Opinion

America Needs Mortgage Finance Reform That Ends Decades of Discrimination

Within 10 years, 70 percent of the nation’s new households will consist of people of color. Senate mortgage finance reform must acknowledge that.

Mike Calhoun is the president of the Center for Responsible Lending. The Center is a North Carolina- based organization that works to foster family and community wealth by protecting homeownership and eliminating abusive financial practices that undermine economic stability.    
National Journal
Mike Calhoun
April 29, 2014, 1 a.m.

Mort­gage fin­ance is a $10 tril­lion mar­ket, and hous­ing com­prises one-fifth of the United States eco­nomy. Re­form­ing the U.S. mort­gage-fin­ance sys­tem is the next — and per­haps fi­nal — step in an on­go­ing ef­fort to cre­ate a safer, sus­tain­able hous­ing mar­ket. The Sen­ate Bank­ing Com­mit­tee lead­er­ship has un­veiled a re­form plan and sched­uled the meas­ure for a com­mit­tee vote as early as today.

Since the re­ces­sion, sev­er­al im­port­ant steps have been taken to safe­guard against fu­ture hous­ing crises. The Dodd-Frank fin­an­cial re­forms have ad­dressed some of the most ab­us­ive lend­ing prac­tices re­spons­ible for the hous­ing crisis. Weak and sloppy mort­gage stand­ards have been reined in, and im­prove­ments have been made to the fed­er­al mort­gage-fin­ance agen­cies Fan­nie Mae and Fred­die Mac.

But a close ex­am­in­a­tion of the Sen­ate Bank­ing Com­mit­tee bill raises sev­er­al con­cerns.

The new sys­tem, as pro­posed, would cre­ate a dual hous­ing-fin­ance sys­tem: one for the four largest banks and an­oth­er for smal­ler com­munity lenders. This would make the big banks big­ger, and con­sol­id­ate the mort­gage-lend­ing mar­ket even fur­ther than it is already. Com­munity banks would be harmed by mak­ing it more ex­pens­ive for them to com­pete against the four biggest banks, which would have cheap­er ac­cess to cap­it­al. Per­haps worst of all, mort­gage costs would al­most cer­tainly rise sig­ni­fic­antly for all home buy­ers.

There are also im­port­ant ques­tions to be raised about fea­tures of the pro­pos­al that aim to en­sure that homeown­er­ship op­por­tun­it­ies are ex­ten­ded to all qual­i­fied buy­ers, in­clud­ing middle-class fam­il­ies, fam­il­ies in rur­al areas, and fam­il­ies that do not have sig­ni­fic­ant wealth. The lend­ing in­cent­ives pro­posed in the bill seem lim­ited with un­cer­tain im­pact. Worse still, the reg­u­lat­or charged with over­see­ing how well this sys­tem is func­tion­ing would not have the au­thor­ity to en­force changes if lenders de­cided to ig­nore cer­tain mar­kets, such as those in rur­al or poor com­munit­ies. This could leave many fam­il­ies — and cred­it-worthy bor­row­ers — with little ac­cess to af­ford­able mort­gages.

In ef­fect, the bill could con­tin­ue a long leg­acy of dis­crim­in­a­tion in the Amer­ic­an hous­ing mar­ket. The hous­ing crisis hit lower-wealth fam­il­ies and com­munit­ies of col­or first and worst; data show that in the lead-up to the crisis, Afric­an-Amer­ic­an and Latino bor­row­ers were vic­tims of pred­at­ory lend­ing and subprime loans far more of­ten than their white coun­ter­parts. Ac­cord­ing to re­search from the Cen­ter for Re­spons­ible Lend­ing, Afric­an-Amer­ic­ans and Lati­nos were 60 per­cent more likely than whites to re­ceive a loan with at least one high-risk fea­ture, such as a high rate or a pre­pay­ment pen­alty be­fore the subprime crisis. And Afric­an-Amer­ic­ans and Lati­nos were more than twice as likely as white bor­row­ers to re­ceive a high­er-rate loan.

