to allow lenders to use a borrower’s positive monthly bank account cash-flow data—in their underwriting processes will help expand access to credit to a wider pool of borrowers.60
Habitability of existing low-cost housing and funding for repairs. Restoring low-cost homes could provide more opportunities for borrowers—and the homes they wish to purchase—to qualify for small mortgages. However, more analysis is needed to determine how to improve the existing housing stock without increasing loan costs for lenders or borrowers.
In addition to reducing structural and regulatory barriers to small mortgage lending, a robust policy response on home financing should focus on borrowers who are acutely affected by the lack of small mortgages. Federal policymakers should look for opportunities to expand existing programs and policies for communities that have historically been excluded from homeownership and mortgage access, particularly:
The Duty to Serve rule, which directs the GSEs to improve access to mortgage financing for borrowers of modest means in three underserved markets: manufactured housing, rural communities, and areas requiring funds to preserve affordable housing. Homebuyers in these markets often require a small mortgage to purchase a home, so the GSEs could seek to link their Duty to Serve obligations with small mortgage lending in these markets.
Equitable Housing Finance Plans, which are three-year strategies that the GSEs develop to promote equitable access to affordable and sustainable housing for disadvantaged groups, particularly Black and Hispanic communities. People in these communities are less likely to own a home and more likely to use alternative financing than the overall population, which probably indicates an unmet demand for mortgages. The GSE leadership should consider adding an objective to their plans related to refinancing alternative financing arrangements—which the plans’ target communities disproportionally use—into mortgages.
SPCPs, which can help lenders better serve specific populations that would otherwise be denied credit or receive it on less favorable terms. Policymakers should encourage the creation and use of these programs for underserved populations in low-cost areas where there is a special need for small mortgages and measure the impacts.
Future Pew research will explore not only important questions about the barriers to small mortgage origination but also the strategies that policymakers can use to expand the nation’s affordable housing stock, improve the habitability of existing low-cost homes, and ensure that small mortgages are more accessible and competitive in the marketplace.
Conclusion
Mortgages are vital financial tools that enable homeownership and wealth-building opportunities for millions of Americans each year. However, the scarcity of small mortgages deprives some prospective borrowers of homeownership opportunities and drives others to buy their homes with cash or risky alternative financing arrangements.
To address this problem, policymakers should aim to expand mortgage access and the overall safety of financing for low-cost homes by reducing the structural and regulatory constraints that increase lenders’ costs and make small mortgages unprofitable, and establishing strong consumer protections for alternative arrangements. In addition, federal agencies and lawmakers can reduce racial disparities in mortgage lending by prioritizing Black, Hispanic, and Indigenous households in the development and implementation of small mortgage and alternative financing programs. Together, these initiatives would help bring homeownership opportunities to more Americans.
This brief also benefited from the valuable insights of Dan Gorin, lead supervisory policy analyst, Federal Reserve Board of Governors; Roberto Quercia, professor, the University of North Carolina at Chapel Hill; Craig Richardson, professor, Winston-Salem State University; and Sabiha Zainulbhai, senior policy analyst, New America. Although they reviewed drafts of the brief, neither they nor their institutions necessarily endorse the findings or conclusions.
This brief was researched and written by Pew staff members Tracy Maguze, Tara Roche, and Adam Staveski. The project team thanks current and former colleagues Nick Bourke, Ryan Canavan, Jennifer V. Doctors, David East, Anne Holmes, Alex Horowitz, Dave Lam, Omar Antonio Martínez, Cindy Murphy-Tofig, Tricia Olszewski, Reagan Ortiz, Travis Plunkett, Andy Qualls, Ryland Staples, Drew Swinburne, and Mark Wolff for providing important communications, creative, editorial, and research support for this work.
Endnotes
Pew defines small mortgages as loans under $150,000. For the purposes of this study, loan values are adjusted for inflation to reflect 2021 dollars unless otherwise noted. This value is based on conversations with mortgage lenders and on an observed decline in lending below that threshold over the past decade. Additionally, for the purposes of this paper, low-cost homes are those priced at less than $150,000, also in 2021 dollars. This price range is consistent with the majority of purchases financed with small mortgages. The median down payment among small mortgage borrowers is just 5%, and as a result, 75% of small mortgages are used to purchase a home under $157,500, although some borrowers do pair small mortgages with larger down payments to purchase higher-cost homes.
