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Minority borrowers heavily affected by high mortgage standards

One of the biggest effects of the economic downturn on the mortgage market was that it became far more difficult for most people to get a home loan in the first place. Lenders significantly hiked their standards after keeping them quite loose prior to the recession, locking millions of people who might have wanted to buy a home out of the market. However, it now seems as though those practices have disproportionately affected minorities in particular.

Through the end of last year, nearly 70 percent of all owner-occupied homes with a mortgage were owned by Caucasians, versus a little more than 8 percent for Hispanic borrowers, and less than 6 percent for African-American owners, according to new data from the Federal Reserve Board. This comes in large part because the latter two minority groups typically have lower credit scores than do white Americans, and the end result is that the significant uptick in lending standards has disproportionately locked minorities out of the mortgage market for nearly a decade.

A closer look
While credit scores have mostly improved for African-American, Hispanic, and Caucasian borrowers since the recession first hit, it's worth noting that more than 18 percent of all borrowers with scores of 780 or better were white, as were 15 percent of those with scores between 740 and 779. Meanwhile, the share of both for black borrowers was well under 1 percent, and Hispanics didn't fare much better. As a consequence, prevalence of minorities being extended home loans has taken a major hit, and the Federal Reserve Board wonders whether mortgage lenders are doing all they can to meet every borrower's potential need.

"Since 2006, the shares of home purchase mortgages to black and Hispanic borrowers declined significantly," the authors of the study wrote. "This note provides evidence that most of the decline in black and Hispanic market shares have come from borrowers with low credit scores (less than 620). Within the white population, low-score lending has also declined sharply, but historically, a much smaller fraction of white borrowers have low credit scores compared with black and Hispanic borrowers. Tighter credit conditions since 2006 has therefore had a disproportionate effect on minorities' credit access."

Lenders still concerned about standards
Many lenders are still extremely worried about taking on mortgage risk these days, even years after the recession ended and despite the fact that economic recovery has been at least somewhat robust. Indeed, some experts still wonder whether a broader loosening of standards could lead to another housing market meltdown, according to Money and Career Cheat Sheet. Some financial institutions have been slowly but surely loosening their grips on the mortgage purse strings, but there has yet to be any sort of significant uptick in default rates to go with that change.

Some experts point out that even if mortgage credit were to become several times easier to tap, the risk lenders would be taking on at that point would remain well below pre-recession norms. In fact, one of the biggest reasons lenders have been able to keep credit so tight in recent years has been refinance volume, which is beginning to dwindle.

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