Much has been written about the 21st Century challenges involved in securing a mortgage loan. Journalists and industry experts have documented the post-Great Recession cautiousness that characterizes today’s regulatory, underwriting and risk assessment approaches. Long cherished as the wealth-building cornerstone of the American Dream, the pursuit of home ownership can feel like a gauntlet too difficult to run for some individuals and families.
It’s true that much more work needs to be done to balance market risk with financial inclusion in the mortgage loan business. But we must resist nostalgia for the “good old days” of early 20th Century lending practices. We should be equally careful about the villainization of industries – such as the credit reporting agencies – that play a vital role in ensuring that mortgage lending remains fair, equally accessible and safer for consumers and financial institutions alike.
Let’s take a walk down memory lane, for example, through the 1970s…
Economic stability and consumer confidence require continual, comprehensive reinforcement, but it’s important to remember how far we’ve come. Simply put, the 70s offered a large helping of financial volatility to go with America’s post-Vietnam War cultural transformation. Let’s start with the stock market. The crash of 1973 and 1974 included a collective 40% loss in value in just 18 months. In the aftermath, it took almost a decade for individual investors to warm back up to stock purchases.
At the same time, economic growth was strained overall. Unemployment numbers reached double-digits during the decade. And runaway inflation led to skyrocketing interest rates. Many struggling consumers were simply priced out of the market for new cars and homes. The situation wasn’t much better for lenders, as higher and more unstable interest rates increased general portfolio risk levels.
However, any realistic assessment of America’s financial picture in the 1970s requires us to look behind the numbers at some of the less institutionalized, but equally damaging dynamics at work in mortgage lending.
Underwriting before credit bureaus
In the earliest days of credit reporting, before the ascent of the big three reporting credit reporting agencies (CRAs) – Equifax, Experian and TransUnion - there were many credit bureaus, employing fleets of representatives rendering highly subjective evaluations of a consumer’s creditworthiness. A rep would call or visit stores and other businesses with which a consumer engaged to ask if he (because it could rarely be a “she” in those gender exclusionary days) was paying his bills on time. Depending upon the mood, account knowledge and prejudices of the responder, a consumer could be marked as credit unworthy, with little recourse to dispute the assessment.
Systemic denial of loans
Character and its influence on financial decision-making in these early days disproportionately affected certain demographics. The systematic denial of loans to women, African-Americans, the LGBTQIA community and other minorities is a historical blight on the economic era. The unequal underwriting standards applied to different groups were not explainable by objective creditworthiness. The fear that an individual with a solid credit history could be denied a loan simply because an officer saw something he didn’t like was well-founded.
Enter the 1970s: Objective credit reporting
Objective credit reporting, put in place by the 1970s, began to put a dent in this systemic disenfranchisement. Lending abuses were further discouraged by the Home Mortgage Disclosure Act, passed in 1975, which required financial institutions to disclose their lending practices, applying them uniformly in communities served. That said, a report from The Fair Housing Center of Greater Boston found that African-American and Latino home buyers still faced discriminatory challenges in the form of “quoted higher loan rates and offered fewer discounts on closing costs.” Given the economic environment of the 1970s and its rampant inflation, many of these consumers were effectively locked out of the mortgage market.
Moving into the digital era
As mortgage lending moved into the digital era, the further adoption of impartial mechanisms for evaluating consumer creditworthiness and preventing discrimination was aided by the credit reporting agencies. The CRAs were well-positioned to facilitate and promote the use of disinterested consumer information in service of democratic, colorblind access to loans. As then-President George W. Bush said in 2003, our economy depends on “every American having the right and a chance to own a home.”
While it may be tempting to criticize the big three credit reporting agencies when it comes to their large role in powering the mortgage loan market, it’s important to remember our nation’s history. By failing to recall the economic mistakes of the past, we may just doom ourselves to repeat them.