Study: Minorities remain much more likely to be denied mortgage in Twin Cities

Racial minorities in the Twin Cities are far more likely than whites to be denied a mortgage, regardless of their credit scores and other key factors, new research from the Federal Reserve Bank of Minneapolis shows.

In 2018 and 2019, the bank found that mortgage denial rates for Asian applicants in the region was 3.2%, for Latino applicants 3.3% and for Black applicants 4.3%. White applicants were denied 1.7% of the time.

“We have one of the largest homeownership gaps in the country and it’s something that hasn’t changed much over time,” said Alene Tchourumoff, the Fed’s senior vice president of community development and engagement, said in an interview.

“We were wondering: What are some of the characteristics that might explain the variations in homeownership?” she added.

The Fed used more detailed information, including the applicant’s credit score, that was not available or incorporated into previous analyses of mortgage denials, to get a better understanding of why people of color are less likely or less able to buy a home. Homeownership, for many people, is critical for building long-term wealth.

Tchourumoff said many previous studies were not able to adjust for factors like credit scores in the mortgage application process, leaving those studies open to criticism that they fail to reflect the most critical considerations in the underwriting process.

This analysis was based on federal Home Mortgage Disclosure Act (HMDA) mortgage data for nearly 100,000 borrowers in the seven-county Twin Cities metro area. It focused on those who applied for a 30-year, conventional mortgage, which tend to be the lowest-risk mortgages, in 2018 and 2019.

The research — which was done by Ben Horowitz, Kim Eng Ky and Katie Lim — controlled for the location of the property, the loan-to-value ratio of the mortgage and the debt-to-income ratios of the borrower.

“This was really about trying to find apples-to-apples comparisons,” Ryan Nunn, assistant vice president for community development and engagement, said. “We were able to see that it’s not about place and neighborhood. It’s about people and how they look on paper.”

The study covers 56% of the home-purchase mortgage applications for owner-occupied, single-dwelling homes in the Twin Cities area…