5 ways to increase the Black homeownership rate right now

While a large share of Black households face affordability hurdles, there also is a sizable contingent that is impeded only because they lack experience managing credit in ways that traditional underwriting recognizes.

Pre-pandemic there were 1.7 million mortgage-ready Black millennials who made $100,000 or more annually, according to anonymized Freddie Mac data. At least 3 million Black households were identified as mortgage ready, and more than 2 million were able to meet income requirements, but didn’t have enough of credit history to meet traditional requirements for home loans, Freddie Mac found.

The CARES Act passed in 2020 aimed to ensure that the impact of the pandemic wouldn’t mar credit records by disallowing forbearance to be recorded as delinquency. However, lenders and public officials should take steps to protect Black homeownership by ensuring that reporting errors and the application of other codes that could be used to indicate forbearance on a credit record don’t have adverse consequences, Thompson said in an email.

To serve thin-file applicants, lenders should note that it may be possible to use alternatives like rental or cell phone information to underwrite on an exception basis even though the current system doesn’t accommodate it.

NAREB has also raised questions about whether other forms of standard underwriting, such as the government-sponsored enterprises’ negative loan-level pricing adjustments for credit or older classic FICO scores, could be updated to measure creditworthiness in ways that wouldn’t unfairly feed into the high denial rates for Black households.

While progress related to incorporating such methods more broadly into the standard underwriting is very slow and can be complicated, it is possible to do it manually today and hold in portfolios, if available, or sell them to alternative investors, Thompson said.

To be sure, investors as well as lenders tend to prefer loans made based on established track records, but today there’s a hot market for mortgages that finance Environmental, Social and Corporate Governance goals as well. Demonstrably financing sustainable housing for Black homeowners could appeal to these investors.

Qualified renters could also enter the housing market if lenders develop detailed assessments of collateral quality and make sure that first-time buyers know how to manage the costs of their home in ways that will build wealth long-term.

“One of the significant barriers to maintaining a homeowner’s property value is having access to capital to purchase or keep up the home,” said Thompson.

Establishing alternative methods of assessing credit and collateral could improve the rate of Black homeownership particularly at lower income levels, where racial disparities are currently quite pronounced, according to Urban Institute data.

For example, there’s about a 10 percentage point gap in homeownership of those with annual incomes of $150,000 or more: 80% for Blacks and 90% for whites. In contrast, for those who make $25,000 or less per year, the gap between Blacks and whites is 25 percentage points, with Blacks having a homeownership rate of 25% and whites at 50%.

There are many systemic challenges when it comes to small loans, and one of the most-cited ones is the fact that lenders make less money on them than bigger mortgages while paying the same amount to produce them.

Given that many lenders have been exceptionally profitable as a result of the recent origination boom, they might be able to absorb the cost of making some smaller loans more easily right now.

But they will have to be careful making sure those loans are made within the spirit of regulations that hold lenders accountable for borrowers’ ability to repay by making sure borrowers understand and can afford the long-term costs of lower-priced homes they buy.

One past Department of Housing and Urban Development program that existed before ability-to-repay regulations were established notoriously failed because it did not factor in costs of repairing or maintaining the houses involved.

The best way for a low-income homeowner to pay for repairs or maintenance may be to refinance and tap more home equity, but often the reluctance to make small-dollar loans precludes that as well.

A borrower may be able to get a small-dollar home loan through say, a special first-time home buyer program. However later, when the time comes to refinance the loan to pay for repairs, lenders may be even more reluctant to deal with the small loan.

In fact, when small loans are sold to the secondary market, a premium is often paid for them because investors are counting on the fact that they get refinanced less often. When loans refinance or prepay, it often diminishes the cash-flows from the investment to buyers, so they prefer to purchase loans where the cash-flow remains constant.

“This inability to leverage home equity and improve a deteriorating home feeds into a perpetual cycle that leads to long-term maintenance issues and persistent degradation of housing values, impeding how much wealth a homeowner will ultimately have,” the Urban Institute’s Housing Finance Policy Center noted in a recent report on small-dollar financing.

The institute has been working with Fahe, a Community Development Financial Institution, and the Homeownership Council of America on a “MicroMortgage” pilot project aimed at finding ways to address some of these challenges.

Strategies used in the pilot, which has initial funding of $2 million, include an appraisal alternatives to lower costs and underwriting based on rent payments rather than a more traditional credit history.

“It’s really about finding out what ancillary costs can be reduced and what different underwriting standards or parameters you could put in place that would enable doing more of this kind of lending,” said Alanna McCargo, a vice president at the institute and one of the report’s authors.

As the Louisville-based project enters its later phases, there may be opportunities for other lenders to encourage increased origination of small loans, said Linna Zhu, research associate at the institute, who also helped author the report.

“The main focus for phase one is new purchase loans, and for phase two we will look deeper into rehab and refinance,” she said. “In phase two, we also are planning to collaborate with more players to increase our scalability.”

As the situation with small loans illustrates, there are some larger challenges in the government-dominated mortgage finance system that limit a lender’s ability to make affordable loans, and that’s only been intensified by steep home price appreciation, which has outpaced borrower savings from lower rates.

While individual mortgage lenders have limited sway over systemic issues, they can increase their involvement with larger trade groups that are pushing governmental policy initiatives to make homeownership more affordable and sustainable.

For example, proposed bipartisan legislation introduced last year would allow for the creation of special tax-advantaged accounts that could be used to save for down payments on homes, helping to overcome a key hurdle for many Black homeowners and others with affordability constraints.

Targeting student loan relief could also be helpful. Given that the Biden administration has shown interest in lowering some hurdles for those with student loans, lenders may want to renew their call for a Federal Housing Administration change that would make it easier for borrowers with educational debt to get a mortgage.

Also mortgage companies could renew their push for responsible rollbacks of the FHA’s complicated servicing policies and lender liabilities to encourage lending through affordability programs. After the Great Recession, many banks withdrew from the FHA and its programs that serve low-income borrowers because of liability concerns. While the Biden administration is generally considered more likely to tighten regulation than decrease it, the end goal of creating more equitable and sustainable lending may encourage such moves.

“It could reduce lending costs and also help the lower-FICO borrowers get lower-priced loans as well,” said David Battany, executive vice president of capital markets at Guild Mortgage, and the co-chair of the Mortgage Bankers Association’s Affordable Housing Committee.

Additionally, improving and expanding the Department of Housing and Urban Development’s 203k rehabilitation and purchase loan program could help create more affordable inventory, Thompson said.

But programs specifically designed to put Black households on an even playing field with other homeowners would be the most effective in creating change, he added.

For example, HUD’s 184 program currently restricted to certain indigenous people in the United States could be expanded to Black borrowers, NAREB has suggested. The program, among other things, has offered a below-market rate on mortgages with flexible underwriting and lower down payments.

NAREB has called for the creation of African-American Homeownership Program “as a restorative policy for past discrimination by the federal government,” said Thompson.

“Currently there are federal housing programs for Native Americans, Alaskans, Hawaiians and Veterans. Nothing for African-Americans. A no-money program with special-purpose credit tools made possible through the Equal Credit Opportunity Act could make a world of difference to increase the rate of Black homeownership,” he added.