Homeownership is the cornerstone of the American Dream and, for good reason, home equity greatest source of wealth for the typical American family. From the first quarter 2021, white non-Hispanic households had a homeownership rate of 73.8% compared to a rate of 45.1% for blacks.
Compare that to home buying rates in 1920. Then, just a year before the destruction of the black neighborhood of Greenwood, owning a home was much more difficult for everyone (regardless of race) – down payments of. 50% were current and repayment was generally expected within 10 years. And yet the homeownership gap between blacks and whites was smaller then than today. by almost 5 percentage points.
While Federal Housing Administration regulations put an end to many of the hardships faced by whites, individual and institutional discrimination has prevented most black households from owning their homes. Blacks have also experienced significant financial exploitation in the process of granting and managing loans.
When it comes to homeownership, are blacks better off today than in 1921, when communities like Tulsa offered vast opportunities for wealth creation?
On the surface yes: for blacks who own a house, their properties help to increase their wealth (even when incomes are the same between black owners and tenants). They also have greater freedom today than a century ago to settle in communities that may have better access to employment and other important amenities.
But in some of the most significant ways, life is worse.
The black homeownership rate increased only 4 percentage points from its level of 41% more than five decades ago. The inability of blacks to own property largely explains the huge racial wealth gap.
According to recent Federal Reserve Board data, the median white household has $ 188,200 in wealth compared to $ 24,100 for the median black household. Several studies have shown that home equity is the main factor behind this large difference in median net wealth between black and white households.
the 1968 Fair Housing Act, which prohibits discrimination in housing, has succeeded in eliminating the most blatantly biased real estate practices. More subtle, but equally harmful institutional discrimination continues today.
Federal support for institutional housing discrimination has its roots in the creation of the modern housing finance system. In response to a nationwide foreclosure crisis during the Great Depression of the 1930s, the federal government created the Real estate loan company (HOLC) and Federal Housing Administration (FHA).
The HOLC home loans purchased that were at risk of default and restructured them to make them affordable to their borrowers. the FHA offered low-cost, low-down payment mortgages that put homeownership within the reach of middle, middle and low-income families.
Both institutions refused loans to black households. They too institutionalized the practice of redlining – a system of cards designating acceptable levels of loan risk, depending on the race of the population living in a community. Agencies judge black communities too risky for federal mortgage assistance, regardless of the income, wealth or education of its inhabitants, or the quality or location of its housing stock.
The result was that non-Hispanic whites were saved from foreclosure by the HOLC during the economic collapse of the 1930s. Whites later took advantage of the FHA to dramatically increase their level of homeownership (and , hence the median household wealth) after World War II.
Lack of access to federal housing finance agencies during this time forced blacks to routinely rely on predatory and exploitative loans, which greatly undermined the value of home ownership. In many cases, loan terms and terms of service made it impossible for the property to be successful.
A 2019 report titled “The plunder of black wealth in Chicago: new findings on the enduring cost of predatory housing contracts“documents a form of predatory loan that took place in Chicago in the 1950s and 1960s, which allegedly stole between $ 3 billion and $ 4 billion of black households in this city alone.
Commonly known as installment sales contracts or deeds of sale, these loan agreements contained a range of operating characteristics.
The report found that black home buyers using land installment arrangements were paying an average of 84% mark-up on homes and an additional $ 587 per month (adjusted for inflation) on their mortgages, compared to the previous month. cost of a conventional loan. As many as 95% of Black Chicago homeowners bought their homes on contract.
In addition, land payment contract buyers did not build equity in their homes during the loan repayment period, properties were often sold to buyers with major structural flaws that required buyers to make repairs. immediate and expensive, and homeowners could be foreclosed on a single missed payment (without having to repay equity to the borrower regardless of how much they had down payments or years of timely mortgage payments)
Blacks gained access to the FHA in the 1960s, but for decades the FHA allowed realtors and brokers to pursue a range of discriminatory practices that continued to limit the value of homeownership to Blacks who were able to reach it.
In the late 1990s, predatory, predatory, non-governmental and predatory loans began to appear in communities across the country. Predatory subprime lenders have disproportionately targeted black communities for their fraudulent loan schemes.
Many loan products came with adjustable rate mortgages designed to trigger unaffordable loan repayments within two to three years of the initial loan creation.
The purpose of lenders to provide unsustainable loans was to force borrowers to return to their lenders for refinancing. Through this process, lenders have obtained a new unnecessary round of start-up operating costs.
By 2008, the US real estate market had become so saturated with bad loans that he collapsed.
By excluding non-government and subprime loans from HAMP, black people suffered a disproportionate share of more than 7 million seizures which ensued between 2007 and 2017.
the concentration of foreclosures in black communities had a domino effect in these areas, pushing home prices down and causing further foreclosures by homeowners who realized their properties were desperately underwater.
As was the case in the 1930s, federal policy both ignored the needs of a large portion of black borrowers and introduced practices that have harmed black people even more economically. Fannie Mae and Freddie Mac, for example, have been required to charge adverse market impact fees on home loans from distressed communities.
Also, after the housing collapse, the way that fees are assessed for loan seekers for loans held by Fannie Mae and Freddie Mac has been changed in a way that greatly undermines black mortgage applicants.
Known as, Price adjustments at the loan level (LLPA), borrowers are now charged more for home loans based on their down payment and credit score; Loan applicants with lower down payments and lower credit scores are often forced to pay significantly more for their mortgages than borrowers with higher down payments and credit scores. This practice represents a radical departure from the historical fee structure of Fannie Mae and Freddie Mac, in which all borrowers who qualified for a loan paid essentially the same loan guarantee fee.
These price adjusters disproportionately penalize blacks over decades of federally sponsored institutional discrimination, which has left blacks less able to afford high down payments and more likely to have lower credit scores.
Forcing low-income consumers to pay more for access to credit disproportionately increases the likelihood of default for black homebuyers.
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Down payment assistance for black applicants could significantly increase homeownership.
However, the positive effects of down payment assistance will be undermined if biased institutional practices are not eliminated from federal housing institutions and if the vestiges of blatant discrimination are not removed.
Addressing decades of housing discrimination must go beyond tinkering with the current housing finance system. This system, put in place during the Great Depression, was not designed to address the challenges facing inner city communities and will not significantly bridge the homeownership gap. racial.
The FHA was designed expressly to finance the construction of new homes in the suburbs. It does not have the types of loan products and the flexibility to finance the older housing stock requiring renovations and associated community infrastructure.
Additionally, years of housing discrimination and segregation have resulted in high concentrations of black unemployment in our country’s inner cities.
Just as infrastructure spending for highways, bridges and dams is a powerful way to create jobs and grow the U.S. economy, a restructured housing finance system should support job creation through the reconstruction of downtown communities. It would not be the first time that the government funded housing finance system has been used to create jobs.
Closing the homeownership gap between blacks and whites will require a solution equivalent to the enormity of institutions, practices and times that have created the huge racial wealth gap in our country.
Jim Carr is a financial consultant and former Coleman A. Young, Endowed Chair and Professor at Wayne State University. He is also the former senior vice president of the Fannie Mae Foundation and deputy director of federal tax and credit policy on the US Senate Budget Committee.