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
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(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