Request for Information Regarding Small Mortgage Lending, 87 Fed. Reg. 60186-87 (Oct. 4, 2022); Request for Information Regarding Mortgage Refinances and Forbearances, 87 Fed. Reg. 58487-92 (Sept. 27, 2022).
U.S. Department of Housing and Urban Development, “Financing Lower-Priced Homes: Small Mortgage Loans” (2022), https://www.huduser.gov/portal/portal/sites/default/files/pdf/Financing-Lower-Priced-Homes-Small-Mortgage-Loans.pdf.
S. Zainulbhai et al., “The Lending Hole at the Bottom of the Homeownership Market” (New America, 2021), https://www.newamerica.org/future-land-housing/reports/the-lending-hole-at-the-bottom-of-the-homeownership-market/; U.S. Department of Housing and Urban Development, “Financing Lower-Priced Homes”; A. McCargo et al., “Small-Dollar Mortgages for Single-Family Residential Properties” (Urban Institute, 2018), https://www.urban.org/research/publication/small-dollar-mortgages-single-family-residential-properties; E. Goldstein and K. DeMaria, “Small-Dollar Mortgage Lending in Pennsylvania, New Jersey, and Delaware” (Federal Reserve Bank of Philadelphia, 2022), https://www.philadelphiafed.org/community-development/credit-and-capital/small-dollar-mortgage-lending-in-pennsylvania-new-jersey-and-delaware; L. Goodman, B. Bai, and W. Li, “Real Denial Rates: A Better Way to Look at Who Is Receiving Mortgage Credit” (working paper, Urban Institute, 2018), https://www.urban.org/sites/default/files/publication/98823/real_denial_rates_1.pdf; A. McCargo, B. Bai, and S. Strochak, “Small-Dollar Mortgages: A Loan Performance Analysis” (Urban Institute, 2019), https://www.urban.org/sites/default/files/publication/99906/ small_dollar_mortgages_a_loan_performance_analysis_2.pdf.
Federal Financial Institutions Examination Council, Home Mortgage Disclosure Act, 2018-2021, https://ffiec.cfpb.gov/data-browser/; Zillow Group Inc., Zillow Transaction and Assessment Database, 2018-21, https://www.zillow.com/research/ztrax/. This analysis uses data on mortgage transactions from the HMDA database, the most comprehensive source of information on mortgage lending in the United States. Mortgage lenders report application-level information directly to the CFPB, which compiles and republishes the data for public use. Data on home sales was provided by Zillow through Zillow’s Transaction and Assessment Database (ZTRAX). More information on accessing the data can be found at https://www.zillow.com/research/ztrax/. The results and opinions are those of the authors and do not reflect the position of Zillow Group.
Bankrate, “Nearly Two-Thirds Say Affordability Factors Are Holding Them Back From Homeownership” (Bankrate.com, 2022), https://www.bankrate.com/pdfs/pr/20220330-march-fsp.pdf.
D. Sackett and K. Handel, The Tarrance Group, letter to Woodrow Wilson Center, “Key Findings From National Survey of Voters,” May 21, 2012, https://www.wilsoncenter.org/sites/default/files/media/documents/article/keyfindingsfromsurvey.pdf.
Ibid.
National Association of Realtors, “Profile of Home Buyers and Sellers” (2022), https://www.nar.realtor/sites/default/files/documents/2022-highlights-from-the-profile-of-home-buyers-and-sellers-report-11-03-2022_0.pdf.
A. Acolin, L. Goodman, and S.M. Wachter, “Accessing Homeownership With Credit Constraints,” Housing Policy Debate 29, no. 1 (2019): 108-25, https://www.tandfonline.com/doi/full/10.1080/10511482.2018.1452042?casa_token=5ZjHGNxo1VoAAAAA%3AtLKWk_xn7JT3Uz2G7T_zziEuPZa0NlarhJ-tGl6m83DgxB6rq-IYSU7eZNI9mIwBAFx5o7BGbulINcjA.
N. Bourke, T. Roche, and C. Hatchett, “Homeowners With Risky Alternatives to Traditional Mortgages Eligible for COVID-19 Relief Money,” The Pew Charitable Trusts, Nov. 1, 2021, https://www.pewtrusts.org/en/research-and-analysis/articles/2021/11/01/homeowners-with-risky-alternatives-to-traditional-mortgages-eligible-for-covid19-relief-money.
Goldstein and DeMaria, “Small-Dollar Mortgage Lending in Pennsylvania, New Jersey, and Delaware.”
Zillow Group Inc., “Zillow Home Value Index (ZHVI),” 2000-22, https://www.zillow.com/research/data/.
