PROJECTHousing Finance Reform Incubator

Marc Morial: The Homebuyers' Bill of Rights 2.0
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In the aftermath of the Great Recession, the tragic loss of wealth, and the bailout of the big banks, our national government must continue to play a central role in the housing market to right previous wrongs, ensure access to all qualified borrowers, and keep the housing finance system afloat for future generations.

The National Urban League’s Homebuyers’ Bill of Rights 2.0, proposed below, is a roadmap to help all Americans—with a targeted emphasis on African Americans and people of color—live the American Dream and attain wealth through homeownership. 

As president and CEO of the National Urban League, the nation’s largest historic civil rights and urban advocacy organization focused on economic empowerment, I lead a dynamic team of economic first responders at more than 90 affiliates in 300 communities who provide direct services to over two million people annually.

As a leading housing counseling agency approved by the US Department of Housing and Urban Development (HUD), we operate housing programs at more than 40 of our Urban League affiliates. Since 2008, we have serviced nearly 200,000 clients.

We know and see it firsthand: African Americans lag behind whites in nearly every economic indicator. Higher unemployment, lower incomes, lower retirement savings, higher numbers of un- and underbanked, lower credit scores, lower homeownership, higher poverty, and less wealth than Whites—across the board—are the realities in life in black America.

I. Economic Disparities

Any effort to rebuild wealth through housing must confront the underlying realities of low wages, wage stagnation, income inequality, and declining disposable income for far too many Americans. A good-paying job is the difference between homelessness, living paycheck-to-paycheck, or struggling financially.

African Americans, who are typically the last hired and the first fired, were disproportionately slammed by the Great Recession and the ensuing financial crisis. According to the National Urban League’s 2015 State of Black America® Unemployment Equality IndexTM, only two of the 70 major US cities surveyed had an African American unemployment rate lower than 10 percent. In addition to higher unemployment, many middle-class African American workers were forced to exchange the jobs that laid them off for low-skilled and part-time work, which paid much less. We must increase the minimum wage to $15 an hour to address this and other pay disparities and ensure all Americans have access to living-wage jobs. We also must ensure all Americans have access to retirement plans through their employers. Currently, less than 50 percent of African Americans have access to an employer-sponsored retirement plan, and those who do have only 20 percent of the retirement income of whites. This is not enough on which to retire comfortably.

Poor credit scores and the absence of quality accessible banking resources in the community have led to an increasing reliance by un- and underbanked African Americans to use alternative financial services that strip wealth from consumers. Approximately two-thirds of African American small businesses are denied loans. African American small businesses start with less capital, use credit cards at a higher rate, and use loans with higher interest rates. Although they are one of the fastest-growing segments of the economy, the average African American small business grosses less than $75,000 in annual revenue, and 95 percent do not have any paid employees. Small businesses are not the same engine for wealth for African Americans as they are for whites.

Homeownership is the primary means of building equity and passing on wealth from one generation to the next. This is especially true for African Americans. According to the Center for Global Policy Solutions, over 90 percent of African Americans’ wealth is in their homes. Unfortunately, 25 percent of the homes that were in foreclosure or deeply underwater during and after the crisis were owned by African Americans. Fifty percent of African Americans’ wealth was wiped out by the financial crisis, and a pernicious false narrative was promulgated by some to blame Fannie Mae and Freddie Mac’s affordable housing goals for the Great Recession. In my testimony before the Senate Banking Committee in 2010, I referred to this egregious falsehood as a “weapon of mass deception.”

African American homeowners were three times more likely to be steered into subprime products, even when they qualified for conventional mortgages. Over 50 percent of the subprime loans in 2005 and 2006 went to African American borrowers; the foreclosure rate for these loans was 10 times greater than conventional mortgages. Lenders steered African Americans into predatory products the lenders knew could not realistically be repaid.

African Americans have only 6 percent of the wealth of whites. This is unacceptable.

II. State of the Housing Market

While the African American homeownership rate peaked in 2004 at 50 percent, it is currently only 42 percent and is projected to decrease to 40 percent by 2030.

Unfortunately, owning or renting a home has become more expensive since the financial crisis, making it more difficult for African Americans and other people of color to access affordable housing in decent neighborhoods. Most people of color—a disproportionate share of African Americans, in particular—will continue to be renters unless meaningful policies address demographic shifts. Nearly 90 percent of the net new households formed between 2020 and 2030 will be headed by people of color. African Americans will make up nearly one-quarter of all new renters between 2010 and 2030, despite comprising only 14 percent of the population.

