Navigating the history of wealth, credit, and housing in the U.S.

Know your credit history, part two

‍“Know your credit history” is a three-part series that tells the stories behind the financial structures that shape how we make, lend, and borrow money in the United States today. Zest AI is making lending smarter, more efficient, and more accessible. Knowing where our systems of credit have come from is the first step in addressing their shortcomings and moving towards creating fairer and more inclusive credit for all.

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If you were planning to buy a house, where would you start?

You’d pick a location — maybe you’re looking for somewhere not too far from your workplace, or a starter home with a great school district to put your children through. With your budget in mind, you save up for a down payment, find a lender to see how much you can borrow and how much you’ll be paying for a mortgage, and hopefully get  a preapproval letter.

Next, you start house hunting with a real estate agent, touring, making calls, and eventually start making offers. After negotiating and landing on a price you complete the mortgage process by inspecting the house, closing, and now you are a homeowner.

Buying property in the U.S. is far from a simple, easy, or quick process. The average time from contract to close is estimated to be 50 days, but most sources say that the real time it takes to buy a home is between six months and a year. However, we are taught that if we do the right things like be responsible with our money, plan for the future, live within our means, and keep a good job, this facet of the American Dream is within everyone’s reach.

For years, Rachelle, a 33-year-old professor with a good credit score, believed the same. That is until she found herself unable to even begin the home-buying process after being turned down twice for a loan. After months of research, working to improve her credit score, and even securing a prestigious teaching position, Rachelle was denied a loan one more time. It turns out that as a black woman in West Philadelphia, her experience was not abnormal; Rachelle’s experience was part of a larger pattern, research showing that in her area, African Americans were 2.7 times as likely as whites to be denied a conventional mortgage.

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The foundations of housing discrimination

Finding the reasons behind the uphill battle certain populations face in securing fair, equitable home loans will take us all the way back to the 1930s.

As part of The New Deal, President Franklin Roosevelt signed the National Housing Act in June of 1934. The purpose of the law was: “To encourage improvement in housing standards and conditions, to provide a system of mutual mortgage insurance.” As a response to the economic collapse of the Great Depression, the law created the Federal Housing Administration (FHA). This federal agency increased access to mortgages to a wider sector of the middle class by insuring private lenders while also incentivizing the construction of low-income housing developments in major cities throughout the country.

While the NHA was a massive step forward for housing access in the U.S., systemic biases colored how this legislation was implemented, skewing how these potentially life-changing government-backed loans were distributed. In The Color of the Law, Richard Rothstein discusses this phenomenon. Under the NHA, each time a bank applied to the FHA for insurance on a loan, the agency would send a local real estate agent to appraise the property in question. As demand for these appraisals increased, the FHA issued the first Underwriting Manual in 1935. The language of this manual emphasized the need for properties in the same areas to be “occupied by the same social and racial classes.”

These important distinctions in how the FHA backed loans were then coupled with the effects of redlining resulted in a system that prevented the upward movement of minorities in the U.S.. Between 1945 and 1959, less than two percent of federally insured loans were granted to Black/African Americans.
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Redlining – a discriminatory practice in which services are withheld from individuals residing in neighborhoods classified as “hazardous” for investment. Generally, these neighborhoods have significant numbers of racial and ethnic minorities and low-income residents.

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Paving the way for fair housing

The bias in the language behind how the FHA backed loans had an intense cascading effect for communities of color in the U.S. Not being able to secure a mortgage goes far beyond not having a safe and secure place to live — it impacts health, education, and social mobility. For example, housing and lending discrimination have led to a continued loss of resources for minority communities. A 2019 study from EdBuild showed that predominantly nonwhite school districts receive $23 billion less funding than majority white school districts, despite serving the same number of students.

During the civil rights era, the consequences of bias in the FHA’s loan practices were called into question, prompting the U.S. government to pass The Fair Housing Act in 1968. This piece of legislation sought to correct the systemic biases behind the implementation of the NHA and made it illegal to discriminate concerning the sale, rental, and financing of housing based on race, religion, national origin, sex, and eventually handicap and family status. While we have come a long way since the origins of housing discrimination in the U.S., there is still progress to be made in terms of providing fair, sustainable credit to all through equitable access to credit.

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Securing and expanding fuller, richer lives for all

Rachelle’s story is just one of many. Even though redlining was outlawed in the 1960s, the National Association of Realtors reported that, as of 2020, homeownership rates were about 72 percent for white households, 62 percent for Asian, 51 percent for Hispanic and 43 percent for Black. The goal of Know Your Credit History is to contextualize statistics like these, to show that we are not so far removed from the lending practices that led to these outcomes.

Home ownership in the U.S. is an excellent case study to demonstrate the need for fair and inclusive credit. Zest AI’s mission is to use the tools we have today to create equitable systems of lending. Affordable, accessible, and fair credit is the first step in making something like a house or a car or the building blocks for a better life available to all. Making this mission a reality will be a joint effort that asks policymakers, lenders, advocates, and technologists to strive towards progress and not repeat the mistakes of the past.

At the end of the day, a house is much more than a house. Lowering the barriers that keep certain populations from owning one is part of a larger systemic change needed to close the wealth gaps that have resulted from legacy scoring methods and unfair lending practices.

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Zest AI wants to recognize the contributions of our Summer 2023 interns for offering their insights to our site — thank you Simi Situ for this blog.