Earlier in 2018, a workshop by the Association of Independent Mortgage Experts (AIME) took place in Irvine, California. While this may have seemed like an ordinary lending conference at its surface, it provided a fresh perspective on inequality and housing in the US. A presentation given by Nadja Vital on affordable mortgage lending provided a solid introduction to understanding contemporary social justice within the US housing market.
Vital addressed affordable homeownership and related information for lenders with a focus on the unavoidable disruption of the market by millennials given their demographic makeup and lack of economic confidence. Vital continually brought focus to homeownership statistics because as she said, “it's not just about putting someone in a house, it's about helping them build wealth”. According to her presentation, 63% of US Americans are current homeowners, which is the same rate of homeownership as in 1968. While this regression from its peak of 68% in 2004 is concerning in and of itself, the demographic breakdowns behind this number illustrate on-going inequity in homeownership: white Americans have a homeownership rate of 72%, while only 41% of black Americans are homeowners, and there are only slightly higher homeownership rates among Latinx Americans, around 46%. Instead of allowing these statistics to overshadow any hope for improvement, Vital made sure to remind the crowd of mortgage experts that these gaps represent opportunities to help underserved communities create a path towards homeownership.
63% of US Americans are current homeowners, which is the same rate of homeownership as in 1968.
Ensuring the burden of closing this gap rests on the mortgage lender instead of the potential homeowner is not only a sound business decision, it ensures that marginalized persons are offered real opportunities to enter the housing market, as opposed to a misleading tagline encouraging them to ‘pull yourself up by your bootstraps.’
Do Home-Buyers Still Need A 20% Down Payment? New Loan Programs Available
Vital asked the audience if they knew that 53% of licensed, current real estate agents still believe a potential buyer must have 20% down to close on a mortgage. Vital stressed this is an outdated idea in 2018, to say the least.
To put this in context, the average down payment in 2016 was just 11%, and specific age groups had even lower rates. Approximately 16% of borrowers under the age of 35 closed a mortgage with 0% down. It’s ultimately knowledge gaps like this have maintained these trends and allowed the inequity we currently face to develop.
16% of borrowers under the age of 35 closed a mortgage with 0% down.
Freddie Mac’s Home PossibleⓇ mortgages offer loan options with 3% and 5% down, as well as solutions for potential borrowers without existing credit scores. There are also new down payment assistance options for borrowers baulked by 3% and 5% down given rising housing prices. All these options make 20% down loans intimidating and unnecessary thing of the past for many potential buyers.
A Very Brief History of US Housing Discrimination
April 11, 2018 marked the 50th anniversary of the Civil Rights Act. Included in this landmark piece of legislation is Title VIII, otherwise known as the Fair Housing Act. This was the US Government’s attempt to eliminate housing discrimination based on race and ethnicity. It’s large legislative overhauls like this that have likely led many (mostly white) Americans to believe institutional racism in the US is a thing of the past. However, just because something is outlawed doesn’t mean its effects don’t live on.
As our Senate hosts services commemorating 50 years of the Civil Rights Act, the wealth gap between white US Americans and black and Latinx US Americans stands at over $100,000 according to recently published analysis by Demos and IASP. This stark reality was forged by the history of segregation and systematic discrimination in the US that continues to impact the lives of people of color in various ways from the mundane to the life threatening. Although this is a particularly daunting subject to discuss, as it affects and is effected by innumerable elements of society, like so many other issues, it is slightly easier to understand when broken down into its component parts.
Redlining Yesterday and Today
This brings us back to Title VIII. Redlining is the name given to the state-sponsored zoning of neighborhoods occupied predominantly by people of color as ‘hazardous’ with regard to lending and general credit by the Federal Home Owners Loan Corp after the Great Depression. Redlining is also often mentioned as a key discriminatory housing practice that was ended by Title VIII. While the red ink itself was thrown out with the inception of the Civil Rights Act, the ripples of this practice are still felt today.
A recent survey shows black residents are effectively redlined in 61% of metro areas studied across the country to this day. While the residential segregation drawn by redlining slowly began healing by the 1970s, other factors like predatory subprime lending, which were common among low income communities as recently as 2009, have kept homeownership out of reach for many Americans, especially people of color.
Five Reasons Mortgage Lenders Should Care
Nadja Vital encouraged mortgage lenders to use disparities in homeownership rates as an opportunity to reach out to those historically left out of homeownership, and to use these facts to motivate a change within the mortgage lending universe. After seriously considering this subject, here are five reasons mortgage lenders should consider actively reaching out to underserved communities and borrowers of color.
1. Serving the Underserved
According to the first quarter of 2018 report from the US Census Bureau, homeownership rates in the US for black Americans have hovered around 42% since the first quarter of 2017, while Latinx homeownership increased to 48% in the first quarter of 2018 (in the past four years, this rate had stayed between 44 to 47%). Meanwhile, the homeownership rate for non-hispanic whites is 72%. These current statistics show how far away the homeownership market is from our ideals of equality and prosperity for all. The current homeownership rates for black US Americans are lower now than they were in the 1960s during the Jim Crow era of rampant discrimination, which ultimately led to the enactment of the Civil Rights Act. Until updates can be made to government programs that regulate and monitor discriminatory practices in finance (like the 40 year old and slightly outdated Community Reinvestment Act), lenders can help close existing gaps in homeownership by including diverse populations in their marketing and outreach efforts.
2. Stabilize and Build Communities
According to DEMOS, if the disparity in US homeownership was eliminated through public policy, and as many black and Latinx homeowners existed as white homeowners (meaning their respective 45% and 47% homeownership rates were brought to 72%), the median wealth for Latinx households would grow by $29,213, and median wealth for black households would grow by $32,113. This simulated equalization would not entirely close the gap in median wealth, and in turn reveals the gap that exists between white homeowners and homeowners of color and their return on the investment that is homeownership.
