Determinants of housing loan patterns toward minority borrowers in Mississippi.

Author:Ezeala-Harrison, Fidel

The issues of inequality and discrimination in bank lending have been studied widely and established as products of the broader institutional mechanism that underlie the greater society that is the U.S. capitalist system. Following Dymski and Mason's (2005) recent analysis, this study examines the pattern of bank lending activities regarding owner-occupied housing loan extensions to minority members of Mississippi's population. We examine this issue as an aspect of the institutional discrimination that is entrenched in the operation of the credit market system in the State. In this respect, and with regards to Mississippi, this paper seeks to contribute to the abundant works that have depicted the operation of the housing loan market as an institution rife with discrimination. The purpose is to determine the degree to which the banks have or have not observed fair and equitable lending practices toward minority borrowers, relative to the members of the majority population. This inquiry is important in several respects. Two of which are: it sheds light on the issue of housing affordability as a major aspect of the overall poverty problem and ways to combat it; and, it enables us to stress the importance of the need for more flexible lending practices among banks toward minority members of the population, as an important way of enhancing the pace of economic development in the society.

Homeownership has been touted as a crucial aspect of economic transformation and empowerment of communities. It represents a type of personal investment in an individual's community that enhances personal and communal economic prospects and strengthens community neighborhoods. The sense of deep-rooted interest and stability within one's community that homeownership provides to an individual and/ or family or household, has been at the core of the realization of the American Dream, which remains the focal point of the aspiration of any individual American. (1) Yet, this "dream" remains illusive to many individual members of the minority population (the majority of which is Black) in Mississippi. (2)

Existing U.S. Bureau of the Census data suggests that the U.S.-wide homeownership rate (the proportion of households occupied by owners) currently stands at a record 68.6%, relative to the overall minority rate of 50.6%--of which over 1.5 million constitutes new (additional) minority homeowners between 2002 and 2004. The data indicates that this is the first time ever that a majority of overall minority family households are resident-owned nationwide, although the picture is quite different in the case of Mississippi where the overall homeownership rate among the population in 2003 was a record 73.4%, much higher than the national rate; and yet the minority homeownership rate of 34.3% (2002) is less than half the overall State rate. This situation underlies the state of economic underclass and disempowerment that this segment of the population is locked into. There is the need to find and tackle their fundamental causal factors as a means of addressing the entrenched poverty problem among the underserved minority population of Mississippi.

As much as homeownership represents a crucial element in the realization of the American Dream, the opportunity and accessibility to bank financing to purchase one's own home, also represents the American (individual taxpayer's) Dream. (3) It is this aspect of the "dream" that continues to present obstacles to the minority group in Mississippi.

In this paper, we analyze data on home loan applications and accessibility patterns among the minority population relative to the majority White population groups in Mississippi, with a view to determining their relative success rates. The objective is to assess whether or not (and to what extent) any non-economic parameters play a major role in home loan accessibility extensions by banks in Mississippi to minority applicants. Certain key determinant factors are considered: factors such as employment status (including employment stability), income level, asset level, credit rating, loan amount, and current and prospective home locations, are contrasted in the relative roles they play in the bank lending decisions toward both minority and White home loan applicants. The outcome would enable us to determine the role of non-economic factors (such as lending discrimination) in influencing bank lending to minority groups in Mississippi.

Home-Loan Discrimination: Previous Literature

For Mississippi, the permeation of mortgage loan discrimination seems counter intuitive given the fact that the State appears among the five States with the highest home ownership rates (although less urban than the national average). A recent (2004) study undertaken by Western Economic Services (WES), assessed Home Mortgage Disclosure Act (HMDA) data covering 1993-2002, and data from the Department of Housing and Urban Development (HUD), to determine the degree of discriminatory racial practices in rental as well as mortgage markets in Mississippi. Among the study's major conclusions is that unusually high denial rates exist for home loan applications for Blacks relative to Whites in Mississippi. (4) Further, it reveals the existence of institutional barriers ranging from the unawareness of legal provisions on the part of borrowers (and ramifications on the part of discriminating banks), to the lack of fair housing testing and enforcement, on the part of housing and development authorities. The study also highlights other key problems and impediments to fair housing provision in Mississippi. These include very high denial rates for manufactured home loan applications (an aspect that has a huge concentration of minority borrowers). There also is the high-risk and burdensome home-improvement loan amounts that are advanced to low-income borrowers by sub-prime lenders (with their usually harsh and severe loan servicing conditions), which tend to jeopardize the financial positions of these low-income homeowners. These illustrate clear examples of the "new inequality" instruments of home loan lending discrimination revealed by Williams, McConnell and Nesiba (2005), in their argument that denial rates alone would understate the degree of discrimination faced by minority applicants.

Holloway (1998) applied a sample of mortgage applicants drawn from the 1992 individual-level Home Mortgage Disclosure Act (HMDA) data, to find that lending institutions treated Black mortgage applicants differently when the application was for buying homes in predominantly White neighborhoods than when buying in Black neighborhoods. This indicated another form of the geographical discriminatory practice of "redlining" (whereby lenders discriminated against minorities by denying credit for properties located in majority and transitional neighborhoods). The discrimination that is contingent on the racial composition of neighborhoods--the neighborhood contingency class--appear to be strong in producing and maintaining the extremely high levels of segregation that exist in most U.S. metropolitan areas. The study compiled evidence of lending discrimination against minorities from the mid-1960s, and concluded that minorities were denied credit directly on the basis of their race. In addition, through the practice of redlining, the home loan market has tended to operate in such a way as to worsen residential segregation between different races in the United States.

From the institutionalist perspective, quite a great deal of work has been done on housing loan discrimination that places the issue squarely at the center of the larger problem that is institutional discrimination. Some of the most important and far reaching studies on the issue of home loan discrimination toward minorities in general, and Blacks in particular, in the United States are perhaps found in the works of Williams, McConnell and Nesiba (2005; 2001), Dymski and Mason (2005), Dymski (2001; 1999), Holloway (1998), and Nesiba (1996) among others. These works clearly establish that the redlining practice pervasive in the operation of the credit market constitutes an institution that fosters discrimination and by extension worsens racial segregation. Dymski (2001) not only argued that racial discrimination is strongly present as evidenced by the empirical implementation of "white privilege" in the residential credit market, but also presented new econometric results which provide empirical insight into the case that while racial inequality is strong in residential credit markets, White advantage in credit markets remains statistically significant in an econometric model of residential loan approval and denial frequencies. His results suggest that for Blacks and Hispanics, racial disadvantage remains statistically significant even though its magnitude in many cities has fallen during the 1990s. Earlier, Dymski (1999) had argued passionately against banking consolidation in that, because of systematic institutional discrimination, large, consolidated banks do not serve minority and low-income customers well, and certainly not as well as smaller banks and non-bank financial institutions would.

In a study that critically examined and compared the findings of empirical researchers with those of economic theorists on the subject of racial discrimination in home loan markets, Nesiba (1996) found strong evidence that supports the position of empirical researchers to the effect that racial discrimination exists in virtually every home loan market in the United States contrary to the conclusions of economic theorists. Moreover, Williams, McConnell and Nesiba (2001) carried out a longitudinal study, which applied Indiana data to compare the characteristics of loans made by different institutions to determine which types of lenders advanced more credit to low- and moderate-income borrowers over the period 1992-1996. They found that even though the...

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