Some borrowers use small mortgages to purchase properties valued at more than $150,000, but Pew is primarily interested in expanding homeownership opportunities to underserved populations, so this analysis considers only low-cost properties.
The Pew Charitable Trusts, “What Has Research Shown About Alternative Home Financing in the U.S.?” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/04/what-has-research-shown-about-alternative-home-financing-in-the-us.
Consumer Financial Protection Bureau, “Manufactured Housing Finance: New Insights From the Home Mortgage Disclosure Act Data” (2021), https://files.consumerfinance.gov/f/documents/cfpb_manufactured-housing-finance-new-insights-hmda_report_2021-05.pdf.
A. Carpenter, T. George, and L. Nelson, “The American Dream or Just an Illusion? Understanding Land Contract Trends in the Midwest Pre- and Post-Crisis” (Joint Center for Housing Studies of Harvard University, 2019), 9, https://www.jchs.harvard.edu/sites/default/files/media/imp/harvard_jchs_housing_tenure_symposium_carpenter_george_nelson.pdf.
The Pew Charitable Trusts, “What Has Research Shown?”; National Consumer Law Center, “Summary of State Land Contract Statutes” (2021), https://www.pewtrusts.org/en/research-and-analysis/white-papers/2022/02/less-than-half-of-states-have-laws-governing-land-contracts.
The Pew Charitable Trusts, “Millions of Americans Have Used Risky Financing Arrangements to Buy Homes” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/04/millions-of-americans-have-used-risky-financing-arrangements-to-buy-homes.
H.K. Way, “Informal Homeownership in the United States and the Law,” Saint Louis University Public Law Review XXIX, no. 113 (2010): 113-92, https://law.utexas.edu/faculty/hway/informal-homeownership.pdf.
Ibid.
HMDA data for 2022 was not available at time of publication.
The Pew Charitable Trusts, “Millions of Americans Have Used Risky Financing Arrangements to Buy Homes.”
National Association of Realtors, “Realtors Confidence Index Survey” (2022), https://cdn.nar.realtor/sites/default/files/documents/2022-09-realtors-confidence-index-10-20-2022.pdf; D. Anderson, “Share of Homes Bought With All Cash Hits Highest Level Since 2014,” Redfin, https://www.redfin.com/news/all-cash-home-purchases-fha-loans-october-2022/.
T. Malone, “Single-Family Investor Activity Bounces Back in the First Quarter of 2022” (CoreLogic, 2022), https://www.corelogic.com/intelligence/single-family-investor-activity-bounces-back-in-the-first-quarter-of-2022/.
Federal Reserve Board, Survey of Consumer Finances, 1989-2019, https://www.federalreserve.gov/econres/scf/dataviz/scf/table/#series:Transaction_Accounts;demographic:agecl;population:all;units:median. In 2019, the median balance in the checking and savings accounts of Americans younger than 35 was just $3,240; it jumps to $5,620 for accountholders ages 55 to 64.
Ibid.
S. Riley, A. Freeman, and J. Dorrance, “Alternatives to Mortgage Financing for Manufactured Housing” (The University of North Carolina at Chapel Hill Center for Community Capital, 2021), https://www.pewtrusts.org/-/media/assets/2022/03/alternatives-to-mortgage-financing-for-manufactured-housing.pdf.
L. Goodman, J. Zhu, and B. Bai, “Overly Tight Credit Killed 1.1 Million Mortgages in 2015,” Urban Wire (blog), Urban Institute, Nov. 21, 2016, https://www.urban.org/urban-wire/overly-tight-credit-killed-11-million-mortgages-2015.
E. Dowdall et al., “Investor Home Purchases and the Rising Threat to Owners and Renters: Tales From 3 Cities” (Nowak Metro Finance Lab, 2022), https://drexel.edu/~/media/Files/nowak-lab/220923_InvestorHomePurchases_Final.ashx?la=en.
Federal Reserve Board, Survey of Consumer Finances, 2019, https://www.federalreserve.gov/econres/scfindex.htm.
Ibid.
ATTOM Data Solutions, “Owning a Home More Affordable Than Renting in Nearly Two Thirds of U.S. Housing Markets,” Jan 7, 2021, https://www.attomdata.com/news/market-trends/home-sales-prices/attom-data-solutions-2021-rental-affordability-report/.
D. Olick, “Here’s Where Owning a Home Is Cheaper Than Renting One,” CNBC, Feb. 7, 2020, https://www.cnbc.com/2020/02/07/where-owning-a-home-is-cheaper-than-renting-one.html.
