This is the first in our 5-part Affordable Homeownership Series: Addressing the racial equity gap in homeownership
By now, everyone is aware of the dire facts.
Black and Latino households are experiencing homeownership rates that are 31 and 26 percentage points lower than the white homeownership rate as of Dec. 31, 2021.1 The minority homeownership gap has also been cited as the largest contributor to the minority wealth gap, as Black and Latino families have an average net worth that is just one tenth of the average net worth of a white family.2
The focus of a racial equity initiative should be to close the gap in homeownership rates between white and minority households. Addressing any business problem starts with asking the right questions. There are 4 questions every racial equity plan should attempt to address:
- Awareness: Are the right tools and platforms in place to encourage minority renters to understand the benefits of owning versus renting such that they desire to pursue homeownership?
- Readiness: For applicants who are not yet mortgage ready, are there systems and practices in place to help them overcome the barriers they face that may be within their control?
- Community: When external barriers arise, is there a plan for addressing them such that they may be lessened over time?
- Solutions: Are there products and programs in place that will meet the unique needs of creditworthy minority applicants and help them achieve long-term, sustainable, wealth-creative homeownership?
Albert Einstein once said, “If I were given one hour to save the planet, I would spend 59 minutes defining the problem and one minute resolving it.” The balance of this article will strive to define the problem in each of the 4 ARCS framework areas – Awareness, Readiness, Community and Solutions – to help increase industry collaboration to close racial/ethnic homeownership gaps and, in doing so, narrow wealth gaps.
Are the right tools and platforms in place to encourage minority renters to understand the benefits of owning versus renting such that they desire to pursue homeownership?
This question supposes that there are many minority families who are self-selecting themselves out of homeownership for a host of individual reasons. Perhaps they don’t have a deep enough understanding of the economic benefits of owning versus renting. Or maybe they don’t believe they ever could qualify for a home loan. Certainly, research3 has revealed that people who don’t grow up in an owner-household are less likely to become homeowners themselves.
In an October 2021 report “Who Are the Future Borrowers? A Deep Dive into their Barriers and Opportunities,” Freddie Mac notes that, among credit-visible people 45 or younger, there are 1.7 million Black “Mortgage Owners” and 3.4 million Black renters who are “Mortgage Ready.” For Latinos, 3.5 million are “Mortgage Owners” and 8.3 million are “Mortgage Ready.” In other words, there are 11.7 million people of color who, today, are 45 or younger, currently renting, and who likely meet the criteria to qualify for a home mortgage. Being intentional about reaching this population – and finding success in serving them – is a necessary first step toward closing homeownership gaps.
For applicants who are not yet mortgage ready, are there systems and practices in place to help them overcome the barriers they face that may be within their control?
The Freddie Mac report also identifies two other cohorts – “Near Mortgage Ready” and “Not Currently Mortgage Ready” individuals. The report documents that these populations are much larger among people of color. As such, any concerted effort to increase Black and Latino homeownership requires a strong focus on helping people in these segments become mortgage ready. The question above addresses “systems and practices” to support these potential borrowers.
The question also addresses barriers “within their control” – such as savings, budget management, creditworthiness and gaining an understanding of the mortgage process and responsibilities of owning a home. The path to homeownership is not the same for all, so potential borrowers will need on-ramps and off-ramps appropriate to their current state of mortgage readiness.
This is not a new idea. In fact, it is a central principle in NeighborWorks’ Full-Cycle Lending® framework, developed and branded in the mid-1990s. Full-Cycle Lending goes beyond simply providing the services required to help individuals become homeowners to include the support needed to help new homeowners maintain successful long-term homeownership.
When external barriers arise, is there a plan for addressing them such that they may be lessened over time?
Let’s be realistic: as mortgage professionals, there is only so much one can do to close the racial/ethnic homeownership and wealth gaps. However, to think that the role begins and ends with a mortgage loan application and closing is probably not giving the industry enough credit. There is also an opportunity to participate in a collective effort to address external barriers to homeownership. In this context, “internal” barriers are those a borrower may individually address, as noted in our section on readiness above. These “external” barriers are those that are beyond a borrower’s individual control – those that arise from conditions in the community around the individual.
Today, the most discussed external barrier is a lack of affordable housing supply. Others include access to down payment assistance (DPA), and appraisal gaps. Here in Milwaukee, a collective of public, private, non-profit and philanthropic interests is attempting to address a reduced capacity to provide homeownership support services. This collective is also standing up a fund that will step in, before cash buyers do, to acquire single-family homes that will be rehabbed and sold to mortgage-ready homebuyers.
Other initiatives include increasing diversity within the mortgage finance industry, from appraisers through loan officers, and advocating for policy changes that align with the objective of closing homeownership gaps.
Are there products and programs in place that will meet the unique needs of creditworthy minority applicants and help them achieve long-term, sustainable, wealth-creative homeownership?
If the mortgage industry has learned anything from the housing crisis, it’s that an unbridled expansion of underwriting guidelines can produce the exact opposite of the intended results. Instead of increasing affordable and sustainable homeownership, an imprudent expansion of guidelines often leads to more foreclosures, a loss of homeownership and a loss of wealth through home price declines.
As overall originations shrink, the industry and policy makers must be careful not to try to replace lost volume by going beyond the proven, tried-and-true guardrails of a borrower’s capacity to repay, or to lower credit standards such that sustainable homeownership is at peril. And as interest rates rise, lenders must be careful not to re-introduce instrument risk (remember “pick a payment” mortgages?) in such a manner that low- to moderate-income households earning a steady income are susceptible to foreclosure due to payment shock.
Today, efforts to increase homeownership with product solutions should be responsive to identified needs, and they should be prudently and thoughtfully applied to minimize risk layering so that we achieve the intended outcome of sustainable homeownership.
From a lender’s perspective, this will require an understanding of the home financing needs and challenges throughout their target lending area. This can be informed by observing Home Mortgage Disclosure Act (HMDA) applications received, denial rates, and denial reasons. It can also be informed through engagement with local non-profits that provide homeownership support services. The goal of any solution should be to serve the home financing needs of “Mortgage Ready” borrowers, and improve the preparedness of those who are “Not Mortgage Ready” (as opposed to expanding the risk envelope for this segment).
Over the next several weeks, we’ll go deeper into the 4 themes of Awareness, Readiness, Community and Solutions. We believe this 4-point ARCS framework offers a pragmatic, straightforward checklist that mortgage lenders can use to establish their plan for closing racial/ethnic gaps in homeownership.
1U.S. Census Bureau, Housing Vacancies and Homeownership
2Brookings Institute, “Examining the Black-White Wealth Gap,” Feb. 27, 2020, Kriston McIntosh, Emily Moss, Ryan Nunn and Jay Shambaugh
3Urban Institute, “Is homeownership inherited? A tale of three millennials,” Aug. 2, 2018, Jung Hyun Choi, Jun Zhu and Laurie Goodman