The American Dream of homeownership will be under siege if we take seriously recent government proposals to reform the housing finance market. Government regulators have already taken steps to increase down payments for loans made through Fannie Mae, Freddie Mac and the Federal Housing Authority, and are also considering mandatory (and arbitrary) down payment requirements. These moves and other recent government proposals could further racialize our housing and credit markets by effectively disqualifying many lower-income borrowers, including a large share of borrowers of color. Together, the impact of these requirements would erase many of the advances in homeownership achieved over the past 40 years.
Homeownership has long enjoyed broad bipartisan support, but different families and communities have experienced homeownership differently. The lingering subprime and foreclosure crisis has brought this truth into stark relief: otherwise-qualified borrowers were steered into subprime loans. At the peak of the subprime lending boom, only 9% of subprime loans went to first-time homebuyers. The majority of subprime loans were equity re-financing loans, many of which ultimately stripped equity (reversed homeownership) in communities of color.
The fact that communities and borrowers of color were the prime targets was no accident; it was a strategic decision made by brokers who knew that these communities were ripe for exploitation after thirty-plus years of redlining, where whole communities were denied access to credit on the basis of race, especially inner urban communities of color. Subprime lenders stepped into this credit void with products that were confusing, unsustainable, and often more expensive than they needed to be. Rather than connecting low-income borrowers to fair and sustainable credit, brokers targeted vulnerable borrowers with higher-cost loans that had troublesome terms, like exploding ARMS and pre-payment penalties, and regulators failed to step in. These unsustainable loans and the subsequent foreclosure crisis have resulted in the loss of $6 trillion in home equity nationally. It will take families several generations to recover, if they ever can, from such a fallout.
Housing in the United States is inextricably linked with opportunity and the accumulation of wealth. The mortgage tax deduction is one benefit. So is life in a high-property-value neighborhood equipped with advantages like better services, more parks, and high-performing schools. Families leverage accumulated wealth to send their kids to college, open a new business, or give their adult children a down payment on their own home. In other words, home equity often provides the platform of opportunity for the next generation. Economists estimate that anywhere between 50-80% of wealth accumulation is in some way attributable to past generations.
Unfortunately, this intergenerational wealth transfer has largely been off limits to homeowners of color who face discrimination in the housing market on many fronts, including the location and value of their house, the terms of mortgage loans, and the benefits subsidized under tax policy. Such factors only reinforce the growth of wealth disparities over time. It is perplexing, to say the least, that the government reports acknowledge the role of the private market in causing the problem, yet their proposal suggests greater reliance on the private market. Relying on the operation of the private market to bring homeownership opportunity to all, as the government's proposals suggest, would perpetuate race-based redlining. Here's why.
America's residential neighborhoods are still largely racially segregated, although they are becoming less so over time. While many of us have stood together to fight racism and achieved significant victories, racism's historical footprint in asphalt and brick is hard to undo. And in fact, the private market exploits neighborhood differences, as we saw so clearly in the subprime lending crisis. Loan terms predict foreclosure rates more than borrower characteristics do, yet it was the borrower who was negatively scrutinized, not the loan terms. Studies have shown that subprime credit exists alongside ongoing market segregation in a dual credit delivery system that often disregards a borrower's creditworthiness. Lastly, due to historical discrimination, people of color do not have the intergenerational wealth they need to use for down payments. Arbitrary down payment requirements will disproportionately hurt the chances of families of color to sustain homeownership and help their children move up the ladder of opportunity.
A recent study by the Community Mortgage Banking Project says that a comprehensive set of quality underwriting standards would be a better means of preventing mortgage default than the mandatory substantial down payments being contemplated by U.S. banking regulators. The Administration needs to focus its restrictions on unsustainable lending terms rather than restricting first time home buyers' opportunity to invest in a home. Any policy should provide housing and credit on affordable terms to advance the opportunity for homeownership for all.
The government has a clear role to play in housing finance. But under the proposals currently being discussed, up to half the market could be cut out entirely, and families of color would face additional hurdles. A policy proposal that constricts opportunity is worrisome indeed. The American ideal of homeownership should not be relegated to an impossible dream. Surely there are allies within government who recognize this and will stand firm against those who wish to dismantle a critical path to wealth and opportunity.
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