While some would argue that the limited amount of mortgage lending in low-and-moderate income census tracts reflects the close connection between borrower income and credit scores, the truth is a bit more
nuanced. It seems that income itself is not a clear predictor of being credit worthy, because once the numbers are broken out by geography it is easy to see that the same group of borrowers differs widely in their underwriting profile.
A few years back, the Federal Reserve published a study on the divergence of credit score among different demographic groups. Since they chose to collapse discrete credit scores into normalized numbers ranging from 1 to 100, the results didn't translate into clear cut prime and sub-prime buckets. Nonetheless, the results did show that demographics did reveal some widespread differences. In average terms, Asians and whites had higher scores than black and Latino borrowers. Young people scored below older people.
But significantly, those numbers sampled from a range of all households that applied for any type of credit. They drew from people applying for an auto loan, a credit card loan, a mortgage loan, a home equity loan, as well as general credit lines. That's very different than a sample that was limited to mortgage applicants. That is a key distinction when an analysis focuses on the availability of credit for buying homes, as it stands to reason that mortgage applicants would come from an upper sliver of all potential borrowers.
I recently had the opportunity to pour over a data pull from the credit and LTV profiles of mortgage applicants at one regional bank. The numbers were interesting. First, while the average numbers were lower for people from LMI tracts and from the Latino and African-American groups, the numbers were not very different. Here are the averages:
- LMI tract applicants: 722; Non-LMI tract applicants: 741
- Majority-minority tract applicants: 717; Majority-white tract applicants: 742
- Latino applicants: 709; non-Latino applicants: 735
- White applicants: 738; Black applicants: 691; Asian applicants: 740
- Male applicants: 726, Female applicants: 727
In every instance, average numbers varied by no more than 51 points and each group averaged above 690.
Where things diverged were in the share of those scores that fell below 680. Overall, 21.8 percent of applicants had scores below 680. However, while only 16.7 percent of LMI tract applicants had subprime scores in Washington, DC, 35 percent of such groups were subprime in Louisville. Thirty percent were subprime in Tampa, as were 29 percent of applicants in Atlanta.
Where geography does appear to show differentiation is at the state level. Here is one odd result: female borrowers in DC were twice as likely to have sub-680 credit than did male borrowers.