The DEMOS study states that for every $1 an average black homeowner accrues as a result of owning a home, a white homeowner accrues $1.34; for every $1 accrued by an average Latinx homeowner, a white homeowner accrues $1.54. Statistics like this are a byproduct of marginalized groups historically being excluded from home ownership, and are further compounded by gaps in income, education, healthcare, and just about every other measurable margin.
Homeownership is a particularly powerful means of investment for underserved communities. Generally, homeownership builds stronger ties to a community than renting because a homeowner is directly financially affected by home values and are motivated to maintain their investment through upkeep and maintenance. Owning a home also usually suggests households who stay in the same place for much longer than renters who can more readily stay or leave as they choose. Homeownership also remarkably reduces the likelihood of being a victim of crime as well as general crime rates while increasing community involvement, healthcare benefits, education rates, and financial stability.
Driving revenue into underserved communities by building individual wealth allows for business and institutions to grow through investment within the community, bridging the gaps left by larger financial entities --which are usually owned by, run by, and generally solely profit white Americans. Community-driven initiatives have already gained some traction, like One United Bank, which is the first black-owned bank to offer online banking. Institutions like One United offer loans to borrowers who have been denied loans by larger institutions who may not fully grasp or appreciate the potential value (financial and social) of local businesses owned by people of color. While the movement of funds may not be a solution to discrimination, it is an extremely effective splint until wider changes take place.
3. New Markets Mean New Inventory
As mentioned in previous Land Gorilla posts, 65% of the US housing stock is more than 25 years old. Renovations can only take this existing stock so far as is apparent after glancing at the data: 5.6 million new single-family houses were built from 2009 to 2017, while 1.7 million were demolished in this same period because of their age. Compounding this problem, the construction industry in the US has halved its production to 1.23 million started projects in 2017 since its peak of 2.1 million in 2005.
The same is true for non-owner-occupied housing, otherwise known as the rental market. Demand in the US for rental property is quickly growing. This trend specifically escalated after the 2007 recession when many victims of foreclosure were forced into rentals.
Another disheartening part of the current housing market is the proportion of large, expensive single-family homes compared to the entry level needs of many buyers. According to Zillow Research, Americans looking to purchase a home in the first quarter of 2018 found 9% fewer homes to choose from than the first quarter in 2017, and the average price of the available homes for purchase rose 8% in this time to well over $200,000.
Luckily, though, Zillow Research also shows construction activity is reaching its highest level since 2009. The realities of the current market lead us to believe there is more than enough motivation and demand for new construction to start focusing on affordable, workforce, and entry-level housing as well as single family homes in the coming years.
Hopefully this trend remains true in the coming years, as one other factor seriously impacting homeownership rates among people of color is age. Generally, Americans of color skew younger than white Americans for various reasons such as huge population gains post WWII which led to the Baby Boomer generation. This slight age gap is one reason why people of color made up 45% of renters in 2016. However, the desire to own a home in the future still overwhelmingly exists among young renters which makes it critical that construction keeps up with this demand in order to ensure there is sufficient stock for future generations of buyers and mortgage brokers alike.
4. New Markets Build Future Clientele
Black and Latinx communities have largely been estranged from homeownership. Reaching out to communities of color regarding different borrowing options is a way to start engaging with these potential customers. Also, successful interactions with financial professionals will bolster a borrower's financial confidence and give them a positive story to tell their friends and family. As Nadja Vital mentioned on her own first-time homebuyer experience as a Latina: “When I went to buy my first home, I went, like, with five people. I was born and raised here [in the US]. I was educated here. But I went with my family, and if I had a good experience, do you think the rest of my family ended up buying? Yeah [they did].”
The Joint Center for Housing Studies of Harvard University’s annual report on the state of the US housing market estimates non-white households will make up nearly three-quarters of the growth in homeownership between 2015 to 2025; Latinx households alone account for a third of this growth. Statistical predictions like this strongly suggest learning the nuances of lending to black and Latinx communities may be of vital importance for the housing market in the next decades.
5. It’s the Right Thing to Do + A Starting Point
The W.K. Kellogg Foundation estimates in it’s 2018 Business Case for Racial Equality report that annual spend on housing would increase $500 billion were the wealth gap closed in the US. While the reality of this goal would require extensive work in nearly every field, there are ways to begin the process today.
Individually, those in and outside the mortgage lending industry-- especially those involved in community development planning--can help equalize housing opportunities by supporting inclusionary zoning at the local level. The BCRE report describes inclusionary zoning as requiring “a percentage of new housing developments to be set aside for low- or moderate-income housing [in order] to increase the availability of affordable housing. [...] Research suggests inclusionary zoning increases economic integration as it incentivizes the creation of low-income housing outside high-poverty, underserved areas.”
Lenders should keep in mind the new Freddie Mac Home Possible®️ mortgage options and consider reaching out and advertising these options to communities of color. There are also options for lenders outside of strict government loans. A paper published by the Federal Reserve Bank of Chicago in 2016 gives lenders five non-standard mortgage options for borrowers who would normally be denied credit based on a FICO credit score or previous credit history that may be marred by a foreclosure during the financial crisis or medical bills.
The space between mortgage lenders and marginalized groups provides the mortgage lending industry ample room to expand and bring in these Americans for the sake of equality and diversity. Astounding opportunities could be created within communities of color as well as our country as a whole by building the foundational wealth that is homeownership. While there are obviously other urgent actions needed to solve systematic problems in the US, the mortgage industry could play at least a small part in this ongoing and necessary healing process.