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Home Lending Reports Reveal that Home Loan Outcomes Vary by Race, Income, and County

The first two in a series of home lending reports by county examine trends in Cuyahoga and Allegheny and reveal differences for not only the counties, but also for borrowers of different races and incomes.

New research from the Federal Reserve Bank of Cleveland’s Community Development Department reveals that applications for home loans have taken a rollercoaster ride over the past three decades in Cuyahoga and Allegheny Counties. Applications climbed to a 25-year high in 2003, plummeted through 2008 as the Great Recession took hold, rose again in 2012, though not nearly as high as in 2003, and fell from that 2012 level and remained lower still as of 2015.

Home loan originations, or those loan applications that have been approved by the lender and accepted by the borrower, followed a parallel path, up the peaks and down the valleys throughout the years, according to two home lending reports released today (Allegheny and Cuyahoga).

Coming up

Stay tuned for home lending reports for other major counties in the Fourth Federal Reserve District, which comprises Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky.

Uncover lending trends yourself

A new tool called the Home Mortgage Explorer draws from Home Mortgage Disclosure Act data—the same data used in the home lending reports above—and allows users to more easily explore trends in mortgages. This infographic explains more.

Why did mortgage applications dip so low? While the reports do not directly address the reasons, research by the Pew Research Center indicates the declines in home purchase applications may be attributed to a decrease in the number of renters becoming homeowners and an increase in the number of homeowners becoming renters1, says Lisa Nelson, a Cleveland Fed community development advisor who, with policy analyst Matt Klesta, is producing a series of county-specific reports exploring how home lending trended before, during, and after the Great Recession.

“It didn’t matter the borrower income, it didn’t matter the neighborhood: The bottom line is originations and applications went down for all groups as we entered the Great Recession,” Nelson says.

Unemployment, income loss, and income insecurity prevented households from purchasing homes in the post-crisis period, according to a 2012 speech by Ben Bernanke, the former chair of the Board of Governors of the Federal Reserve System.2 And falling housing prices inhibited homeowners from tapping into their home equity or “trading up” to larger or better homes.

The good news for those actually applying is that more loans are being approved these days. The rate of originations (the rate at which loans to purchase homes are being approved by the lender and accepted by the borrower) was markedly higher in 2015 than it was in 2005 in both Cuyahoga County, home to Cleveland, and Allegheny County, home to Pittsburgh.

Home loan activity ticked back up in some recent years, namely in 2012 and in 2015, but it didn’t rise in the same way for every race, income group, or county studied, according to the reports, “Home Lending in Cuyahoga County Neighborhoods” and “Home Lending in Allegheny County Neighborhoods.”

Here, we explore 4 differences uncovered in these reports.

When comparing low- and moderate-income (LMI) blacks and LMI whites, home purchase origination rates are higher for whites in each year examined, Nelson says. While the gap in home purchase origination rates for blacks and whites has narrowed since 2010, white borrowers were still more likely in 2015 to get approved for home purchase loans regardless of borrower income and the income of the neighborhood in which they sought to buy.

An example from the Cuyahoga County report: In 2015, nearly 70 percent of black LMI borrowers applying for a home purchase loan in an LMI neighborhood were approved compared to 82 percent of white LMI borrowers purchasing homes in LMI neighborhoods.

Looking at the experiences of white and black borrowers in a different way, the report shows a similar outcome. When examining the number of home purchase loans while accounting for the size of the LMI population, the analysis shows that black LMI borrowers were proportionally less likely than white LMI borrowers to obtain a loan.

The Great Recession and the years bookending it, specifically 2005 and 2010, were a time of decline in home purchase loan rates—number of home purchase loans per 1,000 households—for both whites and blacks, but the rate declined the most for black LMI borrowers.

For example, in Cuyahoga County, there were 58 home purchase loans by white LMI borrowers in 2005 for every 1,000 white LMI households compared to 37 home purchase loans by black LMI borrowers per 1,000 black LMI households. And from these starting points, the home purchase rates from 2005 to 2010 declined 53 percent for white LMI borrowers and 72 percent for black LMI borrowers.

While the home purchase loan rates did increase from 2010 to 2015, the increase was greater for white LMI households (26 percent) than it was for black LMI households (6 percent).

“We can’t explain the differences we see from this analysis,” Nelson says. “The Home Mortgage Disclosure Act (HMDA) data don’t tell us anything about borrowers’ credit scores or their debt-to-income ratios that might help explain these differences.”