Over 25 percent of renters pay 50 percent or more of their income on rent-related costs; we can safely assume it is even worse for African Americans. People of color will continue to suffer the brunt of the current rental crisis, low homeownership rates, and the ills that accompany them without effective policy changes resulting from successful housing finance reform. It is essential for any effort to rebuild the housing finance system to be cognizant of this reality. To do otherwise is a formula for failure.

III. Homebuyers’ Bill of Rights 2.0

The National Urban League’s Homebuyers’ Bill of Rights 2.0 includes the following recommendations:

1. Housing finance reform must include an explicit government guarantee and retain and strengthen affordable housing goals to ensure communities of color have access to affordable mortgages.

Reforms to the housing finance system should include an explicit government guarantee to keep the industry thriving, preserve the 30-year mortgage, and keep credit score and down payment requirements within reason. Our national government must continue to play a central role in backing the housing industry. The government has taken most of the credit risk on home mortgages since the 1930s. Even while in conservatorship, Fannie and Freddie have been the primary source of loans for most homebuyers. Fannie and Freddie hold $5 trillion in mortgage-backed securities and back nearly 90 percent of the nation’s housing market.

Fannie and Freddie’s charters, which require them to provide liquidity to the secondary market, must continue to be included and strengthened in any new version of housing finance reform. Lenders should not have access to the government guarantee unless they actively originate loans for people of color in communities of color. “Fulfilling certain public mandates is a precondition of market participation and enjoyment of the federal government’s support for the financial marketplace.” The nation’s civil rights community will not support—in good conscience—reform legislation that fails in this regard.

Experience has proven that just because lending in certain areas may be profitable, it does not mean lending in those areas will be pursued. To this end, the new housing finance system must not only retain, but also strengthen the affordable housing goals. The goals must “lead the market” to ensure underserved communities have representative access to affordable housing. Although vilified and scapegoated, the goals did not cause the foreclosure crisis, as the Fiscal Crisis Inquiry Commission made clear in its 2011 report. The goals helped qualified borrowers purchase homes.

We opposed Johnson-Crapo, namely, because the bill terminated the goals. The goals are not perfect, but they should remain in place until a viable replacement is offered.

2. Housing finance reform must include reform to the credit scoring model and down payment requirements to ensure all qualified borrowers have access to affordable mortgages.

Almost everyone agrees credit score reform should be included in housing finance reform. According to the Urban Institute, “the market is taking less than half the credit risk it was taking in the precrisis period.” Over 5 million Americans were locked out of the housing market between 2009 and 2014 because of unnecessarily high credit score requirements. Executives from FICO and Vantage Score agree that “lenders’ credit score requirements for home purchasers are too high and out of sync with the actual risks of default presented by today’s borrowers.” This is unfortunate because most prospective borrowers barred from the market are people of color.

Mortgages are much safer now. While subprime loans still exist, they have a much smaller footprint than before the crisis. Qualified mortgages and qualified residential mortgages reformed the industry to ensure borrowers now have the ability to repay their loans. The Consumer Financial Protection Bureau’s mortgage servicing and “Know Before You Owe” rules, its updated Home Mortgage Disclosure Act disclosures, and the Supreme Court’s affirmation of the use of the disparate impact theory in Fair Housing Act cases help limit the predatory and abusive practices that permeated the industry during the subprime boom. As a result of new regulations stabilizing the mortgage market and the Federal Housing Finance Agency’s (FHFA) proposed duty-to-serve rule and the agency’s recent clarification of its reps and warrants policies, we believe a 620 FICO score is an acceptable credit score to purchase a loan and to demonstrate a borrower’s ability to repay the loan, if the current scoring system remains in place. This would not increase defaults; it would increase access to safe loans for people of color. Loans should be priced accordingly and should include lower guarantee fees. Rent and utility payments, among other recurring remittances that reflect creditworthiness that are not included in FICO 9 scores, should be factored into the new model if reform takes place. 

Saving the necessary down payment to purchase a home is one of the major obstacles to attaining the American Dream.  African Americans have lower incomes than whites, making it more challenging for them to save for a down payment for an affordable home in a decent neighborhood. Student loan debt, auto lending discrimination, rental car excise taxes, selective police enforcement, and other wealth-stripping efforts make it especially difficult for African Americans to save for a down payment. Moreover, African Americans are less likely than white borrowers to receive an inheritance or help from parents to buy their homes.

