Time to correct overcorrections on credit availability
As Black History Month observances continue throughout the nation, now is an apt time to revisit the unmet housing finance challenges that affect African-Americans, other consumers of color and low-income whites. While many consumers have felt an economic recovery, many others remain locked out of homeownership and the resulting opportunity to build wealth through home equity.
In order to open up homeownership opportunities to those left behind, public policies must address the impact of mortgage discrimination by promoting robust mortgage lending to all creditworthy borrowers.
An analysis of 2015 Home Mortgage Disclosure Act data by the Center for Responsible Lending found lingering and disturbing disparities. The annual HMDA report is the nation's only one that connects race and income with mortgage lending trends.
When it comes to the most affordable home purchase loans, conventional loans remain the least costly for borrowers and the least likely to default. Even so, among the 1,894,000 loans made in 2015, only 2.7% — or 51,202 — conventional home purchase loans were made to African-American borrowers. Latino borrowers fared only slightly higher with 5.1% of these loans, or 96,975. These figures stand in stark contrast to the 1,361,564 conventional loans made to non-Hispanic, white borrowers, representing over 72%.
That same year, Federal Housing Administration lending provided a well-utilized option for 765,880 non-Hispanic white borrowers accounting for 62% of these loans. Participation by borrowers of color, however, was still meager. Over 13% of FHA loans went to Latino borrowers (162,317), and fewer than 10% to African-Americans (120,618).
It is also noteworthy that, without regard to ethnicity, low-down-payment FHA loans were accessed by over 460,000 low- and moderate-income borrowers.
Owning a home is the cornerstone of the American dream. But it is a dream rooted in a history of inequity. For decades, federal housing policy fostered discrimination in mortgage lending in communities of color that hindered families from safely joining the ranks of America's growing middle class. From Jim Crow to post-World War II, white homeownership served as a foundation to building wealth that transferred in later years to younger generations.
As a result, families of color have much less wealth than comparable whites. According to the Survey of Consumer Finances, whites have 10 times the wealth of Latinos and 12 times the wealth of African-Americans.
Predatory lending dominated formerly redlined communities and, again, borrowers of color were negatively affected. CRL research on the effects of subprime lending found that a disproportionate number of foreclosures occurred in communities of color — even when these borrowers qualified for less expensive and sustainable mortgage loans. When nearly 5 million families lost their homes to foreclosure, the brunt of financial losses were borne by those who had the least wealth: consumers of color. The post-foreclosure spillover costs for these consumers totaled $1 trillion.
Yet, borrowers who received safe mortgages without risky features performed much better. A report on Self-Help Credit Union’s Community Advantage Program, from the University of North Carolina's Center for Community Capital, showed that those borrowers amassed a net worth of $38,000, compared with renters' $266, even as housing values plunged. The Community Advantage Program securitized mortgages for more than 50,000 families in 48 states.
Dodd-Frank, and by extension the Consumer Financial Protection Bureau, includes mortgage protections that prohibit many of the risky practices that fueled the mortgage meltdown. These sensible protections established the ability-to-repay standard on all mortgage loans, along with bright-line rules that safeguard consumers and lenders alike.
Instead of being encouraged by the reforms in the housing finance system, conventional mortgage lenders instituted market overcorrections that prevent creditworthy borrowers from accessing mortgage loans. The Urban Institute reported that 4 million potential borrowers were locked out of the mortgage market from 2009 to 2013 due to unnecessarily tight credit standards as most loans were to borrowers with high credit profiles. Urban also showed that white borrowers received more mortgages due to their higher credit profiles.
The Federal Housing Finance Agency made recent strides in this direction by once again allowing Fannie Mae and Freddie Mac to secure mortgages with smaller down payments.
While this is a step in the right direction, it is not enough. The FHFA must reverse its trend towards risk-based pricing in its loan guarantee fees and loan-level price adjustments. It also should prevent risk-based pricing in front-end credit risk transfers, including deeper mortgage insurance. Pricing structures are important, as they can incentivize lending that only serves those with the least risky credit profiles.
Instead, our system should continue to pool credit risk. This would encourage conventional lenders to make loans to potential mortgage buyers of color and low-income whites, ensuring that all creditworthy families have access to their American dreams.