However, researchers at the Board of Governors found that declines in home purchase lending since 2006 are mainly due to less lending to lower-credit score borrowers, regardless of race. Overall, black borrowers tend to have lower credit scores than white borrowers, so it follows that the declines in home purchase lending were greater for black borrowers than white borrowers after the Great Recession.3

In the years immediately following the recession (2010 and 2011), high-income neighborhoods accounted for more than 60 percent of the home loan refinance activity in Cuyahoga County. That number (share of refinances occurring in high-income areas) was 61 percent in Allegheny County in 2012. Deteriorating housing values plus tightened lending standards during and after the recession may have impacted the ability of some homeowners to refinance their homes, particularly in the low- and moderate-income (LMI) areas within the counties.

“In the post-recession period, it was largely homeowners living in high-income neighborhoods that refinanced,” Nelson says. “When you refinance, you need a certain amount of equity in your home. In areas where the housing prices rebounded, perhaps more so in the high-income areas, borrowers may have had more equity in their homes, allowing them to refinance.”

It was a different story prior to the Great Recession in Cuyahoga County, when the share of refinances in LMI neighborhoods exceeded the share in the county’s high-income neighborhoods.

In 2005, more than a third (36 percent) of all refinances in Cuyahoga County occurred in the county’s LMI neighborhoods compared to 26 percent in high-income neighborhoods.

To the southeast, in Allegheny County, the share of refinances in lower-income neighborhoods was 18 percentage points lower than the share in Cuyahoga County in 2005.

And what was happening in Cuyahoga County was not happening nationally either, Nelson notes: The percent of refinances occurring in LMI neighborhoods nationwide was 17 percent, less than half what it was in Cuyahoga County.

While Nelson and Klesta can’t say definitely why refinance shares were so much higher in Cuyahoga County’s lower-income neighborhoods before the housing crisis, research has shown that subprime credit expanded more in the LMI neighborhoods in Cuyahoga County.4 For example, much of lending in Cuyahoga County’s LMI neighborhoods involved high-cost loans and loans originated by non-depository institutions; this was not the case in Allegheny County.5

A decade later, in 2015, the share of refinances in Cuyahoga County’s LMI neighborhoods (15 percent) had fallen more in line with the share of refinances in LMI neighborhoods nationally (12 percent).

The share of purchases in low- and moderate-income (LMI) neighborhoods dropped from 2005 to 2015 for all race and income groups in Cuyahoga and Allegheny Counties, the home lending reports reveal.

It’s the opposite for purchases in non-LMI neighborhoods: The share of home purchases in higher-income areas was up in 2015 compared to 2005 for both race and borrower income groups. Where there’s an exception (white non-LMI borrowers in Allegheny County), the share of purchases in non-LMI neighborhoods merely remained the same.

In Cuyahoga County, for example, 52 percent of black LMI borrowers in 2015 purchased homes in non-LMI neighborhoods, up from 22 percent in 2005, and 80 percent of white LMI borrowers bought in higher-income areas, up from 71 percent in 2005.

The uptick in Cuyahoga County may be the result of depressed housing prices, which could have left the door open for more borrowers to afford houses in areas that otherwise might have been unaffordable previously, Klesta says. Home prices in Cuyahoga County fell by 11 percent from 2005 to 2009 and an additional 4 percent from 2009 to 2010.

Another driver of LMI borrowers’ loan activity may be the first-time homebuyer tax credit enacted in 2008 and available to qualified borrowers through mid-2010. Federal Reserve researchers have documented an increasing share of home purchase loans to LMI borrowers while the tax credit was in place.6

Allegheny County’s origination rates for home purchase loans have been higher than those in Cuyahoga County across all neighborhood income types in the 3 years examined: 2005, 2010, and 2015. So whether buying in a low-income, moderate-income, middle-income, or high-income neighborhood, borrowers were more likely to secure a home purchase loan in all 3 years in Allegheny County.

The same is true for refinance origination rates (they were higher in Allegheny County than in Cuyahoga County) with the exception of 2005, when refinance origination rates were higher in Cuyahoga County for all neighborhood income types than in Allegheny County.

Asked why the home loan outcomes differ between the two, Klesta and Nelson note that HMDA data doesn’t reveal much about the borrowers but suggest the differing outcomes could be explained, in part, by lower credit scores and higher debt-to-income ratios, among other characteristics that lenders take into account when deciding whether to extend credit.

Overall in Allegheny County, the median incomes are higher. Referring to the maps that accompany the two home lending reports (Map 1 in both Cuyahoga and Allegheny reports), Klesta notes that while more than half of the census tracts in Cuyahoga County are low and moderate income (LMI), only over a third of the tracts in Allegheny County are.

Allegheny County also didn’t experience the steep drop-off in housing prices that Cuyahoga County and the nation did between 2000 and 2016. Instead, homes held their value more, and stable home equity tends to make it more possible for a homeowner to refinance.

Sum and substance: Two researchers in the Cleveland Fed Community Development Department, a group that promotes impartial access to credit, find differences in home loan outcomes for people of different races and incomes in county-by-county reports.