Undoubtedly, 2020/21 has been two tough years for everyone. So many people lost their jobs only recovering this past few months. But, something interesting did happen, more so in 2020 where we had protest and demonstrations over the murder of George Floyd. If one thing, and I would like to take it as a silver lining amidst this chaos is that the pandemic really brought out the racial disparities in terms of treatment, opportunity and wealth that still exists subtly. The past two years have raised a bar, and more than that, what was for a long time ignored and swept under the rag can no longer be contained!
Looking at the homeownership rates for past two decades for all the ethnicities in the country as provided by various sources including the Census Bureau we realize a big part of this problem;
Source: Census.org
See how there is a wide margin between the non-Hispanic whites and all other minority communities in the country? It even gets worse when you compare the rate of homeownership for the non-Hispanics with that of individual ethnicities, say black for instance of the Hispanics.
Do not get me wrong, the rate of homeownership for these ethnicities is far much better than it was during the financial crisis of 2008, but it doesn’t explain why there is a huge gap between these ethnic groups. If anything, the gap between the non-Hispanic white’s homeownership rate and other minorities has increased with a staggering 31 percent difference in homeownership rates between the whites and African Americans.
Away from that, let me direct your eyes to one of the reports by MIT which indicates that African Americans who do not own homes currently are being penalized by paying more across the life of the loan check this out;
- $743 more per year in mortgage interest payments
- $550 more per year on mortgage insurance premiums
- $390 more per year in property taxes
This amounts to an excess of $13,464 across the life of the loan according to MIT estimates. If you think this is nothing, it has a significant impact, in fact, it impacts retirement savings by $67,320.
“These inequities make it impossible for black households to build housing wealth at the same rate as white households. The black-white income gap of $25,800 is exacerbated by this “black tax” on homeownership. If we eliminate these extra costs paid by African Americans, the $130,000 black-white gap in liquid savings at retirement would drop by half.”
Looking at the impact ‘delayed’ housing for the minorities has, we ask ourselves, what role does the lender play? And how can the lender use his capacity to fully empower the minorities to become homeowners?
One thing is certain, lenders need to go an extra mile if they want to fully help improve equitable access to homeownership for all.
Let’s talk about Black homeownership rate
This is the heart of the problem because black homeownership rate has been declining consistently and now staggering at 44% virtually unchanged from the levels of 1968. With the historic barriers of discrimination, wealth inequities and patterns of sustained predatory lending to overcome, it seems that change is a long way coming, however, there are steps that we can take right now.
“Since 2015 there have been approximately 1 million new Black homeowners. Unfortunately, the number of black applicants has not reached pre-2008 levels,” said Antoine Thompson, executive director of the National Association of Real Estate Brokers, the oldest minority trade group in the nation. “Marketing and outreach, diversity in loan officers and staff and mortgage underwriting criteria may play key roles in increasing Black homeownership.”
According to NAREB, lenders can help minorities become homeowners by following a 5 steps;
Reach out to mortgage-ready renters and help them build credit
There is a large share of African Americans that face affordability issues, but that doesn’t discount the sizeable contingent impeded simply because they lack experience in managing their credit in ways that traditional underwriting recognizes. Before the pandemic hit in 2019, there were about 1.7 million mortgage ready Black Millennial who made at least $100,000 annually and even more according to anonymized Freddie Mac data. Additionally, the data shows that there were about 3 million black households who were have been identified as mortgage ready and more than 2 million were able to meet the income requirement, but they never had enough credit history to meet the traditional requirements for the home loans.
One of the many goals of the CARES Act was shield minority communities from the impact of the pandemic and to also ensure that the pandemic wouldn’t mar the credit records by disallowing forbearance to be recorded as delinquency. Even so, lenders should actively take the steps to protect African Americans by ensuring that reporting errors and the application of other codes that could be used to indicate forbearance on a credit record do not have adverse consequences.
Additionally, lenders also need to make sure that their services reach the thin-file applicants. To do this effectively, it may be possible to use alternatives like rental or cell phone information to underwrite on an exception basis even though the current system doesn’t accommodate it.
To be on the safer side, most investors and lenders want to lend based on an established track record, but there’s a hot market for mortgages that finance Environmental Social and Corporate Governance goals as well. Demonstrably financing sustainable housing for black homeowners could be more appealing to these investors. Lastly, the category of qualified renters could enter the housing market if the lenders are able to develop a detailed assessment of the collateral quality and make sure that the first time homebuyers know how to manage the costs of their home in a way that will help them build wealth in the long-term.
