A new rule from the Biden administration will force homebuyers with good credit to pay more to subsidize riskier borrowers.
This policy may disproportionately affect Asian Americans, who already face barriers to qualifying for home lending.
Starting May 1, borrowers with lower credit ratings and less money for a down payment will qualify for better mortgage rates than they otherwise would have. Meanwhile, those with higher ratings will pay increased fees.
However, the burden of the new rules may fall disproportionately on Asian American homebuyers. As a group, Asian Americans have credit ratings that are better than any other racial demographic. According to a report by Investopedia, Asian Americans have an average credit score of 745, the only racial demographic with a rating classified as "very good" by widely used FICO standards.
This average credit score is 11 points higher than White Americans, with an average credit score of 734. Asian Americans also have higher scores than Hispanic and Black Americans, with average ratings of 701 and 677, respectively.
A borrower's credit score is one of the most critical indicators of creditworthiness for lenders. It helps to determine if a prospective borrower will qualify for a loan and what interest rate will apply.
However, those with higher scores may be punished for their creditworthiness under the new rules. Experts estimate that borrowers with a score above 680 could expect to pay an extra $40 per month on a $400,000 mortgage. Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation, called the new rules a tax increase for highly-qualified homebuyers.
"It is mechanically a tax increase to cover an increase in welfare. There's no other way to spin it," Stern said. "A government-sponsored entity is saying that if you have good credit, we're going to 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."
This reality could be even harsher for Asian Americans, who have already faced barriers to homeownership despite having higher average credit scores. According to a 2021 study by the Urban Institute, Asian Americans have a lower homeownership rate (57%) than White Americans (72%). One reason for this disparity is that Asian Americans have higher mortgage denial rates than White Americans.
"We found that the denial rate for Asian mortgage applicants is 8.7%, compared with 6.7% for White mortgage applicants," the authors wrote.
This reality comes despite Asian Americans having a higher average credit score than any other demographic. Other factors, such as income, debt-to-income ratio, and geographic location, also determine whether a loan will be approved.
However, when examining Home Mortgage Disclosure Act (HMDA) data, the study found that Asian Americans experience higher mortgage denial rates when factoring in all lending underwriting standards.
"Asian applicants are denied more frequently than White applicants at all income levels," the study notes. "In 2019, median income was $107,000 for Asian applicants and $82,000 for White applicants. For Asian applicants with annual incomes below $50,000, 16.3% were denied a mortgage, compared with 11.3% of White applicants in that income bracket."
This trend continued as individuals climbed the income ladder, with high-income Asian American mortgage applicants being 50% more likely to see their application denied. The study also found that Asian Americans with similar debt-to-income ratios to White applicants also had higher mortgage denial rates. Asian-American applications with a ratio below 30% and an income below $50,000 were denied at 11.5%, compared to 9.2% for White applicants.
This trend continued as individuals climbed the income ladder, with high-income Asian American mortgage applicants being 50% more likely to see their application denied. The study also found that Asian Americans with similar debt-to-income ratios to White applicants also had higher mortgage denial rates.
Asian-American applications with a ratio below 30% and an income below $50,000 were denied at 11.5%, compared to 9.2% for White applicants. This disparity cannot be explained by geography either. In metropolitan areas with large numbers of Asian mortgage applicants, the denial gap persists regardless of the home price tier, as shown in the study.
This finding suggests that Asian applicants are consistently denied more frequently than White applicants, regardless of the home price. The study concluded that more research is needed to understand why Asian homebuyers are denied mortgages more regularly than White borrowers, despite having, on average, higher credit scores and higher incomes.
Failing to address this denial gap would keep more potential Asian homebuyers out of homeownership and widen the homeownership gap between Asian and White households.
The new Federal Housing Finance Agency rule may exacerbate this issue for Asian Americans. The law punishes those with better creditworthiness by increasing their fees to subsidize riskier borrowers.
According to Richard Stern of The Heritage Foundation, this unintended consequence of government intervention in the market is a common issue. The left's control of the government for the last few decades has increased regulations, taxes, and the size of the government, destroying the free market enterprise system that has lifted so many people out of poverty. Stern warned that the collateral damage of such policies would not hurt bureaucrats and regulators.
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