Banks and LGBT Inequality: Same Sex Mortgage and Housing Discrimination

Lower approval rates, higher finance fees evidence of discrimination for same-sex borrowers.

 

LGBT face a number of economic barriers.  A two decade long major study published by the National Academy of Sciences shows same-sex couples are 73% more likely to encounter higher degree of mortgage application declines and higher fees and interest chargers, leading to major wealth creation discrimination, presented by Iowa State University’s Ivy College of Business.

 

The study “Lending Practices to Same-Sex Borrowers”, was published in the Proceedings of the National Academy of Sciences of the United States, PNAS is one of the world’s most-cited and comprehensive multidisciplinary scientific journals, publishing more than 3,200 of the highest quality scientific research papers, with rigour peer review and approval by NAS members, annually.

 

This new research analyzed national mortgage data from 1990 to 2015 and found the approval rate for same-sex couples was 3 to 8 percent lower. Same-sex applicants were 73 percent more likely to be denied than heterosexual couples.

 

Fannie Mae and Federal Reserve data was used to test whether perceived sexual orientation affected mortgage approval, cost and performance. The data sets allowed the researchers to validate their findings and control for factors such as income, variations in lenders’ underwriting standards and property type.

 

Same-sex couples who were approved paid more in interest and fees. Co-authors Hua Sun and Lei Gao, calculated the difference in finance fees as much as $86 million annually. The research showed no evidence that same-sex couples had a higher default risk.

 

Mortgage lending is largely based on risk-based pricing. That means that lenders will increase the cost of your mortgage for just about every risk associated with your credit profile. The lower your credit score is, the higher the rate that you will pay on your mortgage.

 

“Lenders can justify higher fees, if there is greater risk,” Gao said. “We found nothing to indicate that’s the case. In fact, our findings weakly suggest same-sex borrowers may perform better.”

 

 

Mortgage discrimination or mortgage lending discrimination is the practice of banks, governments or other lending institutions denying loans to one or more groups of people primarily on the basis of race, ethnic origin, sex or religion.  The Fair Housing and Equal Credit Opportunity acts prohibits this kind discrimination, but  fails to prevent it and further neither specifically lists sexual orientation. Despite this leglisation the systematic denial of loans was a major contributor to the urban decay that plagued many American rejection rates for Black and Hispanic applicants was about 1.6 times that for Whites.

 

According to a Pew Research Center analysis of 2015 HMDA data, minority applicants were approved for mortgages at a lower rate than white applicants with comparable applications. The analysis revealed 27.4% of black applicants and 19.2% of Hispanic applicants were denied mortgages, compared with about 11% of white and Asian applicants.

 

In their data, the effect of sexual orientation is greater than the better-studied effect of ethnic discrimination. About 20% of same-sex couples who applied for mortgages were rejected, and the authors’ model predicted that had those same couples been straight, their rejection rate would have been only 11%. Among couples granted mortgages, the different-sex couples achieved the lower interest rates, and their choices to buy a home were less expensive, less stressful, and less risky.

 

Protection needed

The researchers say the findings illustrate a need for change to make the law fair for everyone. Loan decisions should be based on fundamental economic factors, not skin color, sexual orientation or gender. Sun says making sexual orientation a protected class would limit potential discrimination.

 

“Policymakers need to guarantee same-sex couples have equal access to credit,” Sun said. “Using our framework, credit monitoring agencies also can take steps to investigate unfair lending practices.”

 

Fairness in lending was improved by the Home Mortgage Disclosure Act, passed in 1975. It requires banks to disclose their lending practices in the communities they serve. In the 1970s, the private sector fight against mortgage discrimination began to be led by community development banks, such as ShoreBank in Chicago.

 

The gaps in wealth creation magnify over times. As communities lack access to the economic tools to get ahead, the gap in wealth inequality grows greater.  This was shown in the 2015 Measure of America study commissioned by the American Civil Liberties Union the analysis projected that the racial wealth gap will be significantly greater in the next generation because of the differential impact of resources, Impact of the US Housing Crisis on the Racial Wealth Gap Across Generations”.