These kinds of dis­crim­in­at­ory lend­ing prac­tices had real con­sequences. While the fore­clos­ure crisis has been wide­spread and the ma­jor­ity of af­fected bor­row­ers have been white, the crisis has dis­pro­por­tion­ately af­fected bor­row­ers of col­or. By Feb­ru­ary 2012, 11 per­cent of Afric­an-Amer­ic­ans and 14 per­cent of Lati­nos had lost their home to fore­clos­ure, com­pared with 8 per­cent of Asi­ans and 6 per­cent of whites. This trans­lates in­to ap­prox­im­ately $2.2 tril­lion in prop­erty value that has been lost or will be lost by homeown­ers and the com­munit­ies sur­round­ing the fore­closed prop­er­ties. Be­cause of the high con­cen­tra­tion of fore­clos­ures in minor­ity neigh­bor­hoods, over half of this lost wealth will oc­cur in com­munit­ies of col­or.

In the wake of the hous­ing crisis, the lend­ing stand­ards that gave way to sloppy and ir­re­spons­ible mort­gages swung dra­mat­ic­ally in the oth­er dir­ec­tion — and the same com­munit­ies that were tar­geted for subprime loans and risky mort­gages are now be­ing locked out of the mort­gage mar­ket en­tirely. The rate of fore­clos­ures, the con­stric­ted cred­it mar­ket, and the re­newed aver­sion to risk have ef­fect­ively barred Afric­an-Amer­ic­ans and Lati­nos from ac­cess­ing mort­gage cred­it al­to­geth­er.

The evid­ence is clear in the data: Ac­cord­ing to the most re­cent Home Mort­gage Dis­clos­ure Act stat­ist­ics, there were 1.3 mil­lion con­ven­tion­al mort­gage loans made in 2012; of those, Lati­nos re­ceived only 69,217 loans (5 per­cent) and Afric­an-Amer­ic­ans re­ceived 29,405 (2 per­cent). Sim­il­arly, there were 4.9 mil­lion re­fin­ance loans made in 2012, of which Lati­nos re­ceived 76,038 (1.5 per­cent) and Afric­an-Amer­ic­ans re­ceived 75,785 (1.5 per­cent).

The Bank­ing Com­mit­tee pro­pos­al lacks the ne­ces­sary pro­vi­sions to stop this his­tory of dis­crim­in­a­tion — a form of un­equal treat­ment that has a real-world im­pact on the fin­an­cial sta­bil­ity and wealth-build­ing op­por­tun­it­ies of in­di­vidu­al fam­il­ies and en­tire com­munit­ies. Giv­en the find­ings of the Har­vard Joint Cen­ter on Hous­ing that, with­in 10 years, 70 per­cent of the na­tion’s new house­holds will con­sist of people of col­or, the Sen­ate pro­pos­al also car­ries ser­i­ous im­plic­a­tions for the lar­ger eco­nomy.

The Sen­ate Bank­ing Com­mit­tee’s fo­cus on hous­ing fin­ance is well-placed and sin­cerely ap­pre­ci­ated. But sig­ni­fic­ant changes are needed be­fore it moves for­ward. The spon­sors must grant the new reg­u­lat­or the au­thor­ity to en­sure all mar­kets will be served, re­duce the con­cen­tra­tion of power and risk in the largest banks, and en­sure the fair and equit­able treat­ment of bor­row­ers.

A suc­cess­ful and ef­fect­ive mort­gage-fin­ance re­form bill could fix what’s broken in the cur­rent sys­tem and build on what has worked thus far. Un­for­tu­nately, as it is writ­ten, this bill falls short.

Mike Cal­houn is the pres­id­ent of the Cen­ter for Re­spons­ible Lend­ing, a North Car­o­lina-based or­gan­iz­a­tion that works to foster fam­ily and com­munity wealth by pro­tect­ing homeown­er­ship and elim­in­at­ing ab­us­ive fin­an­cial prac­tices that un­der­mine eco­nom­ic sta­bil­ity.

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The Next Amer­ica wel­comes op-ed pieces that ex­plore the polit­ic­al, eco­nom­ic and so­cial im­pacts of the pro­found ra­cial and cul­tur­al changes fa­cing our na­tion, par­tic­u­larly rel­ev­ant to edu­ca­tion, eco­nomy, the work­force and health. Email Jan­ell Ross at jross@na­tion­al­journ­al.com. Please fol­low us on Twit­ter and Face­book.

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