Dear Realtors, We Need to Talk About Discrimination…
Next year will mark the 50th anniversary of the passage of the Equal Credit Opportunity Act, which was signed into law on October 28, 1974. That landmark legislation stated plainly that is was illegal for creditors to discriminate base on race, sex, age, national origin, or marital status, or because one receives public assistance. Known colloquially as ECOA, the Act has undoubtedly helped to make credit more accessible to the groups it intended to protect from discriminatory lending practices.
Along with the Fair Housing Act, which was signed into law on April 11, 1968, and prohibited discrimination concerning the sale, rental, and financing of housing based on race, religion, national origin, sex, (and as later amended) handicap and family status, these two pieces of legislation should have eradicated discrimination in the mortgage lending and real estate industries long ago. But old habits die hard and discrimination, particularly race based discrimination, is woven deeply into the fabric of the American story.
Can a Borrowers Loan Type Hurt Their Chances When Bidding on Real Estate?
So how does discrimination continue to persist today? One of the most insidious ways is by discriminating against the type of financing a would-be buyer is choosing to use. Purchase contracts explicitly ask buyers to indicate the type of financing that they are using. The choices are typically conventional, FHA and VA.
As of August of 2021, nearly 23% of all purchase transactions utilized mortgage loans that were backed by the Federal Housing Administration, Veterans Administration, or the Department of Agriculture. Yet, according to a 2021 survey by the National Association of Realtors (NAR) (National Association of Realtors Research Group, 2021), 89% of seller would be likely to accept an offer from a buyer with conventional financing, but only 30% would be willing to accept an offer backed by FHA or VA.
If we dig a bit deeper into the numbers, this discrimination against government backed financing disproportionately impacts black and brown people. According to 2019 Home Mortgage Disclosure Act (HMDA) data analyzed by the National Community Reinvestment Coalition (NCRC) (Edlebi, 2020) 64% of home purchasers were White/Caucasian, 11.9% were Hispanic/Latino and 7% were Black/African American.
Stated another way, less than 1 in 5 home purchasers were Black or Hispanic and yet nearly 60% of Black/African American purchasers financed with a government insured loan and nearly half (48%) of Hispanic/Latino purchasers used a government loan. NAR’s own survey data states that a whopping 70% of home sellers wont even consider government financed offers, effectively redlining most of the available homes for sale from Black and Hispanic buyers.
What Makes Government Loans Less Appealing to Realtors?
So why would a seller discriminate against an offer from a buyer who is using a government backed loan? Their Realtor is telling them to. In fact, it is not uncommon to see listing agents explicitly exclude government back financing options on their listings. The reasons given for this explicit bias are typically unfounded and rooted in common misconceptions about FHA, VA and USDA financing. Because government backed loans tend to help more moderate-income borrowers and can accommodate lower credit scores (down to 580 with 3.5% down) the perception among many Realtors is that the borrower is somehow less qualified.
However, in today’s mortgage market, government backed loans often offer better terms including lower rates, lower fees, and lower monthly payments than the conventional alternative even for borrowers with 700+ credit scores! Many borrowers typically qualify for both government backed and conventional financing and like any savvy consumer are choosing to utilize a government backed loan to have a lower monthly payment and lower transaction costs.
Realtors also justify this discrimination against government financed offers by claiming the appraisal process with these loans is more onerous. While government backed loans DO require appraisers to note some health and safety related issues that conventional loans do not, the most common issues cited in these appraisals are lack of fire/CO detectors, missing grounded outlets at sinks (a modern building code requirement), missing handrails on staircases, and chipped/peeling paint. NONE of these is particularly costly to resolve and one could argue should be done before a home is even listed. Furthermore, if these types of repairs are required, the seller can request that the buyer pay for the repairs.
What Can Be Done to Eliminate or Counter This Discrimination?
So, what can be done? First, the National Association of Realtors should immediately propose a change to purchase contract language explicitly removing the “type of financing” question. Offers should be evaluated based on the absolute price being offered, if the buyer is paying cash or utilizing financing, the size of the buyers down payment and if the buyer has any contingencies (need to sell an existing home, etc).
The type of financing being utilized should NOT be allowed to be a consideration given the discriminatory effects that practice continues to have on underserved populations. Additionally, HUD, VA and USDA along with their conventional counterparts, Fannie Mae and Freddie Mac, could align their appraisal requirements to a universal standard. These changes would be major step forward in ensuring that the promises of ECOA and the Fair Housing Act are fully realized.
Works Cited
Edlebi, J. R. (2020, June 30). Preliminary Analysis of 2019 HMDA Mortgage Lending Data. Retrieved from https://ncrc.org/preliminary-analysis-of-2019-hdma-mortgage-lending-data/
National Association of Realtors Research Group. (2021, April). National Association of Realtors Loan Type Survey. Retrieved from https://www.nar.realtor/research-and-statistics/research-reports/loan-type-survey