 

Redlining

In the United States and Canada, redlining is the systematic denial of various services to residents of specific, often racially associated, neighborhoods or communities, either directly or through the selective raising of prices In neighborhoods with more same-sex couples, gay ghettos, both same-sex and different-sex borrowers seem to experience more unfavorable lending outcomes overall.  

 

Barriers to Wealth Creation

A single discriminatory decision can create lifelong effects. Different-sex and same-sex couples default on their mortgages about equally frequently, but different-sex couples are more likely to prepay theirs earlier. Same-sex couples are, if anything, the better financial investment for lenders.

 

A $200,000 30-year mortgage, at a rate of 3.625 percent. That translates to a monthly payment of $912.  Contrast this with a .5% higher rate of 4.125 percent for a mortgage of the same size and term. This would result in a monthly payment of $969, that’s higher by $57 per month. If you multiply that by the 360 month term of the mortgage, you’ll be paying $20,520 extra over the life of the loan. That’s about the price of a modest car at today’s prices.

 

Wealth Inequality Extends Beyond Housing

Contrary to popular belief, gays are not wealthier than straights.  Gallup showed that in the largest study of LGBT Americans, LGBT are poorer than the population at large: 35 percent of LGBT adults have incomes of less than $24,000 a year, compared to 24 percent for the general population.

 

Earlier research published show LGBT home ownership lagged behind general market.  

 

In “New Patterns of Poverty in the Lesbian, Gay, and Bisexual Community” The Williams Institute found, gay men were found to have a poverty rate of 20.5 percent; the rate for straight men was 15.3 percent. These data points are confirmed in various international studies such as, A study of low-income LGBT people in Rio de Janeiro found high rates of discrimination and homelessness and low rates of employment. “LGBT People Living in Poverty in Rio de Janeiro.”

 

Additionally there are several other indicators showing the inequality faced:

• Same-sex couples are 1.7 times more likely to receive food stamps.
• LGBT youth make up forty percent of homeless youth—largely because of family rejection.
• LGBT seniors,especially women, are poorer on average than straight seniors, in part because marriage inequality prevents same-sex couples from receiving the spousal social security benefits that straight couples get.
• Transgender Americans face double the unemployment rate of the general population, and 90 percent report harassment or discrimination on the job.

Surveying Access to Financial Tools

Prudential conducts an annual LGBT study that repeats the wealth inequalities found and demonstrates structural barriers to accessing the same tools as heterosexuals. LGBTQ respondents face some unique obstacles to financial success. In addition to the near stagnant growth in middleclass incomes over the past five years, LGBTQ respondents also must contend with a lack of universal protection against job discrimination, unequal access to benefits for samesex partners and even lack of family support.

• LGBTQ respondents own fewer financial products, including retirement accounts.
• Only 27% of the LGBTQ respondents have an employer sponsored retirement savings account such as a 401(k), compared with 41% of non-LGBTQ respondents.
• Both men and women in the LGBTQ community also tend to earn less than the general population,.
• And only 21% have an individual retirement account, versus 32% of non-LGBTQ respondents.

In fact, only half of LGBTQ respondents surveyed have a basic banking product such as a checking, savings or money market account, or certificates of deposit. Two-thirds of the non-LGBTQ respondents own at least one of those products.

 

Thirteen percent of LGBTQ respondents said wage inequality due to discrimination is a barrier to their financial success, compared to 8% of non-LGBTQ respondents.

 

In 2015, NAGLREP founder Jeff Berger reckoned: “Individuals who identify themselves as LGBT represent an estimated buying power of $840 billion.

 

Why Does Mortgage Discrimination Matter?

Homeownership as a Key Driver of Wealth: Homeownership is a unique tool for building wealth in our economy— one that must be made accessible to more people if we hope to increase the financial security of low–income Americans.

 

It’s a simplistic example, but you can spin it out for generations. And it highlights some of the patterns that play out family by family, with results that are evident at the macro-scale. A child born into a wealthy family, for example, is six times more likely to become a wealthy adult than a child who grows up poor. Homeownership has long been a central part of this equation. In 2015, the average net worth of a homeowner in was $195,400, compared to just $5,400 for a renter, according to the Federal Reserve. The significance is even more staggering for people of color. Wealth from equity in a home constitutes 51% of total wealth of the average white household, but 71% for black households.

