How Digital Mortgage Processes Can Create Fairer, More Equitable Homebuying
Amit Haller is the Co-Founder & CEO of Reali, a high-tech, high-touch real estate company founded in 2016.
One of the noblest goals in the technology industry is to democratize information and access to goods and services. In the real estate industry in particular, fair and equal access is one of the highest values we should continually strive for, especially in home lending. Digital mortgage options can play a role in creating a more equitable lending and home-buying process for marginalized communities.
After all, owning a home has long been touted as the pinnacle of the American Dream. However, decades of harmful housing policies, redlining and discrimination have made homeownership an inequitable process for some families. Numerous studies have shown that homebuyers can receive higher interest rates, more restrictive terms, and hidden fees based on race, ethnicity, gender identity, sexual orientation, and ability.
For instance, in 2019, African Americans were denied mortgages at a rate of 16%, and Hispanics were denied mortgages at a rate of 12%, as compared with 7% of white borrowers, according to a report from the Consumer Finance Protection Bureau. In addition, LGBTQ couples were 73% more likely to be denied a mortgage as compared with heterosexual couples with simlar financial details, according to a 2019 study from Iowa State University.
The differences partially stem from credit risk factors, which has long led to discriminatory mortgage lending in the U.S., the bureau reported, as well as other factors. This is where automated online processes may be able to step in to help. Although digital processes won’t solve every systemic issue, they may be able to make homeownership a more equitable process. Here’s how:
1. Online and digital options can provide more access and choice.
Homebuyers in many underserved communities tend to have few — if any — options when looking for a home loan. They often have to opt for the most convenient or closest lender, which can lead to predatory lending practices and high loan rates. If that’s the only available option, community members may “deal with it” or see it as the status quo rather than a bad actor who doesn’t have their best interest in mind.
With digital tools, however, users can pursue the entire homeownership journey online, whether buying, selling or refinancing their home. This can open up numerous options, including customizable and tailored services offered by lenders across the nation. With a broader view and more equitable practices, users can pick the option that best fits them, rather than the only option down the street.
2. The digital process allows for comparison and competition.
Through online tools, homebuyers can quickly compare interest rates, home loan terms and different customizable solutions that match their specific preferences. With the ability to shop around, homebuyers can also save more. In fact, a Freddie Mac study found that borrowers who sought out five rate quotes saved nearly $3,000 on average. Lenders are vying for customers in the online mortgage process, so getting quotes from more than one lender means that buyers are more likely to get a better interest rate, more favorable loan terms, and better long-term savings, the study found.
In addition, rather than feel overwhelmed in a high-pressure, high-stakes conversation, users can take their time to review information, look up additional resources and make an informed decision based on their own comfort level. Without showing their faces or meeting with anyone, borrowers can upload financial information, and the software processes the data.
Reducing the face-to-face process has been helping with applications, according to The New York Times, which reported that online lenders have seen significant increases in traditionally underrepresented homebuyers in recent years, including people of color, single women, LGBTQ couples and customers with student loan debt.
3. Algorithmic loan offerings can lead to less discrimination.
Discrimination in mortgage lending declined between 2009 and 2015, according to a 2019 study from the National Bureau of Economic Research, which the researchers suggested could be linked to automated and algorithmic loan offerings during the digital mortgage process. The bureau found that face-to-face lenders charge African American and Latinx borrowers 7.9 basis points more for purchase mortgages and 3.6 basis points more for refinance mortgages, adding up to $765 million per year in extra interest. In-person lenders also rejected minority applicants about 6% more often than comparable non-minority applicants. This means between 740,000 and 1.3 million loan applications were rejected in 2009-2015 that would have otherwise been accepted.
The researchers found that algorithmic lenders showed no discrimination in loan rejection decisions. That’s good news. However, they also found that online lenders charged minority borrowers about 5.3 basis points more for purchase mortgages, particularly in markets with less competition or instances where borrowers were less likely to shop around for other rates. Based on the growing competition from digital options, however, the researchers concluded that the increased ease of shopping for mortgages online could further reduce bias and discrimination in the lending market. It’s imperative that we continue to strive for this goal and adjust the algorithms to allow for equitable lending.
With additional options, time and more transparent information, digital mortgage options can reduce discrimination in home financing. Online options can also eliminate the hidden fees that studies have shown can accompany discriminatory lending practices. This could save customers tens of thousands of dollars, on average, over the life of a loan.
Although digital mortgage tools can’t fully solve historic discriminatory practices, they can create a safe, welcoming environment for homebuyers to begin their homeownership journey.
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