This is the fifth in our 5-part Affordable Homeownership Series: Addressing the racial equity gap in homeownership
In the first article of this series, Geoff Cooper laid out 4 areas any racial equity plan should attempt to address: Awareness, Readiness, Community and Solutions (ARCS). In the following 3 articles, we discussed considerations in the areas of Awareness, Readiness and Community.
For today’s topic, Solutions, we discuss the products and programs you may want to explore as part of your racial equity plan to meet the unique needs of creditworthy minority applicants and help them achieve long-term, sustainable, wealth-creative homeownership.
Increasing access to affordable homeownership
The aim of a mortgage-focused racial equity plan is to increase access to homeownership that is not just affordable, but sustainable. It’s important that, while engaged in this work, the industry and policymakers avoid an imprudent expansion of guidelines that might lead to foreclosures, a loss of homeownership and a loss of wealth.
Origination volume is likely to continue decreasing well into 2023. However, it’s counterproductive to replace that lost volume by lowering credit standards and going beyond a borrower’s capacity to repay, thereby threatening sustainable homeownership. Setting a borrower up with an obligation that burdens them with a debt load they cannot comfortably maintain and limiting the amount of equity they have at the beginning of their mortgage increases the likelihood the borrower will be unable to recover from an unexpected life event. Interest rates are also rising, so lenders should be cautious about which products they use with borrowers so that low- to moderate-income households will still be able to manage their mortgage payments down the road.
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 we achieve the intended outcome of sustainable homeownership. A high debt-to-income ratio doesn’t necessarily mean a homebuyer won’t be successful, but a high DTI ratio becomes a greater risk factor when combined with a low to no down payment or a history of derogatory credit events, for example.
Identify the needs and challenges in your target lending area
From a lender’s perspective, increasing access to affordable homeownership 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. Here in Milwaukee, for example, when we look at the HMDA data, we see that denial reasons for Black borrowers skew toward credit, while denial reasons for certain census tracts skew toward property reasons.
You can also leverage publicly available loan performance data from the Fannie Mae Data Dynamics platform and the Freddie Mac Single Family Loan-Level Dataset to inform your views on risk.
Another way to identify challenges that may be addressed by product solutions is to engage with local nonprofits that provide homeownership support services to learn what barriers they hear about from the people they help. The goals 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). And for all populations, it’s important to remember that pre-purchase and post-purchase counseling can contribute to borrower success.
Tailor your solutions for prudent lending and affordable homeownership
Once you have identified the issues borrowers in your area face, you can turn your attention to the products and solutions, within your risk tolerance, that may meet borrowers’ specific needs. For example, we at MGIC have identified 4 solution areas:
- Nontraditional credit
- Overcoming the down payment barrier
- Expanding guidelines for non-site-built homes
- Lack of cash reserves after closing
For example, you could take advantage of key mortgage product offerings with low-down-payment options to help overcome the down payment barrier and increase reserves after closing:
- Fannie Mae HomeReady® and Freddie Mac Home Possible® products
- Housing Finance Agency (HFA) programs
- FHA, VA and USDA rural housing programs
- For portfolio lenders, partner with MGIC on portfolio products: Community Pro™ for underserved borrowers and underserved communities, and WealthBuilder Pro™ 100% LTV with a 20-year term builds equity (and wealth) much more rapidly than 30-year loans
Special Purpose Credit Programs (SPCPs) can also be an effective tool for addressing racial equity in homeownership. SPCPs work to close the homeownership and wealth gaps between minority and white households by focusing on sustainable, long-term, financially accretive homeownership. Our colleague, Geoff Cooper, discussed SPCPs and how you can use them to address racial equity in a recent blog post.
Building your checklist
Identify the relevant denial reasons in your community
- What does HMDA data reveal about denial rates and denial reasons in your area?
- Which local nonprofits can you partner with to learn about the barriers that potential homebuyers face?
Identify possible resources
- Which organizations offer products and programs that complement your your racial equity plan?
- Investors, including Fannie Mae and Freddie Mac
- Mortgage insurance partners
- Industry organizations such as the Mortgage Bankers Association
- Housing Finance Agencies
Identify the areas in which you can offer product and program solutions
- What key product resources mentioned above can you leverage?
- Which solutions can you tailor to address the specific issues revealed by your denial research?
- How can you employ those solutions prudently, without expanding guidelines to the point where sustainable homeownership is threatened?
- How will you advertise your product and program solutions to attract “Mortgage Ready Borrowers” who have traditionally not met other program solutions?