Janet Murguía: Updating Our Housing Finance System to Reflect a Changing America
June 9, 2016
Between 2010 and 2020, minorities will account for 70 percent of new household formation, and by 2020, half of all first-time homebuyers will be Latino (Becerra 2014; JCHS 2012).1 Without affordable access to credit for these prospective buyers, the housing market will decline, with harmful consequences on the larger economy. While there is much to consider regarding the future of housing finance—with many solid proposals emanating from this incubator’s authors—our country’s changing demographics require access and affordability to be at the center of the solution.
At the helm of NCLR (National Council of La Raza), the nation’s largest Latino civil rights and advocacy organization, I have the honor of working with a network of nearly 300 Hispanic community-based organizations who annually serve more than seven million Latino families. Creating homeownership opportunities in low- and moderate-income Hispanic communities has been an NCLR priority for more than two decades. NCLR has worked to preserve and strengthen the Community Reinvestment Act, support strong fair-housing and fair-lending laws, and increase access to financial services for low-income Hispanic families. We also provide housing counseling services to more than 50,000 families annually as a US Department of Housing and Urban Development–certified housing counseling intermediary; in the last 12 years, the 51 community-based organizations in our network have nurtured more than 30,000 first-time homebuyers.
Our work could not be more critical during this time of substantial demographic change. Latinos have become the largest and fastest-growing racial or ethnic minority in the United States:
- Between 2000 and 2012, the US Hispanic population increased by 50 percent to reach 53 million. By 2060, Latinos are projected to represent nearly 30 percent of the country’s population.
- One in six Americans are Hispanic, and one in four children under age 18 are Hispanic.
- We are the fastest-growing group of American workers, with the highest labor force participation rate of any population.
- With nearly one million young Latinos turning 18 each year, we are also the youngest and fastest-growing group of potential voters in the nation.
Home Equity Is Key to Latino Wealth
While Hispanics make up more than 18 percent of the US population, we have only 2 percent of its wealth. In 2013, the wealth of white households was 10 times that of Latino households. While there are many economic factors at play, wealth disparities between whites and communities of color are heavily affected by disproportionate rates of homeownership.2 The Latino homeownership rate in the first quarter of 2016 was 45.3 percent, while the white homeownership rate was 72.1 percent. Homeownership remains a cornerstone of the American Dream and is one of the most effective wealth-building tools available to Hispanic families. In 2010, home equity accounted for 67 percent of net wealth for the median Latino homeowner, compared with 38 percent for the median white homeowner (Rockeymoore and Guzman 2014).
In addition, homeownership can provide financial and social stability. Homeowners can establish and maintain a known monthly cost for shelter, enjoy a stable residence and stable schools for their kids without worrying about arbitrary eviction, and devote a portion of the monthly housing cost to building equity by paying down a mortgage. Homeownership is also correlated with better health outcomes, improved educational opportunities, and higher incomes in the next generation. Owning a home also provides an opportunity to transfer assets from one generation to the next.
Yet the benefits of homeownership have not always been available to everyone equally. Our nation has a long history of discrimination and segregation that has limited access to credit for communities of color. Throughout the 20th century, skin color, national origin, and neighborhood demographics have been better determinants of credit availability than one’s ability to pay. Although we’ve come a long way thanks to laws such as the Fair Housing Act and the Equal Credit Opportunity Act, the housing crisis and Great Recession demonstrated how the nation’s mortgage lending system failed people of color. Latino borrowers were disproportionately steered toward subprime loans even when they had good credit, and compared with whites, Latinos were 30 percent more likely to receive high-cost loans at the height of the housing bubble (Bocian, Ernst, and Li 2006).3
Latinos suffered some of the most devastating losses as housing prices collapsed. By 2009, the median Hispanic homeowner had just under $50,000 in home equity, while black homeowners had nearly $60,000 and white homeowners had about $95,000. As a group, Hispanic homeowners lost about $655 billion in home equity between 2005 and 2009. The Financial Crisis Inquiry Commission spent more than a year evaluating the crisis and its potential causes (FCIC 2011). They concluded the crisis was attributable to several factors, including failures in financial regulation, an explosive mix of excessive borrowing by individuals and Wall Street, widespread predatory lending practices, and ill-prepared policymakers who didn’t fully understand the system they oversaw.
