There is a 30-point difference between white and Black homeownership rates in the U.S. today. Shockingly, the gap is wider than it was in 1968, when the federal government first outlawed racially based housing discrimination.
Sadly, the pandemic, which is wreaking disproportionate financial havoc on minority communities, may expand the chasm. This makes it more important than ever to consider how the U.S. will finally welcome persons of color to share fully in the American dream of homeownership.
It’s a serious challenge. The most abhorrent racist practices, such as redlining, are officially prohibited, yet bias creeps into mortgage lending in myriad ways. Countering these forces has been a core objective of my career.
Requiring a down payment up-front from homebuyers has long been considered a cornerstone of risk mitigation for lenders. However, for some segments of our society, down payments are also why the well-worn phrase “it takes money to make money” holds true for homeownership. For a hard-working family, it can take years to save for a down payment. And any setback — such as the coronavirus crisis — can return them to square one.
Down payments aren’t such a challenge for those of intergenerational wealth, on the other hand. The average white, upper middle-class adult can often borrow from mom and dad, grandparents, or a kindly aunt or uncle. They enter into homeownership more easily, with a lifetime to build equity to pass down to their children. So, early in my career, I sought for ways to help would-be buyers, most being minorities, bridge the gap and achieve homeownership earlier.
One tool I used for a time to level this playing field was seller-funded down payment assistance. In the early 2000s, many — including myself — believed empowering someone with a home for sale to contribute to the buyer’s down payment was a small way to help deserving families.
In 2002, to protect lenders, I cofounded and organized an industry association called HAND, whose mission was to educate the mortgage industry on the proper utilization of seller funded DPA, and to curb risky practices. However, the speculative buying frenzy which led up to the crash overcame any serious efforts to institute proper controls. For example, many appraisers were artificially inflating home valuations to cover the assistance, driving housing prices to insupportable highs from which they eventually crashed.
For this reason, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Housing and Economic Recovery Act ended the use of seller-funded assistance to defray a buyer’s down payment responsibilities.
The same laws also eliminated other unsustainable loan programs: subprime mortgages offered to less creditworthy borrowers at steep rates; no-income verification loans where borrowers were trusted to provide accurate salary information; and short-term adjustable rate, interest-only, and other mortgages with deceptively low initial payments which ballooned into unaffordable payments later in the term of the note.
The industry learned from the mistakes of the past and so did I, as well as the entire team at the Chenoa Fund. And now, thanks to these reforms, we live in an era of far greater mortgage banking controls and stability. But there is still a gaping need for people without legacy wealth, to receive the down payment help they need to buy a home. We need to protect these improved avenues for down payment assistance that have since evolved—programs offered by government entities.
The organization I now lead, the Chenoa Fund, is among these federally recognized down payment assistance providers (DPAs). The Chenoa Fund loans down payment money to applicants who meet our strict standards, offers forgiveness to many borrowers who achieve a 100% on-time payment history on their first mortgage, and incorporates comprehensive and on-going financial education to help families plan effectively to stay current on their mortgage — a benefit especially critical as borrowers grapple with the stress of today’s pandemic.
By learning from the lessons of the past, we’ve developed a responsible and safe method to provide much-needed down payment assistance, and I’m proud to be part of it. I’m especially heartened to know that over half the borrowers we helped last year were minorities, and one in three represented the first generation in their family to ever own a home.
Unfortunately, the Department of Housing and Urban Development could, in an act of sheer obstinacy, soon force the Chenoa Fund and other DPA providers to shutter. HUD insists, against evidence to the contrary, that any third-party down payment assistance increases default risk for taxpayer-backed loans, and the bureaucrats are threatening blanket rules that would essentially eliminate operations like ours.
This is a point they make without data, especially given that the most recent FHA monthly report shows that loans with down payment assistance from government entities perform significantly better than loans that received down payment assistance from family.
In essence, HUD is saying that if you come from wealth, where family can help you with a down payment, you can realize the dream of homeownership. On the other hand, if you do not come from a home with legacy wealth, as is the case with most minorities, you will be shut out of buying a home for many years.
Ending down payment assistance for deserving families is an extreme measure, especially when more reasonable alternatives exist. The Chenoa Fund has, for example, provided independent data showing that default rates on loans we’re involved with are well below HUD averages. And HUD could easily collect the information necessary to distinguish the few underperforming DPA providers in the market and target their regulatory activity accordingly, without harming the rest. But despite what’s at stake for minority communities, they have so far refused to perform such basic due diligence.
It’s a frustrating example of systemic racism at a time when citizens are marching in the streets for a more equitable future. At this point, our best hope is that HUD leaders come to their senses before pushing more people of color off the ladder to the middle class and ultimately, the American Dream of homeownership.