The Pew Charitable Trusts, “What Has Research Shown?,” 5.
Goodman, Bai, and Li, “Real Denial Rates.”
Consumer Financial Protection Bureau, “Request for Information: Mortgage Refinances and Forbearances,” Sept. 27, 2022, https://www.regulations.gov/document/CFPB-2022-0059-0001/comment; U.S. Department of Housing and Urban Development, “Request for Information Regarding Small Mortgage Lending,” Oct. 4, 2022, https://www.regulations.gov/docket/HUD-2022-0076/comments.
Alan S. Kaplinsky et al., “DOJ Fair Lending Focus Continues in Settlement of Case Challenging Lender’s Minimum Loan Amount Policy by the Consumer Financial Services and Mortgage Banking Groups,” Casetext, https://casetext.com/analysis/doj-fair-lending-focus-continues-in-settlement-of-case-challenging-lenders-minimum-loan-amount-policy-by-the-consumer-financial-services-and-mortgage-banking-groups. Although some lenders might not originate small mortgages mainly because they operate primarily in high-cost areas, others may require minimum loan sizes, either formally or informally, that exclude low-cost borrowers. The U.S. Department of Justice ruled in 2012 that setting minimum loan sizes of $400,000 or more violates the Fair Housing Act and the Equal Credit Opportunity Act, but whether minimum thresholds of $150,000 are unlawful remains unclear.
Mortgage Bankers Association, “Chart of the Week—July 23, 2021 Retail Production Channel: Cost to Originate ($ Per Closed Loan),” July 23, 2021, https://newslink.mba.org/mba-newslinks/2021/july/mba-newslink-monday-july-26-2021/mba-chart-of-the-week-july-23-2021-retail-production-channel-cost-to-originate/; Mortgage Bankers Association, “MBA: 2022 IMB Production Profits Fall to Series Low,” MBA Newslink, https://newslink.mba.org/mba-newslinks/2023/april/mba-2022-imb-production-profits-fall-to-series-low/.
K. Graham, “Mortgage Origination Fee: The Inside Scoop,” Rocket Mortgage LLC, https://www.rocketmortgage.com/learn/mortgage-origination-fee; M. Crace, “Closing Costs: What Are They, and How Much Will You Pay?,” Rocket Mortgage LLC, https://www.rocketmortgage.com/learn/closing-costs.
Zillow Inc., “How Is Your Loan Officer Paid?,” https://www.zillow.com/blog/how-is-your-loan-officer-paid-500/.
U.S. Census Bureau, American Housing Survey (2021), https://www.census.gov/programs-surveys/ahs/data/2021/ahs-2021-public-use-file–puf-/ahs-2021-national-public-use-file–puf-.html.
E. Divringi, “Updated Estimates of Home Repairs Needs and Costs and Spotlight on Weatherization Assistance” (Federal Reserve Bank of Philadelphia, 2023), https://www.philadelphiafed.org/community-development/housing-and-neighborhoods/updated-estimates-of-home-repairs-needs-and-costs-and-spotlight-on-weatherization-assistance.
U.S. Department of Housing and Urban Development, “MBA Response to FHA RFI Regarding Small Mortgage Lending,” Dec. 5, 2022, https://www.regulations.gov/comment/HUD-2022-0076-0025; U.S. Department of Housing and Urban Development, “New America and CSEM Response to Docket No FR-6342-N-01 on Small Mortgage Lending,” Dec. 5, 2022, https://www.regulations.gov/comment/HUD-2022-0076-0015.
To qualify, loans must meet three criteria: They cannot have negative amortization, interest-only payments, or balloon payments; the total points and fees charged cannot exceed 3% of the loan amount; and the term must be 30 years or less. They also must satisfy at least one of the following three criteria: The borrower’s total monthly debt-to-income ratio must be 43% or less; the loan must be eligible for purchase by Fannie Mae or Freddie Mac or insured by the FHA, U.S. Department of Veterans Affairs, or U.S. Department of Agriculture; or the loan must be originated by insured depositories with total assets of less than $10 billion, but only if the mortgage is held in portfolio.
