How to boost Black homeownership rates

Zero-down mortgages, loan guarantees and approvals based on disposable cash could help African Americans build wealth.

Mary Pherribo was a house servant and a descendant of slaves. It was 1935. Mary was determined to become a homeowner. She purchased a plot of land in Hillsboro, North Carolina, for $500. She moved a house to that plot.

The property appreciated nicely as nearby Duke University became a larger economic presence. Mary was able to parlay her home equity into generational wealth, helping her children and grandchildren become homeowners.

Tai Christenson, government affairs director for the non-profit down payment assistance agency Chenoa Fund, has enormous gratitude for great-grandmother Mary Pherribo. Tai is a college graduate and a homeowner. Great-grandmother Mary laid the foundation.

Mary and her great-granddaughter are the exceptional outcome, not the rule when it comes to Black borrowers obtaining and maintaining homeownership.

According to a February 2019 Wealth Simple article, “Why It Costs More to Borrow if You’re Black,” the median net worth of a Black family in 2014 was $9,590. The median net worth of a white family was $130,800.

With few exceptions, you need at least 3.5% of the sales price for your Federal Housing Administration down payment. About one-third of my first-time buyer clients over the past 33 years received down payment assistance or gift funds, largely from their parents.

How many generations of Black families never achieved homeownership because they lacked the down payment?

Richard Ferguson, Chenoa Fund president, sees the value in zero-down FHA loans. He points to a May 12 Mortgage Bankers Association press release showing 2020, Q1 delinquencies. FHA delinquencies were running at 9.69% while almost exclusively zero-down-payment Veteran’s Affairs loans showed nearly half as many delinquencies at 4.65%.

If FHA would more closely model VA, this could work well. For example, VA uses something called residual income (how much money you have left to live on each month) instead of making sure your total house payment and monthly expenses divided by your monthly gross income don’t exceed a ratio of 56%.

There is a 30% difference between white and Black homeownership rates, according Donnell Williams, president of the National Association of Real Estate Brokers, a real estate trade organization largely representing the interests of Black real estate professionals. He asked me why FHA has a special reduced down payment and easier underwriting program for Native Americans in Section 184 Indian Home Loan Guarantee Program but not for African Americans.

“What is the difference between stolen land and stolen people?” asked Williams.

When the 2010 Dodd-Frank law came to town, it was intended to drain the swamp of all predatory loans and lenders charging excessive rates and high fees, prepayment penalties and balloon payments. And, what about the ability to repay? Yes! Lenders must prove the borrowers’ ability to repay. Why give a mortgage to someone who can’t afford it?

One result was points and fees weren’t allowed to exceed 3% of the loan amount. Low-income, low-wealth communities, oftentimes communities of color, suffered ever since.

If a mortgage loan originator charges 3 points on a $200,000 loan amount, the points are $6,000. If an originator charged 3 points on a $50,000 loan, the points equate to $1,500. Mortgage loan originators don’t want to work for less income if they can find better income elsewhere.

And lenders may even be losing money for producing smaller loans. According to the Mortgage Bankers Association, the production cost to produce a loan was $3,738 during the first quarter of 2009. Compare that to post-Dodd-Frank at $7,882 in the first quarter of 2020. That overhead gets passed directly to mortgage shoppers, hurting lower income borrowers the most.

“We need to explore ways we can lower the sky-high cost of mortgage production, which has doubled in the last decade to keep pace with increasing regulatory requirements,” said Roger Fendelman, managing member of law firm Garris Horn.

Next week: More solid ideas.


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Jeff Lazerson - Mortgage Columnist since 2011