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Policymakers and advocates, including Woodstock Institute, have raised concerns about the impact of conservative lending patterns on wealth-building opportunities, particularly in communities of color that were hit hardest by the foreclosure crisis and the recession. Our recent research has shown that the Federal Housing Administration (FHA) is largely alone in providing mortgage credit to communities of color. But what exactly is the mismatch between lending practices and communities of color? How much has credit actually tightened? Take a look at the charts below to get a sense of how the mortgage market has changed over time.
Fannie Mae and Freddie Mac, which now back 79 percent of newly issued mortgage loan securities, report on their credit standards in their reports to the Securities and Exchange Commission (SEC). The charts below show that these government-sponsored enterprises (GSEs) have, in recent years, focused almost exclusively on lending to those with pristine credit profiles. In 2002, only 36 percent of Fannie Mae-backed loans went to borrowers with credit scores above 740, while in the first quarter of 2012, 76 percent of Fannie Mae-backed loans went to borrowers with scores in that range. Loans made to borrowers with credit scores of less than 659 comprised 17 percent of Fannie-backed loans in 2002, compared to only three percent of such loans in the first quarter of 2012. The average credit score of a borrower in a Fannie Mae-backed loan was 714 in 2002 and 763 in the first quarter of 2012. Freddie Mac’s trends are similar.
 
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The FHA does not file reports with the SEC but makes similar disclosures in quarterly reports to Congress. Even at the FHA, which traditionally has served populations with challenges accessing credit, credit standards have risen substantially over the past five years (no earlier data is available). In the fourth quarter of 2006, 42 percent of FHA loans went to borrowers with credit scores under 620, while only 3.4 percent of FHA loans made in the first quarter of 2012 were to borrowers in that range. Over the same time period, the percentage of FHA loans made to borrowers with credit scores greater than 720 rose from 11 percent to 33.5 percent. The average credit score of FHA borrowers rose from 631 in the fourth quarter of 2006 to 699 in the first quarter of 2012.
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How do these lending patterns compare to borrower profiles in communities of color? Our report “Bridging the Gap: Credit Scores and Economic Opportunity in Illinois Communities of Color” analyzed patterns of credit scores in Illinois communities. Comparing that data to the practices of the GSEs and the FHA, which together back 99 percent of newly issued mortgage securities, it’s clear that borrowers in communities of color have few mortgage options available. Twenty-one percent of African American borrowers in Illinois have credit scores between 620 and 699, while only nine percent of loans backed by the GSEs go to borrowers with scores in that range. Fifty-four percent of African Americans have credit scores below 620, while just one percent of GSE-backed loans and four percent of FHA loans go to borrowers with scores in that range.
 
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These data show how damaged credit resulting in lower credit scores has played an increasing role in reducing credit opportunities for borrowers of color. While not every potential home buyer has the capacity to take out and repay a mortgage loan, it is possible to make safe and sustainable loans to borrowers with a broader range of credit scores than the market currently accommodates.
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