Large down payments are not indicators of a borrower’s ability to repay a loan. There is no correlation between the ability to save a lump sum of money and the ability to pay a monthly mortgage. That is why we support a 3 percent down payment requirement. We urge FHFA Director Mel Watt to encourage and provide incentives for lenders to offer both Fannie and Freddie’s 97 percent loan-to-value products more readily and to adjust the requirements to enable qualified borrowers the opportunity to access these loans. Historically, less than 5 percent of Fannie and Freddie’s portfolio have down payments less than 5 percent. We also encourage elected officials and policymakers to provide innovative savings tools and policies, including individual and child savings accounts, to save for homeownership.

3. Housing finance reform must ensure housing counseling is part of the application process to educate borrowers and limit loan defaults.

Research shows that homebuyers who work with housing counselors have better outcomes than those who navigate the system on their own. Many consumers enter the mortgage application and homebuying process without full knowledge and understanding of how to obtain the best loan for their circumstances. According to Freddie Mac, face-to-face prepurchase education and counseling (similar to that provided by our affiliates) reduces loan delinquencies by as much as 34 percent. The evidence suggests that counseled buyers are not only less likely to end up with unfair loans, but are also better prepared for the responsibilities of homeownership.

Similar to private mortgage insurance, housing counseling should be used as a compensating or risk-mitigating factor, allowing borrowers who do not have the requisite credit score, down payment, or debt-to-income ratio to access the traditional housing market. A data field should be included on the mortgage application to give borrowers credit for receiving these services. “Integrating” housing counseling services into the mortgage application process benefits all parties involved (i.e., borrowers, lenders, and servicers) by educating homebuyers and preventing future delinquencies and foreclosures. This would not increase defaults; it would create responsible homeownership. We also support efforts similar to HUD’s Homeowners Armed With Knowledge, or HAWK, program, which provides incentives for borrowers to participate in HUD-approved housing counseling services.

Conclusion

In 2007, I released our Homebuyers’ Bill of Rights, highlighting the impending crisis in the housing market months before it was front-page news. We were ridiculed as “Chicken Little,” predicting a crash that would never come. The rest of the story is history.

Today, we have an obligation to rebuild the American Dream through homeownership for an emerging generation of Americans, and our recommendations, as embodied in our Homebuyers’ Bill of Rights 2.0, present a path toward this crucial 21st-century objective.     


Marc Morial, who has been described as one of the few national leaders to possess “street smarts” and “boardroom savvy,” is president and CEO of the National Urban League, the nation’s largest historic civil rights and urban advocacy organization. 

Previously, he was a highly successful and popular mayor of New Orleans and president of the US Conference of Mayors. He was also a Louisiana state senator and New Orleans lawyer. He is a leading voice on the national stage in the battle for jobs, education, housing, and voting rights equity.

He has been recognized as one of the “100 Most Influential Black Americans” by Ebony magazine, one of the “Top 50 Nonprofit Leaders” by the NonProfit Times, and one of the “100 Most Influential Black Lawyers in America,” and he has also been inducted into the International Civil Rights Walk of Fame in Atlanta. He holds degrees from the University of Pennsylvania and the Georgetown University Law Center.

