A recent story in the Wall Street Journal brought to light the fact that most jumbo loans by big banks are made to white home buyers. In fact, a whopping 67% of jumbo loans made by the 10 largest U.S. retail banks were made to white buyers? This situation is causing problems for big banks as they face two regulatory mandates: reduce risk and lend to a diverse clientele.
The country’s banks are increasingly focused on making jumbo mortgages, partly in response to regulatory pressure to curb risks. However, these high-dollar loans predominantly go to white and Asian borrowers, contributing to a decline in the share of mortgages that go to Hispanics and blacks.
The biggest U.S. banks are tilting toward these high-dollar mortgages as they overhaul loan operations. And jumbo loans, which were less important during the subprime-loan boom, are helping banks take on less risk, as mandated by regulators in the postcrisis era.
These loans, however, could put banks at odds with another federal regulatory mandate—one that says lenders should serve a racially diverse set of customers. As they approve relatively more jumbos, major banks are granting fewer mortgages to African-Americans and Hispanics than just before the crisis.
For banks, “it’s one of those damned if you do, damned if you don’t situations,” said Stu Feldstein, president at SMR Research Corp., a mortgage-research firm in Hackettstown, N.J.
The Journal analyzed data on every mortgage approval reported to the federal government for home purchases in 2007 and 2014, the most recent available, including borrower race or ethnicity. In that period, each of the 10 biggest U.S. retail banks increased the share of its mortgage approvals that are jumbos.
Jumbos, loans above $417,000 in most markets, are attractive because they typically feature high credit scores, big down payments and low default rates. And they aren’t linked to the government programs that cost banks tens of billions of dollars in fines related to the subprime-loan debacle.
These loans predominantly go to white and Asian borrowers, the analysis showed. In 2014, 3.0% of the biggest banks’ jumbo borrowers were Hispanic and 1.3% were black. As the 10 big banks issued proportionally more jumbos, they collectively decreased their share of all home loans to blacks and Hispanics. Their proportion of lending to those minorities also fell in non-jumbo mortgages alone, though not by as much.
Among all approved mortgage applicants from the 10 banks, 5.3% were black in 2014, down from 7.8% in 2007; 7.4% were Hispanic, down from 10.6%.
Just as the subprime customer was the ideal borrower for some banks before the crisis, the jumbo borrower is most appealing for many banks now. While the jumbo uptick isn’t solely responsible for lending declines to some minorities, these loans epitomize the direction banks are turning their mortgage operations—toward safer, more-affluent customers who tend to be white or Asian.
This poses an existential question for regulators and executives almost a decade since the crisis: Are banks tools to stimulate economic growth and deliver profits for shareholders, or are they like utilities, whose primary purpose is to deliver valuable services to a broad spectrum of society?
The Department of Housing and Urban Development is looking into mortgage-lending declines to some minorities, said Bryan Greene, HUD General Deputy Assistant Secretary for Fair Housing and Equal Opportunity, declining to specify whether it was examining specific lenders or products. A number of the federal agencies overseeing fair lending have said there isn’t necessarily a conflict between fair-lending requirements and new mortgage regulations or jumbo lending.
Regulators have fined two smaller banks, one focused on jumbos, in the past nine months for not lending enough to blacks and Hispanics. Prosecutors have said they are developing other cases.
Have you worked with minority buyers who’ve struggled to get jumbo loans? We’d love to hear from you.