Bloomberg writers Shawn Donnan @sdonnan , Ann Choi @annjychoi , Hannah Levitt @hannahlevitt and Christopher Cannon @homiedonttweet just published an article titled "Wells Fargo Rejected Half Its Black Applicants in Mortgage Refinancing Boom. Fewer than half of Black applicants were approved by the biggest bank mortgage lender." This is an incredibly misleading article full of misinterpreted information and some fake data. (editors, contributors Robert Friedman @rfriedman305 Alex Tribou @AlexTribou David Scheer @david_scheer Jason Grotto @jasongrotto)
In the first anecdote with no evidence it's stated Mauise Ricard III tried to refinance a home he didn't live in. Non owner occupied is considered investment property. It's a riskier loan so there is always a higher rate, lower loan to value ratio and stricter loan requirements. They didn't charge him a higher rate because he's black. There is plenty of racism in this world but not everything is racism. Why didn't the writers talk to a loan agent or appraiser to get some accurate information? They wanted more traffic to their article so they intentionally made these false sensationalist claims of racism and outlandish click bait title.
Let's start with some real facts based on real independent data. Whites make and have more money than blacks, Latinos. "As of 2020, black families have a median household income of just over $41,000, whereas white families have a median household income of more than $70,000." Ref. 1. People who make more money have more money, assets and a higher FICO score Ref. 2. They are a lower credit risk when it comes to loans because they are more likely to be able to afford to pay back the loans. The higher the FICO, the more likely you are to get loan approval, see top chart. Chart below shows the correlation between income and FICO scores. National Association of Realtors NAR research shows the higher the income, the less likely you are to be denied a loan. This is a money issue and not a race issue.
People buy homes they can afford. Someone who makes less money will buy a less expensive home in a less expensive area because that is what they can afford. That is the correlation. If you want blacks to have higher credit ratings and own more expensive homes, help them make more money. Don't yell at banks and home appraisers for not giving them loans and not appraising their homes over market value. You can complain all day and banks, appraisers can't do anything to fix it. In fact when banks were allowed by the government to be looser with loans and home values were skyrocketing, black homeowners got loans then lost their homes in the great recession because they couldn't afford the payments. You would do a disservice to someone with less money, less income if you gave them a loan they couldn't afford because they are more likely to be foreclosed upon and lose their entire investment and home. You'd be hurting and not helping them.
Here's an analogy maybe people can more easily understand. Blacks and Latinos own cars which are in general worth less money than cars owned white people because they make and have less money. Is Kelly Blue Book the reason why black, Latino owned cars are worth less than white owned cars? No, it's because they bought less expensive cars to begin with because that is what they could afford. Why aren't these people calling KBB racist and biased like they're calling banks and appraisers? It would make just as much sense.
The article goes on to state that whites were able to refinance more often than blacks in the recent real estate run up with low interest rates. This goes back to income inequality. Even if black, Latino owned homes increased in value, the borrower is still making the same amount of money. While the loan to value ratio is important your home loan amount is based on your ability to repay the loan. Banks don't want a repeat of the great recession where they gave loans to people with equity but no ability to repay those loans. People blamed appraisers for that when it was actually caused by less government oversight and the resulting loose lending. The government and people forced banks to give risky loans to blacks, Latinos and people with low credit ratings. They're trying to do it again now. They do it every time there is a run up in home values. When they did it before the great recession many poorer people just took all the equity out of their homes and spent it on personal items. Then they lost their homes.
"Wells Fargo, which declined to comment about individual customers, didn’t dispute Bloomberg’s statistical findings. It says it treats all potential borrowers the same, is more selective than other lenders, and an internal review of the bank’s 2020 refinancing decisions confirmed that “additional, legitimate, credit-related factors” were responsible for the differences." (FYI the bank can't comment about individual customers to the media or anyone except the borrower based on privacy, confidentiality law)
Banks have the right to set their lending requirements based on finances. They can discriminate based on finances. After Wells Fargo's tough times a while back you can bet they will tighten lending requirements which is their right. Do people want them giving fast and loose loans to anyone then have another banking crisis and have to bail them out? Remember this below?!
"Wells Fargo agreed in 2012 to pay more than $184 million to settle federal claims that it unfairly steered Black and Hispanic homeowners into subprime mortgages and charged them higher fees and interest rates. The bank didn’t admit to any wrongdoing and said at the time that it treated all customers fairly regardless of race." (FYI government doesn't have to prove bias in these cases. They just have to show one race was treated differently than another).
Previously Wells Fargo gave loans to riskier borrowers and they defaulted. This goes back to income inequality. The less money your make and have, the more likely you are to default on a loan. This time around Wells Fargo decided to reject riskier borrowers and people claim racism, bias and discrimination. No win situation here. Damned it you lend to riskier borrowers, damned if you don't.
"Rohit Chopra, head of the Consumer Financial Protection Bureau, said at a press conference in October announcing a new push by the Justice Department and regulators to combat so-called redlining by financial institutions. Among the issues he singled out was the role of mortgage underwriting algorithms that banks have long used, calling the disparities in lending outcomes a sign of “digital redlining, disguised through so-called neutral algorithms.”"
The algorithm is based on income, assets, debts, loan to value ratio, debt to income ratio... Research based on millions of loans over decades has shown a positive correlation between higher income, more assets to the ability to repay a loan. The opposite correlates with the inability to repay a loan. It's not redlining. Credit cards, auto loans, other loans are based on the same FICO scores but they're not tied to a property address. That is how people have made lending decisions for centuries all over the world. If a nonprofit or the government wants to loan money to high risk people, let them do it. Don't force private businesses to do it especially government insured banks.
