Reaching Minorities With Homeownership
Policy Paper by Rosalyn Crain
Amidst the uncertainties of the Iraq war, the economy and the national unemployment rate, the United States has experienced one area of strength over the past few years – housing. Outlasting a financial crisis in 1998, an economic recession in 2001 and job losses in 2002 and 2003, the recent housing boom has been an area of much-needed stability for the country. Despite suffering a disproportionate amount of the adverse effects of the wavering economy, minorities have also surprisingly benefited from the surge in homeownership. The rise of the sub-prime mortgage lending has made capital readily available in communities that were once pushed to the fringes of the market. As a result, homeownership rates have dramatically increased among all ages, household types, and ethnicities. According to a recent press release by the United States Department of Housing and Urban Development, minority homeownership reached an all time high during the first quarter of 2005. In 2004, the homeownership rate for African Americans and Hispanics was roughly 50 percent and 47 percent respectively, a notable increase for African Americans over a decade ago in 1993 when the homeownership rate for the group was 42.3 percent. Unfortunately, the dramatic growth has also brought along with it some unexpected challenges for people of color. Increasing foreclosure rates and bankruptcies have accompanied the rise in minority homeownership, making it apparent that targeting underserved markets alone is not enough. When taking into account the overall financial improvement of minority families, the results of the increased rates have been mixed, revealing the need for a different strategy to improve homeownership rates among people of color. Closer examination of the effects of the rising homeownership rate offers convincing evidence that an integrated strategy of homeownership and financial literacy education, along with increased advocacy, has the potential to be an effective way to ensure the homeownership dream of minorities is realized.
Current Homeownership Patterns and the Need for Education
Improvements in the mortgage finance system with automated underwriting, multi-layered financing, and downpayment assistance programs have made homeownership for minorities more of reality than ever before. Despite this, the homeownership rate of African Americans and Hispanic Americans continues to pale in comparison to the rate for whites. Research suggests a myriad of reasons for this lag in minority homeownership, including wealth and income constraint, housing discrimination; lower credit scores, and even a “historical” disadvantage (a reference to the economic effect of the slave system upon African Americans) . However, one reason has been found to be one of the chief factors affecting minority home purchasers— participation in homeownership and financial education. The education component of homeownership has proven to be of key importance because of its overarching ability to positively influence other factors. Educating a potential home buyer about the importance of savings and paying their bills on time improves their credit score, income accumulation, and ultimately results in a more cost-effective mortgage. More importantly, it helps ensure that the purchased home becomes a mean of wealth accumulation, instead of financial burden, an outcome that could produce generational benefits to a family.
According to a recent national survey by the Fannie Mae Foundation, 40 percent of African Americans lack the vital information critical to homeownership. Similarly, 36 percent of English speaking Hispanic Americans and 56 percent of Spanish speaking Hispanic Americans also lack this necessary information. Credit scores also, on average, tend to be lower for minorities in comparison to whites, making them targets for predatory practices. Current estimates of unbanked households in the U.S. range anywhere from 10 million to 22.2 million families, with a significant proportion of this number being comprised of minorities who have depended on untraditional financing options for years. As a result, minority communities have become one of the prime target demographics of the sub-prime mortgage industry. Sub-prime lenders tend to accept higher-risk applicants who typically have credit scores not high enough for approval in the mainstream market and consequently, many minorities have settled for realizing their dream of homeownership through these providers. However, the achievement of homeownership through these means has proven to be a mixed benefit for minority borrowers who are usually given high interest rates and often find themselves in a worsened financial situation. Furthermore, this trend has also resulted in increased foreclosures and bankruptcies.
According to a 2004 study conducted by the Fannie Mae Foundation, there has been a 69 percent increase in bankruptcies over the past decade. While bankruptcy protection often provides consumers with a measure of protection from their debts, the “bankruptcy” mark on an individual’s credit report places them further to the outskirts of the market. Moreover, recent passage of bankruptcy legislation in Congress makes it more difficult to file for this protection in the future, and further illustrates why preventive measures to financial distress are important. Housing research cites homeownership counseling and financial literacy education as a very powerful method of combating this trend. By simply equipping families with a greater understanding of the financial responsibilities of homeownership and the necessary preparation, the disparate financial “playing field” many minorities find themselves on is improved.
Despite the seeming accomplishments, focusing solely on homeownership numbers is a narrow and short-sighted goal that fails to address a number of other essential factors. While some researchers insist that sub-prime mortgage loans have provided a great opportunity to people of color, careful attention must be paid to the costly terms of these loans. The mainstream mortgage market continues to provide the most cost-effective and least risky method of financing, and it is essential that minorities become integrated into the mainstream financial system.
Additional Strategies for Minority Homeownership
In addition to focusing on homeownership and financial literacy education, there is also a need for increased advocacy on behalf of affordable housing causes (homeownership, rental, and community development). Years of housing and community development research has established the need for more than just houses to build an economically stable and vibrant community. In spite of this, over the past four years federal support for housing and community development programs has dwindled. Federal programs such as the Home Investment Partnerships Program (HOME), the Community Development Block Grant (CDBG), and the Section 8 homeownership initiative have been vital to providing affordable housing and homeownership opportunities for minorities and low- and moderate-income families. Yet, despite this fact these programs remain threatened by under-funding and complete elimination.
Supporters of increased homeownership opportunities must voice their concern by advocating for increased funding and preservation of programs and policies that strengthen minority communities. A timely example of this urgency is exemplified by the recent attacks on the Community Reinvestment Act (CRA) of 1977, legislation that has protected community and economic investment in minority communities for over twenty five years. CRA has been an extremely important tool in maintaining bank investment in neighborhoods of color by making it a requirement for financial institutions. However over the past year, regulators of the federally-insured financial institutions (which are held liable to CRA regulations) have submitted proposals to weaken CRA standards for certain institutions. Under the proposals, CRA requirements would be removed for financial institutions with a $1 billion or less in assets. While this mandate specifically affects smaller financial institutions, it would still negatively impact investment in minority communities across the nation.
After an abundance of expressed concern over the proposal by organizations and advocates across the country, a joint interagency proposal was recently issued in March by three of the CRA regulators: the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency. The agencies submitted a proposal that re-instated investment liability to smaller financial institutions, with specific standards affecting low- and moderate-income communities. However, this has been a marginal victory for advocates. The fourth CRA institution, the Office of Thrift Supervision, has maintained its original proposal to dismantle CRA responsibility for smaller financial institutions, keeping the threat of the protection’s dismantling very much alive. Similarly, many other federal programs are currently in a comparable place of threatened existence.
Conclusion
The consequence of targeting minority communities with only the objective of homeownership has been evident. Simply placing a family in the bricks and mortar of a home is not enough. Families must have sound financial advice, an understanding of the necessary steps to homeownership, and knowledge of the overall responsibility. Simultaneously, policy advocacy must remain an equal mission. Expressed support for policies and programs such as CRA, CDBG and the Section 8 Voucher program is just as important as providing financial education. Policies that maintain stable housing, whether rental or owned, are crucial to creating strong communities and should be preserved. In order to guarantee homeownership as tool of wealth accumulation and empowerment, the welfare of the community as a whole must be improved and maintained. Those concerned about the future of minority homeownership must continue to fight for policy protections while providing the necessary educational tools that will enable communities to be brought closer to realizing the full fruition of the American dream of homeownership.
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