Fed vice chair: Wealth gap widening

Economic background

After a relatively mild economic downturn in 2001, the U.S. economy grew at moderate pace in 2002 and then more vigorously in the succeeding years. At first, much of the step-up in economic activity was achieved through productivity gains rather than through the addition of more workers. As a consequence, the unemployment rate continued to rise, peaking at 6.5 percent in mid-2003. Since then, however, employment has been expanding apace, and the jobless rate has declined to about 5 percent. In asset markets, most major stock market indexes have posted only small positive gains since 2001, while housing prices have risen substantially. The slow initial recovery in the labor market and the stock market, combined with rising house values, has led to an uneven distribution of the gains from recent economic growth.

Changes in family wealth

Income is an essential measure in gauging the ongoing health of family finances, but net worth is, in the long term, an even more important yardstick. Compared with the significant gains observed in real median and real mean net worth from 1998 to 2001, changes over the 2001-04 period were subdued. Over that more recent period, the median net worth of all families in real terms was essentially unchanged, while mean net worth increased about 6 percent. A rise in the mean relative to the median indicates that the gap in net worth between households in the upper part of the wealth distribution and other households has widened. At the same time, the difference in median wealth between non-Hispanic white families and black families widened even further.

A substantial part of the wealth gap between black families and non-Hispanic white families is associated with a difference between the two groups in their ownership of assets. In 2004, about 16 percent of black families had no type of financial asset – that is, no checking or savings accounts and no stocks, bonds, or retirement accounts; this percentage was essentially unchanged from 2001. The percentage of black families that have no type of nonfinancial asset—for example, that do not own a home, a vehicle or a business – declined from about 24 percent in 2001 to about 20 percent in 2004. The comparable figures for non-Hispanic white families were below 5 percent in 2004 for both financial and nonfinancial assets.

Changes in homeownership

Black families made progress in homeownership from 2001 to 2004. Indeed, for most home-owning households, regardless of race or ethnicity, the home is their largest and most important asset. Homeownership is one of the cornerstones of wealth creation and is generally associated with a range of socially desirable outcomes, including better schools, less crime and neighborhood stability. For these and other reasons, increasing the rate of homeownership has been a longstanding national priority.

In recent years, factors such as low interest rates, a growing economy, and rising employment have helped spur home buying by all segments of society. In addition to favorable economic conditions, the goal of increasing homeownership has been helped by the introduction of new information-processing technologies, including credit scoring, that have reduced the costs of obtaining a mortgage and by the introduction of a host of new, more affordable mortgage products.

The rise in the homeownership rate is important for wealth creation, but there has been a concern that increased levels of home-secured debt – such as mortgages, home equity loans and home equity lines of credit – could negate any gains from the rise in house values that occurred over the past few years. One way to address this concern is to examine the amount of equity that families have in their homes – that is, the difference between the value of the home and any debt secured by it. For black homeowners, the median value of home equity increased 24 percent from 2001 to 2004, to $45,000; the median also increased for non-Hispanic white homeowners, but the percent change was about one-half of the increase of black homeowners. Nonetheless, the level of home equity is much higher for non-Hispanic white homeowners than for other homeowners.

The Home Mortgage Disclosure Act

Congress enacted the Home Mortgage Disclosure Act 30 years ago. This law requires most home lenders to disclose selected information about the applications they receive and the loans they extend each year. The act was enacted to address concerns about redlining and unfair treatment of mortgage borrowers. Importantly, it is a disclosure law.

The act does not direct lenders to make loans nor does it proscribe lender behavior. Rather, it helps to identify potential market failures, including racial, gender or other illegal discrimination, by shining a bright light on lender behavior and by facilitating enforcement of the nation’s fair lending laws.

In 2002, the Federal Reserve Board amended its regulations that implement HMDA to expand the types of information that lenders must disclose to the public about their lending activities. The amendments were intended to improve the quality, consistency and utility of the reported data and to keep the regulation in step with recent developments in home-loan markets, particularly growth in the subprime portion of the market. Most prominently, the new information provides the first publicly available loan-level information on loan pricing in the higher-priced segment of the home-loan market. Data released to the public this past September covering lending activity in 2004 are the first to reflect the changes in the reporting rules.

Loans with rates above the thresholds are referred to as higher-priced loans. These thresholds were carefully selected to limit data reporting, which is costly, to that segment of the home-loan market that has been raising the biggest concern.

Fair lending

Though much of the focus right now is on the higher-priced segment of the mortgage market and on lenders that make higher-priced loans, the agencies examine all institutions for compliance with the fair lending laws. They examine them for unlawful price discrimination in the prime segment as well as in the subprime segment of the mortgage market. The agencies also examine mortgage lenders for redlining and for unlawful steering of potential borrowers to higher-priced loans.

Clearly, enforcement of our nation’s fair-lending laws is critical. In the long run the best defense against unfair practices is ensuring vigorous competition for the business of knowledgeable consumers. Increased competition will best ensure that informed consumers obtain the loan products most appropriate to their circumstances. In this regard, I believe that enhanced efforts to promote financial education and literacy are crucial steps in preparing individuals for the home-buying process.

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