 

What makes buying a home such a singular wealth-building method in the U.S. economy?

• Homes appreciate It appreciates annually at average rates from about 3% to 5%. While the mortgage payments remain the same, market prices tend to rise, creating valuable home equity that increases a family’s net worth.
• It is enhanced by leverage, the unique power of this investment, though, is that it appreciates based on the entire value of the home. Equity accumulates on not only what you’re able to pay, but also what you borrow. That means that rather than earning 4% appreciation on the $100,000 down payment you fronted—or $4000—you build equity on the full $1,000,000 value of the house—$40,000—as if you had invested all of that money yourself. You leveraged your $100,000 into a $1,000,000 investment.

 

Should we work on policies and programs to help create wealth?

Havard launched the Joint Center for Housing Studies to answer this question and hosts a national symposium: “Homeownership Built To Last” sponsored by  Ford Foundation, Bank of America, and NeighborWorks America.

 

And though the downturn took a particularly hard toll on homeowners of color and those with low-incomes, many advocates still view access to homeownership as an important part of a strategy to build wealth among historically disadvantaged groups.  Touting the new concept of “equitable development” as a just way to revitalize disinvested communities. Done well, this approach brings together practitioners and residents to develop and carry out initiatives that can help transform low-income and minority neighborhoods into places that provide economic opportunities, affordable living, and cultural expression for all residents, even in the face of gentrification.

 

Harvard concludes that homeownership continues to represent an important opportunity for individuals and families of limited means to accumulate wealth. As such, policies to support homeownership can be justified as a means of alleviating wealth disparities by extending this opportunity.

 

How to help fight discrimination:

Learn to identify unfair lending practices. According to the law, lenders may ask you for most of the information that could identify you as a protected class except for your religion, but they can’t legally use that information to discriminate against you in lending.

Examples of lending discrimination include but are not limited to:

• A lender or loan officer discouraging someone from applying for a mortgage based on a protected class or because they get public assistance
• A lender imposing unfair terms such as a higher interest rate, additional fees, a different repayment term or larger down payment on a loan because the applicant falls under a protected class.
• A lender asking about a borrower’s plans for having a family
• A lender requiring a borrower to add a cosigner on a loan even though they meet the requirements
• A lender discouraging a borrower from purchasing a home because of the racial or religious makeup of the area
• A lender or loan officer offering you different terms on the phone than they do in person
• A lender denying a borrower a loan without an explanation

How to know and what to do if you face discrimination?

• Compare offers “The best way to try to avoid discrimination is to talk to many different lenders,” says Tendayi Kapfidze, LendingTree’s chief economist.
• If you get approved for a loan but feel you didn’t get the best terms, you can try to negotiate. Fees on the mortgage, such as those charged for origination, application and processing, may be negotiated.
  • You may ask the lender for what’s called a rate sheet — a list of mortgage rates issued by the lender. The rate sheet is an internal document so you may or may not be allowed to see it, but it’s worth a try to see where your offer stands compared with comparable borrowers. If you reject the loan terms, you also have the right to know the specific reason you were offered less favorable terms than you applied for.
• If you are denied, you have the right to know why. The lender must give you the specific reason you were rejected if you ask within 60 days. It’s not enough to tell you you failed to meet their minimum standards. They must be specific, like telling you your income was too low to qualify for a mortgage.

Regardless of being approved or denied, if you feel you’ve been discriminated against you can also:

• Complain to the lender.
• Check with your state’s attorney general office to see if any laws have been broken. Your state may have its own equal opportunity laws, as many states do.
• Sue the lender. If you win, you can recover the money you spent in the legal battle and may be awarded punitive damages if the discrimination is found willful. If you can find others with the same claim, you may file a class-action lawsuit with a group.

File a complaint regarding a violation of the ECOA with the CFPB and one regarding an FHA violation to the U.S. Department of Housing and Urban Development (HUD). HUD complaints must be filed within one year.