F. D’Acunto and A.G. Rossi, “Regressive Mortgage Credit Redistribution in the Post-Crisis Era,” The Review of Financial Studies 35, no. 1 (2022): 482-525, https://academic.oup.com/rfs/article-abstract/35/1/482/6136188?redirectedFrom=fulltext; Freddie Mac, “Cost to Originate Study: How Digital Offerings Impact Loan Production Costs” (2021), https://sf.freddiemac.com/content/_assets/resources/pdf/report/cost-to-originate.pdf; T. Hogan, “Costs of Compliance With the Dodd-Frank Act” (Rice University’s Baker Institute for Public Policy, 2019), https://www.bakerinstitute.org/research/dodd-frank-costs-compliance.
K. Berry, “Fed’s Rate Hikes Are Tanking the Mortgage Market,” American Banker, Oct. 24, 2022, https://www.americanbanker.com/news/feds-rate-hikes-are-tanking-the-mortgage-market.
Mortgage Bankers Association, “MBA Members Urge Bureau to Change Loan Originator Compensation Rule,” MBA Newslink, Oct. 24, 2018, https://newslink.mba.org/mba-newslinks/2018/october/mba-newslink-wednesday-10-24-18/mba-members-urge-bureau-to-change-loan-originator-compensation-rule/.
Y. Benzarti, “Playing Hide and Seek: How Lenders Respond to Borrower Protection,” TheReview of Economics and Statistics (2022): 1-25, https://direct.mit.edu/rest/article-abstract/doi/10.1162/rest_a_01167/109257/Playing-Hide-and-Seek-How-Lenders-Respond-to?redirectedFrom=fulltext; Consumer Financial Protection Bureau, “Manufactured Housing Finance,” 25-27.
Consumer Financial Protection Bureau, “Request for Information: Mortgage Refinances and Forbearances.”
Federal Housing Finance Agency, “FHFA Announces Targeted Pricing Changes to Enterprise Pricing Framework,” news release, Oct. 24, 2022, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Targeted-Pricing-Changes-to-Enterprise-Pricing-Framework.aspx. G-fees are based on the individual mortgage’s product type and credit risk attributes and help Fannie and Freddie cover administrative costs and credit losses from borrower defaults. However, these fees also increase loan origination costs.
Americans for Financial Reform, “Joint Letter: FHFA RFI on PACE Loans,” March 16, 2020, https://ourfinancialsecurity.org/2020/03/joint-letter-fhfa-rfi-pace-loans/; G. Kromrei, “Industry to Congress: G-Fees Aren’t Your ‘Piggybank,’” HousingWire, July 23, 2021, https://www.housingwire.com/articles/industry-to-congress-g-fees-arent-your-piggybank/; L. Goodman et al., “Guarantee Fees—an Art, Not a Science” (Urban Institute, 2014), https://www.urban.org/sites/default/files/publication/22841/413202-Guarantee-Fees-An-Art-Not-a-Science.PDF.
Federal Housing Finance Agency, “FHFA Announces Two Measures Advancing Housing Sustainability and Affordability,” news release, Oct. 18, 2021, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Two-Measures-Advancing-Housing-Sustainability-and-Affordability.aspx.
S. Lee, “How Mortgage, Housing Industries Tackled Affordability in 2022,” National Mortgage News, Dec. 29, 2022, https://www.nationalmortgagenews.com/list/how-mortgage-housing-industries-tackled-affordability-in-2022; Wells Fargo, “Wells Fargo Announces Strategic Direction for Home Lending: A Smaller, Less Complex Business Focused on Bank Customers and Minority Communities,” news release, Jan. 10, 2023, https://newsroom.wf.com/English/news-releases/news-release-details/2023/Wells-Fargo-Announces-Strategic-Direction-for-Home-Lending-A-Smaller-Less-Complex-Business-Focused-on-Bank-Customers-and-Minority-Communities/default.aspx.
A. McCargo et al., “The MicroMortgage Marketplace Demonstration Project: Building a Framework for Viable Small-Dollar Mortgage Lending” (Urban Institute, 2020), https://www.urban.org/research/publication/micromortgage-marketplace-demonstration-project; Hurry Home, “A New Way to Be a Homeowner,” https://www.hurryhome.io/.
Federal Housing Finance Agency, “FHFA Announces Inaugural Housing Finance TechSprint,” news release, April 4, 2023, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Inaugural-Housing-Finance-TechSprint.aspx.
L. Goodman, J. Zhu, and T. George, “Four Million Mortgage Loans Missing from 2009 to 2013 Due to Tight Credit Standards,” Urban Wire (blog), Urban Institute, April 2, 2015, https://www.urban.org/urban-wire/four-million-mortgage-loans-missing-2009-2013-due-tight-credit-standards.
