Expanding Access to Credit Could Shrink the Homeownership Race Gap

Rhea-AI Summary

A new Zillow analysis reveals that limited access to credit-building products significantly affects Black and Latinx Americans, hindering their homeownership opportunities. Approximately 26 million Americans lack a credit record, with many living in 'credit insecure' areas. Nearly 72% of home buyers require loans, especially among Black (78%) and Latinx (77%) buyers. The analysis suggests that improving credit reporting and expanding access to small lenders could help bridge the racial homeownership gap. Current policy proposals aim to include non-traditional data for establishing credit histories.

Positive

• Potential policy changes could increase access to credit for Black and Latinx communities.
• Expanding small lenders in credit insecure areas could improve mortgage access.

Negative

• Many Black and Latinx Americans remain 'credit invisible', limiting their homeownership prospects.
• The mortgage denial rate for Black applicants is significantly higher at 24.3%.

SEATTLE, March 3, 2021 /PRNewswire/ -- Limited access to credit-building products and services disproportionately cuts off Black and Latinx Americans from the wealth-building advantages of homeownership that can last for generations, a new Zillow® analysis shows, shedding light on a prime barrier to entry for prospective homeowners of color.

Twenty-six million Americans do not have a credit recordⁱ and around 12.5 million adults live in "credit insecure" counties,ⁱⁱ characterized by a high number of residents with poor or no credit history, as well as relatively limited structural access to formal credit products and services. A disproportionate number are Black or Latinx.

One of the many consequences of restricted credit access is the inability to secure homeownership -- nearly three-quarters of home buyers (72%) obtain a loan to help pay for their home, and an even higher rate of Black (78%) and Latinx (77%) home buyers do.ⁱⁱⁱ As counties become more credit secure there is a direct and meaningful correlation with higher homeownership rates,^iv outlining a possible path to bridging the racial homeownership gap. Potential drivers could include adjusting the way credit history is recorded and expanding the reach of small lenders that are less likely to deny applicants based on their credit history. 

"Lower homeownership is just one of many negative results borne out of poor credit health in communities nationwide," said Nicole Bachaud, economic data analyst at Zillow. "For many, walking into a bank or going online to apply for a loan or open a new credit card is simple. But for those excluded from the formal credit market in this country, it is a far more daunting task, and Black and Latinx households are especially vulnerable. A shift in credit reporting might be a first step to reducing the systemic barriers into homeownership and the financial market overall." 

Currently, credit history, or lack thereof, is the number one reason mortgage applications are denied to Black applicants, underscoring the potential for progress in this area. About 15% of Black and Latinx Americans are "credit invisible," completely lacking a record of credit, compared to 9% of white and Asian Americans. 

Being credit invisible can create a catch 22 that's difficult to break out of -- opening new lines of credit is often conditional on having an existing credit score -- and can bleed into future generations, as lack of access to credit now will limit future wealth accumulation and the amount of generational wealth available to pass on. 

President Biden's administration has proposed restructuring the current credit system to accept non-traditional sources of data like rental payments and utility bills as an alternative path to establishing a credit history. The goal of such a restructuring would be to bring many credit invisible individuals into the system they are currently locked out of.

Not only are Black and Latinx individuals more prone to being credit invisible, they are also more highly concentrated in counties with higher credit insecurity. Almost one in 10 Black households (9.7%) and 7.9% of Latinx households live in counties considered credit insecure, compared to 2.7% of white households and 3.5% of Asian households. 

The presence of smaller, more localized banks in a community could improve access to credit in these types of areas where credit insecurity is high. The overall mortgage denial rate at small banks -- those with less than 1,000 applications received -- was 7.4% in 2019, less than half the rate (17.2%) at large banks with more than 100,000 applications. And only 2.6% of all mortgage applications at small banks were denied based on credit, again less than half the rate (5.7%) at large banks. Small banks are currently less prevalent in counties that are considered credit insecure. 

Race	Overall Mortgage Denial Rate*	Most Common Reason for Denial*	Share of Households in "Credit Assured" Counties**	Share of Households in "Credit Insecure" Counties**
All	14.4%	High debt-to-income ratio	28.8%	4.6%
Asian	14.3%	High debt-to-income ratio	31.8%	3.5%
Black	24.3%	Poor credit history	16.3%	9.7%
Latinx	19.2%	High debt-to-income ratio	16.2%	7.9%
White	13.7%	High debt-to-income ratio	34.7%	2.7%

*Source: 2019 Home Mortgage Disclosure Act

**Sources: Federal Reserve Bank of New York's Credit Insecurity Index, 2018; American Community Survey, 2018

About Zillow Group
Zillow Group, Inc. (NASDAQ: Z and ZG) is reimagining real estate to make it easier to unlock life's next chapter. 

As the most-visited real estate website in the United States, Zillow® and its affiliates offer customers an on-demand experience for selling, buying, renting or financing with transparency and nearly seamless end-to-end service. Zillow Offers® buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline. Zillow Home Loans™, our affiliate lender, provides our customers with an easy option to get pre-approved and secure financing for their next home purchase. Zillow recently launched Zillow Homes, Inc., a licensed brokerage entity, to streamline Zillow Offers transactions.  

Zillow Group's brands, affiliates and subsidiaries include Zillow®, Zillow Offers®, Zillow Premier Agent®, Zillow Home Loans™, Zillow Closing Services™, Zillow Homes, Inc., Trulia®, Out East®, StreetEasy® and HotPads®. Zillow Home Loans, LLC is an Equal Housing Lender, NMLS #10287 (www.nmlsconsumeraccess.org). 

ⁱ Consumer Financial Protection Bureau: https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf
ⁱⁱ Federal Reserve Bank of New York: https://www.newyorkfed.org/medialibrary/media/outreach-and-education/community-development/constraints-on-access-to-credit.pdf
ⁱⁱⁱ Zillow Consumer Housing Trends Report, 2020
^iv Zillow analyzed the Federal Reserve Bank of New York's Credit Insecurity Index and found that for every 10-point increase in a given county's credit insecurity index score, homeownership fell by 2%. https://www.newyorkfed.org/medialibrary/media/outreach-and-education/community-development/constraints-on-access-to-credit.pdf

 

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SOURCE Zillow

FAQ

What did the Zillow analysis published on March 3, 2021, reveal regarding credit access?

The analysis highlighted that limited access to credit-building products disproportionately affects Black and Latinx Americans, hindering their homeownership opportunities.

What percentage of Black and Latinx home buyers require loans according to the Zillow report?

According to the report, 78% of Black and 77% of Latinx home buyers require loans to purchase homes.

How does credit insecurity impact homeownership rates according to Zillow's findings?

Zillow found that as counties become more credit secure, homeownership rates increase, suggesting a direct correlation.

What is the current mortgage denial rate for Black applicants based on the Zillow analysis?

The mortgage denial rate for Black applicants is reported at 24.3%, significantly higher than other racial groups.

What measures are being proposed to help credit-invisible individuals according to Zillow?

Proposals include restructuring the credit system to accept non-traditional data sources like rental payments and utility bills.