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This is the third chapter in a series of research articles on racial inequities in US housing produced by the Chandan Economics Research Team. Other posts in this series can be found here: 1. Racial Inequities in Household Wealth. ; 2. Racial Inequities in Housing Affordability ; 4. Racial Inequities in Housing and Environmental Quality ; 5. Racial Inequities in Housing: Policy Considerations.
In the first two chapters of our series, our discussion focused on barriers to upward mobility for Black, Indigenous, and people of color in America and the residual effect on housing affordability. In this piece, we peel one layer deeper and explore the financial market disparities fueling the persistent racial wealth gap.
Significance of Credit Access
"Credit access" generally refers to a person's ability to borrow financial capital and is a crucial driver of growth in a market-based economy. Examples of these functions include loans to small businesses, leverage in investment deals, and probably the most familiar to the everyday consumer— mortgages and credit cards. Credit products like these allow individuals and institutions to invest in areas of potential, often boosting productivity and wealth in the process.
Banking sits at the foundation of credit market access as it both establishes direct relationships between households and creditors, and functions as an engine of economic growth. As a result, the lack of banking in a community severely limits its economic potential.
According to the FDIC, roughly 4.5 % of US households had used no banking services in 2021. A separate 14.1% of households are estimated to be "underbanked," meaning that they have used nonbank credit such as payday loans or anticipated tax refunds for their financial needs within the past 12 months.
The US unbanked rate displays familiar disproportions when measured by race. In 2021, 11.3% of Black Americans reported having no access to a checking or savings account in the previous 12 months. 9.3% of Hispanic Americans were unbanked, while 6.9% of Native American and Alaskan Native households were unbanked. 5.0% of Multiracial-identifying households were unbanked, followed by 2.9% of Asian households and 2.1% of White households.
Lower-income households intuitively face higher barriers to credit access than higher-income ones; still, racial disparities in unbanked rates persist even between lower-income households. Among those earning between $30,000 and $50,00 per year, 8.4% of Hispanic households are unbanked, 8.0% of Black households, and 1.7% of White households.
Historical Context
Racial disparities in credit access that persist today are naturally tethered to the legacy of slavery and structural racism in the United States. Following the US civil war, many newly freed African Americans were fundamentally internally displaced. The multi-generational extent of US slavery meant that many African Americans lacked basic education or resources, while families were often scattered across several states.
The conflict also left much of the American South, where most of the African American population resided at the time, in physical and economic ruin. While post-war reconstruction efforts often spur economic growth in affected areas, Jim Crow laws that enforced racial segregation and voter disenfranchisement restricted such market-based outcomes.
These complex economic and political realities limited the development of markets in African American communities compared to predominantly White ones—including financial markets. One of the earliest institutions created to provide credit access to African Americans was the Freedman’s Savings and Trust Company, chartered shortly after the war’s end in 1865. By the late 1800s, the nation’s first Black-owned community banks were established, establishing new commercial credit markets for African American families.
As the federal government extended its role in financial markets — particularly the mortgage market — during the Great Depression, federal policy played an increasing role in reinforcing racial disparities in credit access. A 2020 paper by The American Sociological Review found that segregation was more prevalent in areas appraised by Home Owner’s Loan Corporation (HOLC), a New Deal-era lending agency aimed at spurring American homeownership in response to the Great Depression. Redlining practices often categorized entire neighborhoods as “hazardous” based on an areas’ racial characteristics, dampening real estate development in minority-majority neighborhoods.
Government programs where African Americans faced better access still experienced a degree of racial disparities in benefit impact. For example, a study by The National Bureau of Economic Research (NBER) analyzed the use of the G.I. Bill for educational attainment by World War II veterans following the war. It found that although Black veterans enjoyed comparable access to G.I. benefits as White veterans, a pre-War racial gap in education levels and the concentration of most Black students in segregated, underfunded colleges in the South ultimately limited Black veteran outcomes.
Efforts to Close the Financing Gap
Credit Reporting and Underwriting
Having no established credit history is a significant obstacle to accessing financial markets. Unfortunately, this is both a widespread issue for US households and impacts races disproportionally.
A 2021 survey conducted by Credit Sesame found that more than half (54%) of Black Americans reported having poor, fair, or no credit history at all. 41% of Hispanic Americans, 37% of White Americans, and 18% of Asian Americans reported similarly. According to a 2022 analysis by LendingTree, limited access to financial products due to poor credit scores is widespread, impacting more than 4-in-10 Americans.
Fannie Mae has made recent strides, via its role as a federally backed mortgage insurer, to increase credit access by allowing borrower rental payment history to be considered in loan applications. The change will enable renters that lack an established credit history a mechanism for building one, eventually leading to improved mortgage access to traditionally underserved households. Fannie Mae expects the change to increase homeownership opportunities for approximately 20% of the US population.
Public Financing
According to research conducted US Department of Housing and Urban Development (HUD), federal policies have been "critical" in helping American families build wealth. However, they often require borrowers to have already some level of savings, which, over time, has led to policies disproportionally benefiting higher and middle-income families.
Some examples that HUD notes in their analysis include the mortgage interest-rate tax deduction and tax credits for education and retirement. These products perform well at boosting outcomes for households with access to such incentives but do little to assist low-income families with little to no starting capital.
Direct rental assistance and supportive services such as HUD’s Family Self-Sufficiency FSS program have shown some success. However, researchers at HUD cited evidence showing that the FSS program performed well at fostering family savings rather than helping change incomes—given that labor markets determine wages. In 2021, the average FSS participant produced about $9,500 in savings, with 25% of participants no longer needing rental assistance following completion. Moving forward, HUD has emphasized the need for federal programs to focus on asset building through a combination of savings incentives and direct credit access.
Appraisals
A study conducted in 2022 by Brookings using FHFA data found that homes are consistently undervalued in majority-Black neighborhoods, often up to 23% below what their valuations would be in non-Black neighborhoods. Hispanic-majority, Asian-majority, and White-majority neighborhoods do not exhibit similar devaluations in comparison to each other.
Racial bias in appraisals extends back generations and likely reinforces racial segregation. Today’s appraisal gap is less understood, and its impact is difficult to quantify given that homes typically sell above appraised values. Many speculate that racial bias plays a role. Industry groups have taken steps to address the gap, including addressing diversity within the appraisal profession itself. According to The Appraisal Institute, 85% of US appraisers identify as White. The Biden Administration also recently established a task force probing the issue.
Diversity in Banking
A 2022 assessment of community lending at Federal Reserve-regulated banks by the Harvard Law School found that an increased presence of minority directors at the Fed’s regional banks was associated with greater lending outcomes to minority communities.
The paper's conclusions rely on several proxies and comparisons. Still, one compares minority lending outcomes between banks regulated by the Federal Reserve and those regulated by other regulatory agencies. It found that a diverse regional Fed board led to improved minority lending outcomes compared to both banks that were regulated by less a diverse regional Fed, and banks regulated by entirely separate agencies.
While the mechanisms of such board influence are difficult to ascertain, the research supports evidence that representation has benefits beyond symbolism and influences economic outcomes in underserved communities.
Other posts in the 2023 series can be found here: