New Research on AI in Mortgage Finance Identifies Opportunities to Advance Racial Equity in Homeownership, Pitfalls to Avoid

FHLBank San Francisco and Urban Institute collaboration delves into evolving role of AI in mortgage finance industry, issues recommendations for pursuing equitable outcomes

Photo of Urban Institute Paper on Aritifical Intelligence in Mortgage Finance

SAN FRANCISCO and WASHINGTON, November 6, 2023 – The Black-white homeownership gap is wider today than it was in 1960, sitting at nearly 30 percentage points, and the rapid adoption of Artificial Intelligence (AI) puts the mortgage finance industry at a crossroads. A new research paper titled “Harnessing AI for Equity in Mortgage Finance,” explores how AI could either shift the industry toward promoting greater equity in the mortgage financing process to close the homeownership gap or perpetuate long-standing biases that will persist in undermining the wealth-building potential of Black and Brown individuals and families.

This latest report from the Racial Equity Accelerator for Homeownership, a collaboration of Federal Home Loan Bank of San Francisco (FHLBank San Francisco) and the Urban Institute, considers the benefits of AI for the mortgage finance industry but cautions that, with adoption still in its relative infancy, now is the time to set standards and remove biases before racial inequality is further entrenched and amplified on a larger scale than ever before.

“Harnessing AI for Equity in Mortgage Finance” is a qualitative study of perspectives gleaned through interviews of key stakeholders in the mortgage ecosystem. The report’s authors note the key economic and mortgage market trends driving the need for greater innovation. However, they point out several critical challenges, starting with a lack of clarity and agreement on the definition of AI and how it specifically pertains to the mortgage finance industry. The authors also warn that AI’s promise for advancing equity in homeownership could be undermined on multiple fronts, from how algorithms are developed to the data they draw upon for training to keeping within all legal confines when incorporating considerations for race. Beyond the threat of amplifying existing racial disparities, AI poses the danger of creating new, unforeseen racial barriers within the industry.

“AI and the potential disruption in its wake have been the subject of many conversations, and this latest paper underlines the importance of getting ahead of the technology and harnessing it to advance equitable outcomes in our society,” said Janneke Ratcliffe, vice president of the Housing Finance Policy Center at the Urban Institute. “We cannot afford to wait and see how stakeholders will implement AI in their processes; we should act now to establish guidelines and guardrails to ensure that Black and Latino households are supported in their pursuit of homeownership.”

Teresa Bryce Bazemore, president and CEO of FHLBank San Francisco, agrees: “AI has the potential to revolutionize processes in the mortgage finance industry, not only introducing greater efficiency and customization but also promoting greater equity in homeownership. However, it will only deliver the desired results if, and only if, data and algorithms are free of bias. If not, Black and Latino individuals and families will continue to be at a disadvantage when it comes to building equity and stability and, ultimately, intergenerational wealth. That outcome is simply unacceptable.”

Authors of “Harnessing AI for Equity in Mortgage Finance” solicited views from nearly 50 individuals involved in federal government, financial technology, mortgage lending, consumer advocacy, and research organizations. In their report, they describe AI’s penetration both across the mortgage application process and around the mortgage industry ecosystem. The adoption of AI was found to vary within the mortgage finance industry, with larger mortgage lenders, fintech firms, and government-sponsored enterprises already implementing AI in functions such as underwriting, property valuations, fraud detection, and marketing. In contrast, adoption is lower among smaller and mission-oriented lenders, such as minority depository institutions (MDIs) and community development financial institutions (CDFIs).

Based on their findings in the mortgage finance ecosystem, the authors provide three distinct recommendations. First, increased regulatory guidance is recommended to establish clear guidelines on applications and protect the rights of consumers. Second, intentional design must be the backbone of any AI models to ensure algorithms are free of bias and centered on equity. Finally, pilot programs are suggested to test models and ensure that industry and consumer outcomes are consistent with intentions and support equity in homeownership.

“Harnessing AI for Equity in Mortgage Finance” is the last in a series of four reports developed through a two-year, $1.5 million collaboration between the Urban Institute and FHLBank San Francisco. Previous reports examined incorporating alternative data into mortgage underwriting, mitigating the impact of student loan debt on Black homeownership, and using mortgage reserve accounts to help sustain homeownership.

About the Federal Home Loan Bank of San Francisco

The Federal Home Loan Bank of San Francisco is a member-driven cooperative helping local lenders in Arizona, California, and Nevada build strong communities, create opportunity, and change lives for the better. The tools and resources we provide to our member financial institutions — commercial banks, credit unions, industrial loan companies, savings institutions, insurance companies, and community development financial institutions — propel homeownership, finance quality affordable housing, boost economic vitality, and revitalize whole neighborhoods. Together with our members and other partners, we are making the communities we serve more vibrant, equitable, and resilient and changing lives for the better.

About the Urban Institute

The Urban Institute is a nonprofit research organization that provides data and evidence to help advance upward mobility and equity. We are a trusted source for changemakers who seek to strengthen decision making, create inclusive economic growth, and improve the well-being of families and communities. For more than 50 years, Urban has delivered facts that inspire solutions—and this remains our charge today.

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