“One of the significant barriers to maintaining a homeowner’s property value is having access to capital to purchase or keep up the home,” said Thompson.
Make small, affordable and sustainable loans
Financing has been the biggest hurdle to homeownership for many people and blacks are no exception. Therefore, by establishing alternative methods of credit and collateral, this could improve the rate of black homeownership especially with emphasis on the grassroots levels where the racial disparities are more pronounced.
“For example, there’s about a 10 percentage point gap in homeownership of those with annual incomes of $150,000 or more: 80% for Blacks and 90% for whites. In contrast, for those who make $25,000 or less per year, the gap between Blacks and whites is 25 percentage points, with Blacks having a homeownership rate of 25% and whites at 50%.”
But the problem i, when it comes to smaller amounts of loans, there are so many systemic challenges and one of the most cited one is the fact that the lenders make less money on them than bigger mortgages while paying the same amount to produce them. While that may be true, let’s be realistic, many lenders today have been exceptionally profitable after the recent origination boom which means, now may be a good time to offset the cost of making the smaller loans. That doesn’t mean that it’s time for lenders to go rogue.
They must be very careful making sure that these loans are made within the spirit of regulations that hold the lenders accountable for the borrower’s ability to repay by making sure that borrowers understand and can actually afford the long term costs of lower priced homes they buy.
One of the most sought option for the low income homeowner to afford the cost of repairs and maintenance is to refinance and tap into the home equity, but often the reluctance to make the smaller loans precludes that too.
We have seen cases where a borrower qualifies for a small loan through first time special buyer programs, but when it came to refinancing, the lender was reluctant to deal with the smaller loan.
Dealing with smaller dollar loans has always been feared, more so that when small loans are sold on the secondary market, a premium is often paid for them because the investors are counting on the fact that they get refinanced less often.
“This inability to leverage home equity and improve a deteriorating home feeds into a perpetual cycle that leads to long-term maintenance issues and persistent degradation of housing values, impeding how much wealth a homeowner will ultimately have,” the Urban Institute’s Housing Finance Policy Center noted in a recent report on small-dollar financing.
‘Urban Institute has been working with Fahe, a Community Development Financial Institution and the Homeownership Council of America on a MicroMortgage pilot project aimed at finding ways to address some of these issues. One of the strategies employed in the pilot program is an initial funding of $2 million which includes an appraisal alternative to lower costs and underwriting based on rent payments rather than a more traditional credit history.’
“It’s really about finding out what ancillary costs can be reduced and what different underwriting standards or parameters you could put in place that would enable doing more of this kind of lending,” said Alanna McCargo, a vice president at the institute and one of the report’s authors.
“The main focus for phase one is new purchase loans, and for phase two we will look deeper into rehab and refinance,” she said. “In phase two, we also are planning to collaborate with more players to increase our scalability.”
Join the call for some of these public programs
Just as we have seen that there are challenges in smaller dollar loans, there are even bigger problems in the overall government dominated mortgage system which has only been intensified by the steep rise in home prices over the last decade. These are the challenges that limit the lender’s capacity to make affordable loans.
The capacity of an individual mortgage lender is insignificant compared to the industry and some of the systemic issues that goes on, but still with their limited capacity, they can increase their involvement with some of the larger trade groups that are pushing the governmental policy initiatives to make homeownership a reality and more sustainable.
As an example, in 2020 there was a proposed bipartisan legislation that would allow for the creation of a special tax advantaged account that could be used to save for the down payments on homes and this helps many African Americans and other minorities to overcome the cost constraints associated with homeownership. Additionally, it has been noted that many people are struggling with student debts and targeting these individuals could be helpful. The Biden Administration seems to be invested in lowering the hurdles for the people with student loans, thus, lenders could step in and renew their call for a federal Housing Administration change that could facilitate easier borrowing with educational debt.
If anything, the FHA’s complicated guidelines and procedures have made so many people fear the homeownership process, but, mortgage companies are uniquely positioned to push for a responsible rollback on some of these servicing policies and lender liabilities to encourage lending through affordable programs. After the Great Recession, many lenders withdrew from the FHA and its programs that serve the low income people because of the liability concerns. The Biden administration might fix that, and even though it’s looking to tighten the regulations than fixing them, the end which is equitable and sustainable lending justifies the means.
“It could reduce lending costs and also help the lower-FICO borrowers get lower-priced loans as well,” said David Battany, executive vice president of capital markets at Guild Mortgage, and the co-chair of the Mortgage Bankers Association’s Affordable Housing Committee.