Fannie Mae, “Fannie Mae Introduces New Underwriting Innovation to Help More Renters Become Homeowners,” news release, Aug. 11, 2021, https://www.fanniemae.com/newsroom/fannie-mae-news/fannie-mae-introduces-new-underwriting-innovation-help-more-renters-become-homeowners; Freddie Mac, “Freddie Mac Takes Further Action to Help Renters Achieve Homeownership,” news release, June 29, 2022, https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-takes-further-action-help-renters-achieve; Freddie Mac, “Freddie Mac Announces Underwriting Innovation to Help Lenders Qualify More Borrowers for a Mortgage,” news release, Oct. 17, 2022, https://freddiemac.gcs-web.com/news-releases/news-release-details/freddie-mac-announces-underwriting-innovation-help-lenders; U.S. Department of Housing and Urban Development, “Federal Housing Administration Expands Access to Homeownership for First-Time Homebuyers Who Have Positive Rental History,” news release, Sept. 27, 2022, https://www.hud.gov/press/press_releases_media_advisories/HUD_No_22_187.
Editor’s note: This brief was updated July 3, 2023, to recognize the peer reviewers and Pew staff members who contributed to its development.
Housing discrimination continues to be a serious problem plaguing renters, homebuyers, and homeowners throughout America.
There were more than 31,200 fair housing complaints filed in 2021, the most recent year where data was available, according to the National Fair Housing Alliance’s 2022 Fair Housing Trends Report. That was the most complaints filed in at least 25 years. The majority, 82%, involved rentals.
“Housing discrimination is pervasive in housing markets across the country,” says Morgan Williams, general counsel of NFHA. “Discrimination is significantly underreported. It’s hard to get good data.”
In 1968, the federal Fair Housing Act was passed to make the rampant discrimination in the housing market illegal. It initially protected people based on race, color, national origin, and religion. Familial status, disability, and sex, which includes sexual orientation and gender identity, have since been added as protected classes.
This is meant to ensure that everyone is treated equally when renting or buying homes, receiving home loans or insurance, and having their homes appraised. However, people are still being denied housing based on their race or sexual orientation, and pregnant women are being denied mortgages.
The NFHA commissioned a report in 2004 that estimated that there were likely more than 3 million fair housing violations against Black, Hispanic, Asian, and Native Americans in the rental and for-sale housing market. This didn’t include violations against other protected groups or in the mortgage, appraisal, and other facets of the real estate industry. When adding those in, he expects there are more than 4 million victims of housing discrimination a year.
Much of the discrimination goes unreported. Many people don’t realize they are victims or are unaware of how to file a fair housing complaint. Those who do often face an uphill battle in proving that they are victims. And some worry about losing their housing if they complain.
“It is a real problem in the market,” says Williams.
What are the most common fair housing complaints?
The bulk of the fair housing complaints received in 2021 were related to disability, according to the NFHA report. These made up about 54.2% of complaints. It was followed by race, familial status, sex, national origin, color, and religion. The report captured complaints filed with nonprofit fair housing organizations and government agencies, including the Department of Housing and Urban Development.
“There is still a tremendous amount of ignorance, as well as conscious and unconscious bias regarding people who are differently abled,” says Stephen Beard. He is an Oakland, CA, real estate agent with Keller Williams who specializes in working with people with disabilities. “Some landlords and other decision-makers do the minimum they can get away with.”
Some of the issues faced by those in the disabled community include being denied rentals because of the way they are perceived, not receiving reasonable accommodations for ramps, chairlifts, and closer parking spaces, as well as landlords not allowing service support animals. Sometimes light fixtures and countertops are out of reach for those in wheelchairs, or kitchens aren’t wide enough to accommodate a chair.
“There simply is not enough accessible housing stock for people with physical challenges, as well as bias against people with cognitive challenges such as autism or who have mental health issues,” says Beard. Many people “can’t find housing. If they have housing, they sometimes can’t afford to move or make their own homes accessible.”
Securing housing is also often a challenge for members of protected classes. For example, families might report that their landlords illegally prohibit their children from accessing amenities in their complexes. People of color are denied mortgages or charged higher fees for loans compared with white borrowers with similar financial pictures. Transgender renters report being evicted due to their gender identity.
“Housing affects absolutely everything you do,” says Marlene Zarfes, executive director of Westchester Residential Opportunities. The civil rights agency works on fair housing complaints in Westchester County, NY, which is located just north of New York City. “If you don’t have suitable housing, how do you get to your job? How do your kids go to school?”