Homeownership is the cornerstone of the American Dream and, for good reason, home equity is the largest source of wealth for the typical American family. As of the first quarter of 2021, non-Hispanic white households had a homeownership rate of 73.8% compared with a rate of 45.1% for Blacks.
Compare that to home-buying rates in 1920. Then, just a year before the Black neighborhood of Greenwood was destroyed, owning a home was much more difficult for everyone (regardless of race) – down payments of 50% were common and repayment was typically expected within 10 years. And still, the gap in homeownership between Blacks and whites was lower at that time than it is today by nearly 5 percentage points.
While Federal Housing Administration regulations ended many of the difficulties faced by whites, individual and institutional discrimination has barred most Black households from owning their homes. Blacks have also experienced significant financial exploitation in the loan origination and servicing process.
When it comes to homeownership, are Blacks better off today than in 1921, when communities like Tulsa provided vast opportunities to build wealth?
On the surface yes: For Blacks who do own homes, their properties contribute to increasing their wealth (even when incomes are the same between Black owners and renters). They also have greater freedom today than a century ago to locate in communities that may have better access to employment and other important amenities.
But in some of the most significant ways, life is worse.
The Black homeownership rate has increased only 4 percentage points from its level of 41% more than five decades ago. The inability for Blacks to access homeownership explains much of the substantial racial wealth gap.
According to recent Federal Reserve Board data, the median white household has $188,200 in wealth compared with $24,100 for the median Black household. Multiple studies have found that housing equity is the largest contributor to that vast difference in median net wealth between Black and white households.
The 1968 Fair Housing Act, which prohibits housing discrimination, was successful in purging the most overtly biased real estate practices. More subtle, but equally harmful institutional discrimination continues today.
Federal support for institutional housing discrimination has its origins in the creation of the modern housing finance system. In response to a national foreclosure crisis during the Great Depression of the 1930s, the federal government established the Home Owners Loan Corporation (HOLC) and Federal Housing Administration (FHA).
The HOLC purchased home loans that were at risk of default and restructured them to be affordable to their borrowers. The FHA offered low-cost, low down payment mortgages that placed homeownership within reach of middle-, moderate- and lower-income families.
Both institutions denied loans to Black households. They also institutionalized the practice of redlining – a system of maps that designated acceptable levels of lending risk, based on the race of the population that inhabited a community. The agencies deemed Black communities too risky for federal home loan assistance, regardless of the income, wealth or education of its inhabitants, or the quality or location of its housing stock.
The result was that non-Hispanic Whites were rescued from foreclosure by the HOLC during the economic collapse of the 1930s. Whites later leveraged FHA to greatly expand their level of homeownership (and, consequently, median household wealth) after World War II.
Lack of access to federal housing finance agencies during that era forced Blacks to routinely rely on abusive and exploitative loans, which greatly undermined the value of owning a home. In many instances, loan terms and servicing arrangements made successful homeownership impossible.
A 2019 report titled “The Plunder of Black Wealth in Chicago: New Findings on the Lasting Toll of Predatory Housing Contracts” documents one form of exploitative lending that occurred in Chicago during the 1950s and 1960s, that is estimated to have robbed between $3 billion and $4 billion from Black households in that city alone.
Commonly known as land installment or deed sales contracts, those loan arrangements contained a range of exploitative features.
The report found that Black home purchasers utilizing land installment arrangements paid an average of 84% markups on homes and an additional $587 per month (inflation adjusted) on their mortgages, relative to the cost of a conventional loan. As many as 95% of Black Chicago homeowners purchased their homes on contract.
Land installment contract buyers further did not accumulate equity in their homes during the loan repayment period, properties often were sold to buyers with major structural defects that required the buyers to make immediate and costly repairs, and owners could be foreclosed upon for a single missed payment (with no equity returned to the borrower regardless of the amount of their down payments or years of timely mortgage payments).
Blacks gained access to FHA in the 1960s, but for decades, FHA allowed real estate agents and brokers to pursue a range of discriminatory practices that continued to limit the value of homeownership to Blacks who were able to attain it.
In the late 1990s, abusive, non-government, predatory subprime loans began to appear in communities across the nation. Predatory subprime lenders disproportionately targeted Black communities for their fraudulent lending schemes.
Many loan products had adjustable rate mortgages that were designed to trigger unaffordable loan payments within two-to-three years of initial loan origination.
The goal of lenders of originating unsustainable loans was to force borrowers to return to their lenders to refinance. Through this process, lenders gained a new and unnecessary round of exploitative origination fees.
By 2008, the U.S. housing market had become so saturated with abusive loans that it collapsed.
By excluding non-government, subprime loans from HAMP, Blacks suffered a disproportionate share of the more than 7 million foreclosures that ensued between 2007 and 2017.
The concentration of foreclosures in Black communities had a domino effect in those areas, driving home prices further downward and triggering additional foreclosure by owners who realized their properties were hopelessly underwater.
As was the case in the 1930s, federal policy both ignored the needs of a large share of Black borrowers and ushered in practices that further economically harmed Blacks. Fannie Mae and Freddie Mac, for example, were required to charge Adverse Market Impact Fees on home loans originated in distressed communities.
In addition, after the housing collapse, the way fees are assessed to loan applicants for loans held by Fannie Mae and Freddie Mac, was modified in a manner that greatly undermines Black mortgage applicants.
Known as, Loan Level Pricing Adjustments (LLPAs), borrowers are now charged more for home loans based on their down payment amounts and credit scores; loan applicants with lower down payments and credit scores are often forced to pay substantially more for their mortgages than borrowers with high down payments and credit scores. This practice represents a stark departure from the historic fee structure of Fannie Mae and Freddie Mac, in which all borrowers that qualified for a loan paid basically the same loan guarantee fees.
These price adjusters disproportionately penalize Blacks for decades of federally sponsored, institutional discrimination, that has left Blacks less able to afford high down payments and more likely to have lower credit scores.
Forcing low-wealth consumers to pay more to access credit increases the probability of loan default disproportionately for Black home buyers.
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Down payment assistance for Black applicants could greatly increase homeownership.
The positive impacts of downpayment assistance, however, will be undermined if biased institutional practices are not purged from federal housing institutions and the vestiges of blatant discrimination are not eliminated.
Redressing decades of housing discrimination must go beyond tinkering with the current housing finance system. That system, enacted around the time of the Great Depression, was not designed to meet the challenges facing inner-city communities and will not meaningfully close the racial homeownership gap.
The FHA was designed expressly to finance new home construction in the suburbs. It lacks the types of loan products and flexibility required to finance older housing stock in need of renovation and associated community infrastructure.
Also, years of housing discrimination and segregation have resulted in high concentrations of unemployment of Blacks in our nation’s inner cities.
Just as infrastructure spending on highways, bridges and dams is a powerful way to create jobs and grow the U.S. economy, a restructured housing finance system should support job creation through the rebuilding of inner-city communities. It would not be the first time the government-supported housing finance system was used to create jobs.
Closing the homeownership gap between Blacks and whites will require a solution that is equivalent to the enormity of the institutions, practices and time that created the massive racial wealth gap in our nation.
Jim Carr is a financial consultant and a former Coleman A. Young Endowed chair and professor at Wayne State University. He is also the former senior vice president of the Fannie Mae Foundation and assistant director for tax and federal credit policy with the U.S. Senate Budget Committee.