"Kristy Fercho, who in August 2020 became the first Black woman to oversee Wells Fargo’s home-lending business and its more than 25,000 employees, says the bank’s processes are race-blind and that its lending decisions were “consistent across racial and ethnic groups.” Any racial disparity in outcomes for refinancing in 2020 was the result of variables Wells Fargo doesn’t control, she and other executives say, including credit scores, the appraised value of homes and broader inequities in the U.S. economy."
Finally the article speaks a truth, "A typical White family had eight times more wealth than a Black one, according to a triennial Fed survey last published in 2019." And now a huge misleading statement, "The refinancing gap gets at the ability of Black families to build on the wealth they have. Not being able to refinance a home “means that people have less resources to invest in their children, less resources to start businesses, less resources to renovate their homes, less resources to buy additional homes,” says Andre Perry, a senior fellow at the Brookings Institution whose 2018 study found that the average Black home was valued at $48,000 less than its White equivalent. That differential amounts to $156 billion in missing Black wealth."
Andre Perry's "study" is a paper written by himself that was not published or peer reviewed Ref 3. It was based on inaccurate Zillow robot home estimates. No appraisers were involved. Perry intentionally chose two very different groups made up of homes in areas where 0-1% were black and homes in areas well over 50% were black. He didn't know if the homes were owned by white or black people because it's impossible to tell ownership. He compared the very different group values to each other. He did not adjust for location because it's impossible to adjust for location. Everyone knows the main indicators of home value are location, location, location. That misleading paper based on a very small intentionally misleading sample allegedly showed a difference of $48,000 in value between homes in majorly white verses black areas.
We again go back to the real research which shows whites make more money than blacks, Latinos. Again, people buy homes they can afford. Someone with only $1,000 and a low credit score is not going to buy a $5,000,000 home in Beverly Hills no matter what race they are. They may buy a $75,000 home in Detroit with government financing. Is the bank or appraiser responsible for the differences in value between the $5,000,000 home and the $75,000 home? Not in reality but according to the article they are.
The article stated that blacks were even less likely to refinance more recently. This goes back to income, credit rating. Even if their home appreciated in value their income, assets, credit rating stayed the same. Banks are more cautious after the great recession. They now make sure people can pay back the loan, make the loan payments based on their income.
Finally after reading the entire article they post a truth, "A 2021 study by Fed researchers given access to a privileged version of the same data used by Bloomberg that included applicants’ credit scores showed racial gaps can be largely attributed to those scores and the recommendations automated underwriting systems make to lenders." Credit scores are the main indicator of underwriting decisions!
Of course the article went on to state that the credit score algorithm is biased and should be changed. It should include rent payments. Fine, let it include rent payments then do some research to see how that affects ability to repay home loans. Clearly it would only affect first time buyers as second time buyers don't pay rent.
The article then promotes the false biased appraiser myth. Then the article stated that banks raised the credit scores needed to get loans after the great recession which they state is not fair for black people. These people complained when black people lost their homes after the great recession and now they're complaining that they can't get a loose and easy loan? The only way some of these people will be happy is if people just gave them free money and houses. They might think that is fair.
The authors end their article on the big lie, "He and his wife moved their young family to a bigger home in the more expensive, and predominantly White, Fulton County suburb of Sandy Springs in 2017 to be closer to better schools. (snip)” The move has also given him a rare perspective on the economics of segregation. His new home and those around it are valued far higher than those in the predominantly Black southwestern Fulton County suburb they left behind, where they still own the property they sought to refinance with Wells Fargo. But Ricard says he pays almost as much for the home insurance on his old home, which he now rents out, as his new one."
Ricard wanted to move out of his old predominantly black neighborhood into a predominantly white neighborhood per his own words. He was willing to pay more for a home in a different whiter location. He noted the better schools. Property taxes pay for most of a school's budget. Property taxes are based on home values. The higher the home values, the more money for schools and the better they are. There is also a correlation with lower crime. Lower crime, lower home insurance rates. Of course his insurance is lower in the more expensive neighborhood. This has nothing to do with segregation today. These are all common sense facts for anyone especially anyone in finance, banking and real estate.
I believe these writers wrote this article knowing full well it's totally inaccurate. The real cause of the wealth gap between whites and blacks is the income gap. Fix the income gap and you will fix the wealth gap. White and black owned homes would eventually appraise the same if their incomes were the same. Stop blaming banks and appraisers for the income gap. Stop spreading this false and misleading misinformation. This misinformation has been weaponizing race to further divide our nation. Racism is a big enough problem as it is. We must do everything we can to stop racism but false and misleading articles like this just make it worse. They detract from the real issues of racism.
*I sent this blog article to all of the writers, contributors and editors of this misleading article.
Article: https://www.bloomberg.com/graphics/2022-wells-fargo-black-home-loan-refinancing/
Ref. 1. Szapiro, Aron (October 6, 2020). "Can Baby Bonds Shrink the Racial Wealth Gap?". Morningstar.com. Retrieved October 8, 2020.
Ref. 2. People who make more money, have more money and a higher FICO score.August 13, 2018. "Are Income and Credit Scores Highly Correlated?" Rachael Beer, Felicia Ionescu, and Geng Li1
https://www.federalreserve.gov/econres/notes/feds-notes/are-income-and-credit-scores-highly-correlated-20180813.htm
Ref. 3. Andre Perry's paper is based on erroneous data and contains major statistical and analytical errors making the results meaningless.
https://mary--cummins.blogspot.com/2021/06/false-statement-by-president-joe-biden.html
Chart below shows loan approval rating for difference FICO scores for FHA loans. They have looser requirements. Still, the higher the FICO, the higher the chance of loan approval.
Mary Cummins of Cummins Real Estate is a certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.
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