Researchers know it’s harder to get a home loan if you’re black. What they might not have known until now is that the difficulties start very early on in the lending process. According to a new experiment, being black makes it harder to get so much as a response from key gatekeepers—roughly the same effect, in fact, as a 71-point drop in a person’s credit score.
The experiment closely followed the methods used by researchers Marianne Bertrand and Sendhil Mullainathan in 2004, which showed that people with white-sounding names got 50 percent more job interviews compared to those with black-sounding names, despite submitting exactly the same resumes. It’s one of the clearest examples of racial prejudice you can find—literally the only difference potential employers could see was a name.
A decade on, Marquette University economist Andrew Hanson and his colleagues wondered whether something similar might be true in the home loan market. “There are substantial documented differences between African Americans and whites in the price paid for credit,” the economists write in the Journal of Urban Economics. Estimates vary, but blacks seeking home loans pay around 10 basis points (or 0.1 rates) higher interest rates on home loans than whites do.
“An African American name reduces the probability that an MLO responds by the same magnitude as does reporting a credit score that is 71 points lower.”
Assuming, of course, they’re able to get a loan. In fact, Hanson and his team report, black Americans might have a hard time even getting someone to talk to them about a loan. Using New York City birth records and United States Census data, the economists constructed 20 names with a high likelihood of being either white or black—names like Jake Krueger and Kadeem Jefferson. Then, they wrote two emails to more than 5,000 mortgage loan originators (MLOs), the people who are most borrowers’ entry point into the home loan market. The two emails differed either in a potential borrower’s race (as suggested by their name), credit score, or both.
Emails from people with white-sounding names received slightly more responses than those with black-sounding names—68.3 percent versus 65.7 percent. But to put that in context, the team compared those numbers to the response rates based on credit score. MLOs responded to 69.5 percent of emails that indicated a credit score between 700 and 750—considered high—compared to 65.8 of those that indicated a score between 600 and 650, generally considered low. Those numbers “suggest an African American name reduces the probability that an MLO responds by the same magnitude as does reporting a credit score that is 71 points lower,” the team writes.
“The level of discrimination we find is large for a characteristic that should not matter (race) relative to one that should matter (credit score),” the authors write, and it’s especially problematic that discrimination happens so early in the lending process. “If African American borrowers are less likely to receive communication from an MLO … it makes submitting a loan application more difficult, and the remainder of the home purchase more arduous.”
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