According to Antoine, improving and expanding the Department of Housing and Urban Development’s 203K rehabilitation and purchase loan program could help create more affordable inventory. NAREB gives the example that the HUD’s 184 program that currently is limited to indigenous people could be expanded to include the black borrowers. This is a program that among so many other things offers below market rate on mortgages with more flexible underwriting requirements and a lower down payment. The organization has on several occasions called for the creation of the African American Homeownership Program “as a restorative policy for past discrimination by the federal government,” said Thompson.
“Currently there are federal housing programs for Native Americans, Alaskans, Hawaiians and Veterans. Nothing for African-Americans. A no-money program with special-purpose credit tools made possible through the Equal Credit Opportunity Act could make a world of difference to increase the rate of Black homeownership,” he added.
Beef up compliance in these areas
Discrimination is one of the social ills we have to fight to the end and I am glad that the current administration is clearly taking all the measures to beef up enforcement of anti-discrimination rules adding more scrutiny to measures of equitable lending. In our previous issue, we discussed about the hope of reviving the disparate impact, and it indeed it falls through, lenders might want to make sure that they have equitable practices in the following areas.
- Mortgage Rates. We all know that African Americans tend to be charged higher mortgage rates on a median basis along with other factors such as incomes. According to a study published by Raheem Hanifa, a research analyst at the Harvard Joint Center for Housing Studies. “The difference at the $100,000 and above income level, for example, was 4.17% for Blacks vs. 3.91% for whites, American Community Survey statistics from 2019 show.”
- Neighborhood Lending. The current administration should invest more in looking for a broader application or enforcement of the Community Reinvestment Act especially after the fact that the administration has stated before that the CRA “does little to ensure that ‘fintechs’ and nonbank lendersare providing responsible access to all members of the community.”
- Denial rates. The average denial rate stands at 16% for the conventional home-purchase loans and remains relatively higher for the African Americans in the last set of Home Mortgage Disclosure Act data released. The data reflects 2019 information. In comparison, the Hispanic’s denial rate was 10.8%, 8.6% for the Asians and 6.1% for the Whites.
- Property Valuation. This is an issue that needs more attention and recently came to light after a biracial couple in Colorado reported that they received two appraisal values that differed based on who was at home at the time.
Improve representation in the field with a recruitment program
Fair representation, equity and diversity are key issues that need to be highlighted because currently, there are about 12% of credit counselors and loan officers who are black professionals and less than 6% of real estate brokers and sales agents are. But, there are efforts by some companies to increase representation with the aim of serving a broader customer base.
Recently, NAREB partnered with Homelight a technology company to create scholarship and mentoring program for aspiring black professionals aged between 18 and 35 and currently not established as agents. As part of this partnership, the two will provide up to $5000 per individual to help them cover the onboarding cost for new agents, such as pre-licensing classes, agent exams and certain marketing and technology expenses. A NAREB broker will provide support for at least the first year and the participants will spend between 5 to 10 hours a week working with mentors on continuing education.
MBA offers scholarship for continuing education through the diversity and inclusion committee for its own programs.
Roughly 45% of the members of New American Funding’s workforce are minorities and its lending to Black households exceeds industry benchmarks according to data from the 2019 Home Mortgage Disclosure Act data from the Consumer Financial Protection Bureau. Additionally, more than 13% of New American Funding loans go to Black borrowers as compared 6% nationwide.
Lenders are uniquely positioned to help everyone, not just the minority communities in the country and therefore, I feel that if they are to take the initiative and commit to some of these (if not all) recommendation from NAREB’s annual meeting, the “Bridging the Gap in Black Homeownership” they’d make a really huge impact in the area of homeownership for minorities. It is also your initiative as a buyer to ask (and if it forces you- demand) for some of these policy changes. It is your responsibility to search for knowledge about what lenders are doing and how you can take advantage of the opportunities that come. If you would like to kickstart your journey today of homeownership, reach out to Eric Lawrence Frazier MBA at 800-261-1634 ext. 703.
About The Power Is Now Media
The Power Is Now Media is an online multimedia company founded in 2009 by Eric L. Frazier, MBA, and is headquartered in Riverside, California. We are advocates for homeownership, wealth building, and financial literacy for low to moderate-income and minority communities. The Power Is Now Media corporate office is located at 3739 6th Street Riverside, CA 92501. Ph: 800-401-8994 Website: www.thepowerisnow.com
