Closing the Homeownership Gap

Minority households in the U.S. face significant hurdles when trying to buy a home. Reflecting decades of unfair policies, the mortgage denial rate is still twice as high for Black applicants as it is for the overall population.

White households are 40% more likely to be able to afford to buy a home compared with Black households, according to the National Association of Realtors, and government figures show that in the second quarter of 2022, the homeownership rate for white households was 75%, compared with 45% for Black households.

“The homeownership issue is a wealth issue and really has profound implications for our entire economy,” said Vanessa Perry, professor of strategic management and public policy at the George Washington University School of Business, in a presentation at the MIT Golub Center for Finance and Policy. “People often think or assume that the racial homeownership gap is a story about income disparities, but this story isn’t just about income. It really is about intergenerational wealth transfers and access to financial services — credit in particular.”

A gap that large and persistent will take concentrated effort to address. “To close the [homeownership] gap in 10 years, we need something like an additional, incremental 5,000 Black families every week purchasing a home,” said Edward Golding, executive director of the Golub Center and a former senior adviser in the U.S. Department of Housing and Urban Development.

Options like special-purpose credit programs are helpful, but “it really does take a big pivot to close that within 10 years,” said Golding, who also served as the head of the Federal Housing Administration from 2015 to 2017. “We really do have to make fundamental changes.”

Toward that end, the Golub Center and the MIT Department of Urban Studies and Planning recently hosted Housing Finance & Social Equity, a lecture series that invited experts in civil rights, lending, and government to unpack these complicated issues. The talks were hosted in connection with an MIT course on the housing finance system and social justice and funded in part by Harvard’s Joint Center for Housing Studies.

What follows are four suggestions on how to create more equality in the U.S. housing market.

Modify underwriting requirements

A long history of redlining and discrimination affects mortgage underwriting, Perry said.  

In her presentation, Addressing Race and Racism in Mortgage Lending, Perry explained that Black families are more likely than white families to face rejection in the mortgage market because they tend to have higher loan-to-value ratios, higher debt burdens, and/or lower FICO scores, which until recently were based on traditional forms of credit.

“Up until very recently, about a third of Black and Latino households actually didn’t have credit files that included traditional forms of credit, so they couldn’t have FICO scores, and that in and of itself became a barrier to access to mortgage credit,” Perry said. Standard underwriting requirements will continue to be a barrier because they don’t account for the effects of past discrimination and racism. “The only way around that is to change those requirements,” she said.

One sign of progress is that a year ago, Perry was able to offer the Biden administration some advice that it took: Permit the Federal Housing Finance Agency to give Freddie Mac and Fannie Mae permission to waive loan level price adjustments for low- and moderate-income first-time homebuyers.

“I won’t take credit for it, but it’s something that I told them that they should do early on, and they did it,” she said.

In her talk, Perry also addressed the dearth of available housing, saying that it’s time to rethink assumptions to bring more options to the market. “We all need to be thinking about how we can get away from this notion that everybody needs to live in a four-bedroom house on half an acre and try to figure out some alternatives so that we can have more housing units for people to buy,” she said.

Involve banks more in government lending

Alanna McCargo, president of the Government National Mortgage Association, would like to see more banks, such as regional banks and those that are part of the Federal Home Loan Bank System, up their involvement in government home loan programs.

As it stands now, U.S. government mortgage programs are primarily operated by non-depository independent mortgage banks, “not the Bank of Americas and the big or midsize depositories that you think of,” she said in her presentation, Learning From Ginnie Mae.

There’s a lot of opportunity to bring more diverse counterparties into the Ginnie Mae system to have access to the platform and the capital liquidity that we provide, so that those institutions can also do more government lending as well,” she said. 

Ginnie Mae historically worked with large commercial banks on originating eligible loans, but after the 2008 financial crisis, banks began to retreat from home lending. Today, the nondepository independent mortgage banks that filled that gap “do not have a prudential regulatory framework” and are “not regulated in the way that the banks are,” McCargo said.

Specifically, McCargo would like to see more major banks servicing FHA and VA loans and believes that FHLBanks could bring more stability to the Ginnie Mae system.

“Like [with] any good investment portfolio, you’d like to see diversity, because that really helps you manage better and not have all your eggs in one basket,” she said. “We feel like we have a lot of eggs in one basket, and we would like to see more participation of the banks back in this.”

Consider a “high touch, high tech” approach

No region in the U.S. needs affordable housing more than the Deep South, said Bill Bynum, CEO of Hope, a trio of organizations that provide financial services, raise financing, and advocate for equality in minority communities. Hope encompasses the Hope Enterprise Corp., the Hope Credit Union, and the Hope Policy Institute.

Bynum called Alabama, Arkansas, Louisiana, Mississippi, and Tennessee a “capital-starved” region with little philanthropic giving and no major banks.

“None of the major banks prioritize community reinvestment in the Deep South region that we cover,” he said in his presentation, Learning From Hope’s Work in the Deep South. “We generally do a few hundred mortgages a year, which is important to each of those families, but it is not moving the needle on closing the homeownership gap.”

Encouraging more community development financial institutions would help — provided that they “have a record of lending in communities that are most vulnerable,” Bynum said.

When it comes to mortgage lending, Hope employs an “old-style community banking approach” that doesn’t involve using algorithms and scores to determine an applicant’s eligibility, Bynum said. “We sit down and we understand what their financial situation is, how are they handling the resources they have, and what can they afford.”

That said, Hope is taking advantage of technology on the underwriting side to create its own version of an online Rocket Mortgage-type product that is tailored to meet the characteristics of their borrowers — “a mix of high touch, high tech,” he said.

“Using technology is going to be a big, big part of how we scale, but we also have to be consistently in a position to be that personal banker, and you can’t do that without having one-on-one engagement,” Bynum said.

Create a public bank

A public bank is a lending and depository institution managed by the government and designed to serve the public good and the community.

In New York, the nonprofit New Economy Project is advocating for the creation of Public Bank NYC. Doing so would build community wealth and bring more affordable housing to the market, said co-director Deyanira Del Rio in her presentation, Learning From the New Economy Project.

New York has “one of the broadest landscapes of worker-owned businesses and worker co-ops in the country — the public bank could take New York’s billions of dollars of deposits, create an institution, and help channel funds to that,” Del Rio said, noting that the bank would be structured to prioritize investments in community land trusts and social housing.

Before a public bank can be created in New York, however, the state’s banking laws must first be amended. A bill is currently being considered by the New York State Legislature. Around the world, there are already more than 900 public banks “in countries that are very different politically and economically,” Del Rio said. “We’re really the anomaly in this country that we don’t have a more robust public banking system.”

Also essential to creating affordable housing is establishing community land trusts, she said. Del Rio estimated that in New York City, there are around 1,200 units of affordable housing that are either already in a CLT or on the way to becoming part of one. “We’ve had the city council invest almost $4 million in community land trust organizing over the past few years,” she said.

Del Rio believes in CLTs because they incorporate a type of board structure where residents who live in the housing are the ones making the decisions.

“There’s built-in control of people who are in the neighborhood and in the housing,” she said. “We think it [the CLT approach] is a really important tool that we need to create a just housing system and to advance racial equity in housing and land use.”

Continuing Work

The Golub Center, the MIT Department of Urban Studies and Planning, and the Harvard Joint Center on Housing Studies plan to continue to focus on the homeownership gap and issues of social equity in housing finance in the coming years through a combination of papers, symposia, and class offerings.