The Federal Housing Finance Agency’s new rules, set to take effect on May 1, will require borrowers with lower credit ratings and less money for a down payment to pay less for a mortgage, while those with higher credit ratings will pay higher fees.
This new policy disproportionately affects Asian American homebuyers, who already have difficulty qualifying for home lending despite their excellent credit scores.
Asian Americans have an average credit score of 745, higher than any other racial demographic in the United States.
According to Investopedia, they are the only racial demographic with a rating classified as “very good” by widely used FICO standards. However, despite having higher credit scores, they still have lower homeownership rates than White Americans.
A higher credit score is equivalent to paying more.
Under the new rules, experts estimate that borrowers with a score above 680 could expect to pay an extra $40 monthly on a $400,000 mortgage.
Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation, noted that the new rules would act like a tax increase on highly-qualified homebuyers.
“A government-sponsored entity is saying that if you have good credit, we will have you pay more. And we’re going to use that to have other people pay less who have less money and a lower credit score,” he said.
Lower homeownership rates for Asian Americans.
Asian Americans already face barriers to homeownership, despite their high credit scores.
A study by the Urban Institute found that Asian Americans have a lower homeownership rate (57%) than White Americans (72%). One of the reasons for this disparity is that Asian Americans have higher mortgage denial rates than White Americans.
The study found that “the denial rate for Asian mortgage applicants is 8.7%, compared with 6.7% for White mortgage applicants,” even though Asian Americans have a higher average credit score than any other demographic.
Asian Americans experience higher mortgage denial rates.
The study further revealed that income, debt-to-income ratio, and geographic location play a role in mortgage approvals.
However, even when factoring in all lending underwriting standards, Asian Americans experience higher mortgage denial rates than White Americans. The study notes that “Asian applicants are denied more frequently than White applicants at all income levels.”
Asian Americans with a higher income are 50% more likely to see their application denied. Even those with similar debt-to-income ratios to White applicants have higher mortgage denial rates.
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Geography is Not a Factor.
The study also examined mortgage denial rates for Asian American homebuyers in metropolitan areas.
It found that “the denial gap persists and holds regardless of home price tier,” suggesting that Asian Americans are consistently denied mortgages more frequently than White Americans, irrespective of the home price.
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Further Research Is Needed to understand why Asians are denied mortages.
The study concluded that “more research is needed to understand why Asian homebuyers are denied mortgages more frequently than White borrowers, despite having, on average, higher credit scores and higher incomes.”
If this denial gap is not addressed, it will keep more potential Asian homebuyers out of homeownership and widen the homeownership gap between Asian and White households.
Stern noted that the new rules could be another unwelcome obstacle for Asian Americans, adding that “such unintended consequences are a common byproduct of government intervention in the market.”
He argues that the left has controlled the government for the last few decades, increasing regulations, taxes, and the size of the government. As a result, fewer people are making it up the social ladder.
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