Where We Are Today
Unfortunately, today’s housing market remains broken and is not serving communities of color significantly better. Housing prices in many urban markets with heavy minority populations are once again rising faster than income. Overcorrection in today’s credit market means that low-income families have more trouble accessing credit, and it is more difficult to obtain mortgages for homes less than $100,000. The Urban Institute estimates that “four million more loans would have been made between 2009 and 2013 if credit standards had been similar to 2001 levels.”4 Latinos may have missed out on loans because they did not fit the imposed credit standards; they are less likely to have a traditional credit history and more likely to have credit scores damaged by unemployment or underemployment during the recession. Hispanic borrowers are also left out of the credit box even when their incomes could support sustainable homeownership, because they are more likely than others to have a cash income, multiple sources of income, or a family structure with multiple co-borrowers on the same loan.
As the conventional market has turned away from the Latino community, the Federal Housing Administration share of lending to Hispanics increased from 6 percent in 2005 to 55 percent in 2012 (Bostic 2013). While Federal Housing Administration lending has provided an important backstop for creditworthy Latino borrowers during this period, high insurance premiums often make these mortgages more expensive than a conventional loan. When Hispanics are paying more to borrow money, it takes longer for them to build home equity and wealth.
Ensuring Access and Affordability
The government must have a role in the housing finance system, and there are many compelling proposals for how to structure a more effective system. An explicit duty to serve all communities across the country is essential in a future structure. The price of admission for any government backstop is a duty to serve all markets with affordable mortgage credit. In addition, a new structure must encourage innovation around new products or processes that can expand homeownership safely and profitably.
We do not have to start from scratch to find models that promote access and affordability. With programs such as the Community Home Buyers Program in the 1990s, lenders exercised intense scrutiny to ensure that borrowers were prepared for their mortgage obligations through a combination of low down payments and homeownership counseling. Research shows that between 1997 and 2002, the government-sponsored enterprises’ affordability goals helped expand mortgage credit to underserved populations—including communities of color and low-income borrowers—by standardizing eligibility criteria and underwriting factors that enabled more households to obtain loans. During this same period, rates of Hispanic homeownership increased from 43.3 percent to 48.2 percent.
If we are to regain the ground we lost during the Great Recession, effective future housing finance should incorporate some of these lessons and must include the following principles.
- Increase access to affordable homeownership. A redesigned housing finance system must be based on creating affordable and sustainable credit to the broadest possible range of creditworthy borrowers. The system must include an explicit “duty to serve” to ensure communities of color and low- and moderate-income people gain needed access to quality loan products, including 30-year fixed-rate mortgages that do not mandate down payment requirements in underwriting standards. Further, effective enforcement tools must be available to render a duty to serve provision meaningful in the primary and secondary markets.
- Uphold fair and nondiscriminatory lending practices. The federal government should monitor the market for discrimination, with a zero-tolerance policy on unethical lending. Any housing finance system must include a clear obligation to serve all qualified borrowers and an entity that will approve originators. Consistent with existing civil rights statutes including the Fair Housing Act and Equal Credit Opportunity Act, no homebuyer should be subject to discrimination based on race, sex, religion, age, or any other protected class. Not only is discrimination illegal, but according to former Federal Reserve chairman Alan Greenspan, it also drags down the economy because it delays wealth accumulation among much of the population.