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A photo of Laurie Goodman. Dark hair, glasses, bright smile.
"It is time for an open-minded look at the housing finance system and what role, if any, today’s government-sponsored enterprises might play in the future."
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Tim Howard
"When invented narrative is replaced with verifiable fact, Fannie and Freddie cease to be a 'failed business model' that must be wound down and replaced; they instead become valuable resources that must be built upon and improved."
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A photo of Jim Millstein. White hair, slight smile, suit and tie.
"To address the conflict between their affordability mission and shareholder returns, the mortgage guaranty businesses should be subjected to utility-like regulation, with strict activity, leverage, and return on equity limitations."
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A photo of Alex Pollock. Slight smile, suit and tie.
"At the 10% Moment, Congress should declare the senior preferred stock fully retired, as in financial substance it will have been. Simultaneously, Congress should formally designate Fannie and Freddie as systematically important financial institutions.
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A photo of Mark Zandi. Slight smile, suit, brown hair.
"A group of us has put forward a reform proposal that addresses the system's structural problems and keeps what works."
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A photo of James Carr. Severe smile, suit, dark hair.
"The basic pillars of America’s housing finance system were enacted 80 years ago. Since then, major reconfigurations in our economy, demographic composition, and household locational preferences demand a bolder vision for housing finance in the 21st century."
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A photo of Andrew Davidson. Slgiht smile, greying hair, glasses.
"A realistic approach to GSE reform is to strip the GSEs down to the functions that promote standardization, liquidity, and access to credit, and adopt the best governance structures for those functions. This can be achieved in four steps: streamline, share risk, wrap, and mutualize."
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A photo of Mark Calabria. Slight smile, suit, dark hair, glasses.
“Mortgages, under any system, have to rest on someone’s balance sheet. Like water running downhill, the risk has flowed to the most leveraged sectors of our financial system. This is a recipe for instability.”
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A photo of Patricia Mosser. Dark hair, glasses, bright smile.
“The characteristics of mutuals that may be seen as disadvantages for some types of financial companies are in fact advantages for our financial market utility proposal because they align the utility’s incentives with other actors in the securitization chain.”
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A photo of Marc Morial. Big smile, suit, dark hair.
“In the aftermath of the Great Recession, the tragic loss of wealth, and the bailout of the big banks, our national government must continue to play a central role in the housing market to right previous wrongs, ensure access to all qualified borrowers, and keep the housing finance system afloat ...
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A photo of Laurie Goodman. Dark hair, glasses, bright smile.
"Between now and 2030, this country will face an unprecedented surge in rental housing demand. Already, rents are skyrocketing out of the reach for many families, especially in places with job opportunities. New multifamily housing construction is at its highest level since the 1986 Tax Refo...
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A photo of three individuals. All three are smiling, have suits, ties, and dark hair.
"There will be nuanced demands coming from the high concentration of household formation in African American, Asian, and Hispanic communities. Ginnie Mae 2.0 looks to be the safest way to build a sustainable platform to bring proven market stability to meet the needs of a materially changing demo...
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A photo of two individuals. Both are smiling, have suits, ties, and glasses.
“The most critical need for multifamily is simply that policymakers pay attention to it early and plan ahead.
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A photo of two individuals. Both are smiling, have suits, ties, and glasses.
We propose a spinoff of the multifamily business units of the GSEs and the formation of other new guarantors to increase access to affordable multifamily financing.
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A photo of two individuals. Both are smiling, have suits, and ties.
"Consensus exists that a reformed housing finance system must protect taxpayers, emphasize the private markets, support a broad variety of housing options and remain liquid throughout an economic cycle. Surprisingly, few recognize that a proven model already exists that meets those objectives-and...
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A photo of Jim Millstein outside. Dark hair, big smile, suit and tie, glasses.
"Mortgage finance reform discussions have failed to generate consensus assuring the widest possible access to sustainable mortgage credit at the lowest practical cost. We can resolve this impasse if we integrate all federal supports for mortgage finance into one cohesive whole."
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A photo of Pinto. White hair, glasses, slight smile, suit.
"Today’s government-centric housing finance system is an “economics free zone” indifferent to supply and demand. Composed of an alphabet soup of agencies, this system has fostered a massive liberalization of mortgage terms and provided countless trillions of dollars in lending. Yet housing has be...
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A photo of Taylor. White hair, suit.
"Much of the conversation on Capitol Hill and among policy thinkers has pushed affordability and access to the back burner. We need to bring it to the forefront of the conversation. The shape and quality of housing finance reform will have repercussions in every neighborhood and community and for...
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Mike Calhoun and Sarah Wolff
"Average price estimates obscure significant variation. To assess access and affordability, we need to look closely at differential prices, not just overall prices or prices for low–credit risk profiles."
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Rodrigo Lopez and Debra Still
"We believe that all housing needs, from the most directly-subsidized, affordable rental housing to the prime jumbo single-family lending market, lie along a single continuum. This housing continuum can be best served only by addressing single-family and multifamily, rental and homeownership, gov...
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Janet Murguía
"By 2020 half of all first-time homebuyers will be Latino. Without affordable access to credit for these prospective buyers, the housing market will decline, with harmful consequences on the larger economy."
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Jim Parrott
"Coming out of the crisis, there was thus almost universal agreement that we should reduce our reliance on this duopoly and shift more risk into a competitive private market."
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row of houses rendering
Research Areas Housing finance
Policy Centers Housing Finance Policy Center