Home ownership is the cornerstone of the American dream, and for good reason it is greatest source of wealth for the typical American family. From the first quarter of 2021Non-Hispanic white households had a home ownership rate of 73.8% compared to 45.1% for blacks.
Compare that to home buying prices in 1920. Just a year before the destruction of Greenwood’s Black Quarter, it was much more difficult for anyone (regardless of race) to own a home – 50% down payments were common and the Repayment was usually expected within 10 years. Yet the home ownership gap between blacks and whites was narrower at the time than it is today by almost 5 percentage points.
While the Federal Housing Administration rules put an end to many of the troubles whites face, individual and institutional discrimination has prevented most black households from owning their homes. Blacks have also experienced significant financial exploitation in lending and servicing.
When it comes to home ownership, are blacks doing better today than they are in 1921, when communities like Tulsa offered tremendous opportunities to build wealth?
On the surface, yes: for black people who own a home, their real estate helps increase their wealth (even if the incomes are the same between black owners and tenants). They also have more freedom today than they did a century ago to settle in communities that may have better access to employment and other vital facilities.
But in some of the most important cases, life is worse.
The black home ownership rate has increased by only 4 percentage points compared to its level 41% more than five decades ago. The inability of blacks to gain access to home ownership explains much of the significant racial wealth gap.
According to recent Federal Reserve Board dataThe middle white household has $ 188,200 net worth compared to $ 24,100 for the middle black household. Several studies have found that home ownership is the largest contributor to this huge difference in mean net wealth between black and white households.
The Fair Housing Act 1968Banning Housing Discrimination has been successful in eliminating the most overtly biased real estate practices. More subtle, but equally damaging institutional discrimination continues today.
The federal government’s support for institutional housing discrimination has its origins in the creation of a modern housing financing system. In response to a national foreclosure crisis during the Great Depression of the 1930s, the federal government set up the Home Owners Loan Corporation (HOLC) and Federal Housing Administration (FHA).
The HOLC purchased home loans These were at risk of failure and were restructured to be affordable to their borrowers. The FHA offered Low-cost, low-down payment mortgages that brought home ownership within the reach of middle-, middle- and low-income families.
Both institutions denied credit to black households. they also institutionalized the practice of redlining – a card system that determined an acceptable credit risk based on the race of the population living in a parish. The agencies looked at black communities too risky for the support of federal housing loans, regardless of the income, assets or education of its residents or the quality or location of its housing stock.
The result was that non-Hispanic whites were saved from foreclosure by the HOLC during the economic collapse of the 1930s. Later whites used the FHA to expand their home ownership (and, consequently, median household wealth) significantly after WWII.
Lack of access to federal housing finance agencies during this period forced blacks to routinely rely on abusive and exploitative credit, which severely undermined the value of owning a home. In many cases, loan terms and service agreements made successful home ownership impossible.
A 2019 report entitled “The Looting of Black Wealth in Chicago: New Findings on the Persistent Number of Predatory Housing Contracts“documents a form of exploitative lending that took place in Chicago in the 1950s and 1960s, and between which it is estimated that there was robbery $ 3 billion and $ 4 billion of black households in this town alone.
These loan agreements, commonly known as land installments or deed sales contracts, contained a number of exploitative features.
The report found that black home buyers using land rate plans pay an average of 84% home surcharges and an additional $ 587 per month (adjusted for inflation) on their mortgages relative to the cost of a conventional loan. 95% of Black Chicago homeowners bought their homes on a contract basis.
Land installment buyers did not accumulate equity in their homes during the loan repayment period. Buyers were in danger Buying property with structural defects That required immediate and costly repairs from the buyers, and it could be the owners excluded for a single missed payment (with no repayment of equity to the borrower, regardless of the size of his down payments or years of timely mortgage payments).
Blacks got access to FHA in the 1960s, but for decades FHA approved real estate agents and brokers a number of pursue discriminatory practices that continued to limit the value of home ownership to blacks who could reach it.
In the late 1990s, abusive, nongovernmental, predatory subprime loans began to emerge in communities across the country. Predator subprime lenders have disproportionately targeted black communities for their fraudulent lending systems.
Many loan products had adjustable rate mortgages that were supposed to trigger prohibitive loan payments within two to three years of the initial borrowing.
The goal of lenders to take out unsustainable loans was to force borrowers to return to their lenders for refinancing. Through this process, the lenders received a new and unnecessary round of exploitative origination fees.
By 2008, the US real estate market had become so saturated with improper credit that it collapsed.
The Concentration of foreclosures in black communities had a ripple effect in these areas, pushing property prices further down and triggering additional foreclosure by owners realizing their properties were hopelessly under water.
Additionally, after the residential property collapse, the way fees are charged to loan applicants for Fannie Mae and Freddie Mac loans has changed in a way that significantly undermines black mortgage applicants.
Known as, Loan level price adjustments (LLPAs), borrowers can now get more for home loans based on their credit scores; Loan applicants with lower down payments and credit scores are often forced to pay significantly more for their mortgages than borrowers with high down payments and credit scores. This practice marks a marked departure from the historic Fannie Mae and Freddie Mac fee structure in which all borrowers who qualified for a loan paid essentially the same loan guarantee fees.
These price adjusters have been punishing blacks for decades from government-sponsored, institutional discrimination that has resulted in blacks being able to afford lower down payments and more likely to have lower credit scores.
When low-wealth consumers are forced to pay more for access to credit, the likelihood of credit default increases disproportionately for black home buyers.
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Down payment help for black applicants could significantly increase home ownership.
However, the positive effects of down payment assistance will be undermined if biased institutional practices are not removed by federal housing authorities and the traces of overt discrimination are not removed.
Eliminating decades of housing discrimination needs to go beyond tinkering with the current home finance system. Introduced at the time of the Great Depression, this system was not designed to address the challenges faced by inner-city communities and will not meaningfully bridge the gap between racist home ownership.
The FHA was specifically designed to finance new residential construction in the suburbs. It lacks the types of loan products and flexibility needed to finance older residential properties in need of renovation and associated community infrastructure.
Years of discrimination and segregation in housing have also led to a high concentration of black unemployment in our country’s inner cities.
Just as infrastructure spending on freeways, bridges, and dams is an effective vehicle for job creation and the growth of the U.S. economy, a restructured real estate finance system should support job creation by rebuilding inner-city communities. It wouldn’t be the first time the government-backed real estate finance system has been used to create jobs.
Closing the homeownership gap between blacks and whites requires a solution that is commensurate with the vast amount of institutions, practices, and time that has created the massive racial and prosperous gap in our nation.
Jim Carr is a financial advisor and former Coleman A. Young Endowed Professorship and Professor at Wayne State University. He is also a past senior vice president of the Fannie Mae Foundation and assistant director of tax and federal credit policy on the Senate Budget Committee.