- Recognize the value of pre- and postpurchase housing counseling. Loan performance is greater when a family has housing counseling support. Housing counseling supports safety and soundness and should be more fully integrated into the credit process. Prepurchase counseling should be encouraged with pricing discounts or as a compensating factor to reduce down payment or credit score requirements, as appropriate. Not only are housing counseling services beneficial to the homebuyer but the lender and investor also benefit from having a more informed consumer. Additionally, postpurchase counseling can help families manage their obligations and remain in their homes. The value of housing counseling has been proven many times, and the integration of housing counseling into housing finance reform was a key feature of a 2013 report from the Bipartisan Policy Center’s Housing Commission, where I was a commissioner (Bipartisan Policy Center Housing Commission 2013).
- Expand the role of lenders that deliver innovative and responsible lending models. Credit unions, community development financial institutions, and community lenders have provided safe and affordable mortgages to underserved communities for years. Regardless of size, these lenders should have access to the secondary market to bring their products to scale without suffering from volume-based pricing, for example.
- Find balance among the multiple market players. The Federal Housing Administration plays a critical role by making credit available to people with modest incomes who have the ability to repay a mortgage but have limited resources to cover a down payment or closing costs. However, the Federal Housing Administration will work best in a competitive market where it is one of many options. If the secondary market structure is too narrow, we risk perpetuating a two-tiered lending system where white borrowers and communities of color are treated differently and are funneled into separate channels with different fees.
Our nation is dynamic and diverse, and the Latino community is one of the driving forces behind much of the demographic change. By 2044, people of color will account for more than half the population. For our country to have a well-functioning economy that works for Americans of all income brackets, we need a safe and sustainable housing finance system. This system should encourage and promote homeownership opportunities that allow parents to have financial stability, build a nest egg, and send their kids to college. More Hispanic homeowners make for stronger families, more stable communities, and a healthier economy.
- The terms “Hispanic” and “Latino” are used interchangeably by the US Census Bureau and throughout this document to refer to persons of Mexican, Puerto Rican, Cuban, Central American, Dominican, Spanish, and other Hispanic descent; they may be of any race.↩
- Robert R. Callis and Melissa Kresin, “Residential Vacancies and Homeownership in the First Quarter 2016,” press release, April 28, 2016, http://www.census.gov/housing/hvs/files/currenthvspress.pdf. ↩
- “Justice Department Reaches $335 Million Settlement to Resolve Allegations of Lending Discrimination by Countrywide Financial Corporation,” US Attorney’s Office, Central District of California, last updated June 22, 2015, https://www.justice.gov/usao-cdca/dojcountrywide-settlement-information. ↩
- Laurie Goodman, Jun Zhu, and Taz George, “Four million mortgage loans missing from 2009 to 2013 due to tight credit standards,” Urban Wire (blog), April 2, 2015, http://www.urban.org/urban-wire/four-million-mortgage-loans-missing-2009-2013-due-tight-credit-standards. ↩
Becerra, Alejandro. 2014. State of Hispanic Homeownership Report 2013. San Diego, CA: National Association of Hispanic Real Estate Professionals.
Bipartisan Policy Center Housing Commission. 2013. Housing America’s Future: New Directions for National Policy. Washington, DC: Bipartisan Policy Center.
Bocian, Debbie Gruenstein, Keith S. Ernst, and Wei Li. 2006. Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages. Durham, NC: Center for Responsible Lending.
Bostic, Raphael W. 2013. Market Channel Segmentation, Its Patterns and Effects: What Role has the Government Played in Creating a Dual Mortgage Market in the Past and How Likely is One to Emerge in the Future? Paper presented at Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families, Boston, MA, April 1–2.
FCIC (Financial Crisis Inquiry Commission). 2011 “Conclusions of the Financial Crisis Inquiry Commission.” Stanford, CA: Stanford Law School.
JCHS (Joint Center for Housing Studies). 2012. The State of the Nation’s Housing 2012. Cambridge, MA: Harvard University.
Rockeymoore, Maya, and Elvis Guzman. 2014. “The Racial Wealth Gap: Latinos.” Washington, DC: Center for Global Policy Solutions.