The Unequal Costs of Black Homeownership

This reality plays a major role in the racial wealth gap that continues to plague this country.

When access to homeownership is not evenly distributed between white and Black communities, the gap persists and Black Americans continue playing a game of catch-up. In 2021 the United States is still witnessing the ripple effects of years of segregation, racism, inherent bias and slavery. In part because of the nation’s dark history, Black homeowners pay a higher price just to call themselves homeowners. Barriers to entry aside, once Black Americans achieve homeownership, they are still being penalized. There are policies that disproportionately rob them of the wealth they are seeking to build while reducing their potential savings by tens of thousands of dollars, further exacerbating the wealth gap.

A report out of the MIT Golub Center for Finance and Policy entitled “The Unequal Costs of Black Homeownership” analyzes the current policies adopted by both federal and private financial institutions that put Black homeowners at a disadvantage¹. Simply put, Black families on average fall victim to higher interest rates and mortgage insurance premiums due to risk-based policy choices made by traditional lenders, losing an average of $67,320 in savings over the life of a mortgage.

Eliminating the policies that place a heavier burden on Black homeowners and supporting accessible financing programs like those available through Community Development Financial Institutions (CDFIs) will go a long way toward evening the playing field and laying the groundwork for Black wealth generation.

Unlike traditional financial institutions, CDFIs are mission-driven, serving low-income and minority communities where support is needed most. The function of CDFIs provides a stark contrast to that of most institutions providing home loans. Knowingly or not, these lenders disenfranchise Black homeowners through policies that do not take a holistic approach when assessing applicants. One of the most glaring examples of such policies is the risk-based approach to arriving at interest rates for home loans. The current equation used to generate an applicant’s interest is inherently harmful. Rather than pooling risk, lenders review applicants on a case-by-case basis. Often, the assessed risk of a Black household is overpriced by factoring in loan-to-value ratio, credit score, and loansize. This results in Black homeowners payingon average $250 more a year in purchase loans or $11,000 in total saving sover the lifetime of a loan.

Black homeowners also suffer from a lack of access to the same refinancing opportunities white families leverage to reduce long-term debt owed on homes. Typical policies lead to mortgage rate increases as credit scores and down payments decrease. The legacies of slavery and systemic racism have historically led to fewer opportunities for Black families to build quality credit and savings for down payments, resulting in their categorization as high-risk. A 2019 study² showed that discrimination in lending lead to rejection for “at least 6% of creditworthy Black and Latinx applicants,” equal to 1.3 million Black and Latinx applications between 2009 and 2015.

Traditional financial institutions adopt similar credit policies that stand in the way of Black households refinancing, including debt-to-income and loan-to-value thresholds, culminating in an average $20,000 loss in potential savings over the life of a loan.

Besides higher interest rates, Black homeowners often fall victim to mortgage insurance premiums that white homeowners do not. Another form of risk-based pricing, mortgage insurance premiums are triggered when a borrower makes a down payment of less than 20% of the home price. For first-time homebuyers especially, down payments often come from relatives of the borrower. However, Black borrowers are less likely to have relatives that can make a significant contribution and other systemic barriers to wealth generation and savings opportunities limit the nest egg many Black borrowers can access to pay for a significant portion of a home up front. This results in an average mortgage insurance cost of $550 per year, a total loss in potential savings of over $23,000.

It is important to note that the policy choices disenfranchising Black homeowners are just that: choices. Alternative policies exist, but traditional lenders have made the decision to take a risk-based approach that accounts for factors benefiting white households and hurting Black households. The reluctance among conventional financial institutions to adopt policies that would increase Black homeownership, such as tax credits for first-time homeowners, a government-supported insurance program, or creative lending plans that limit influence of LTV or percentage down is precisely why CDFIs are essential. CDFIs are the most effective ways for Black borrowers to leave the disparate system behind and generate wealth through homeownership. In 2018 CDFIs delivered more than $75 million in loans, putting power back in the hands of minority and low-income homeowners.

While traditional lenders are beholden to a financial bottom line, CDFIs take a “double-bottom line” approach in which people come before profit; in which Black households have just as much opportunity to obtain wealth through homeownership as any other. While the United States has made some strides towards racial equality, true progress toward closing the wealth gap will remain limited while lending policies prevent Black families from owning homes. Supporting CDFIs and the work they do to lift Black homeowners is the most effective way to counteract discriminatory lending policies and put the U.S. on track to dismantle the racial wealth gap.

Katherine Peoples is the Founder of HPP CARESCDE. HPP CARESCDE (hppcares.org) is a non-profit program devoted to improving access to credit for low-and moderate-income and historically underserved communities of color, through qualified programs that identify and support the engines of affordable housing, homeownership, small business technical assistance, financial literacy, and economic development establishing the framework needed for a solid foundation aimed at sustaining communities, neighborhoods, and households.

^{1 Information in this article comes from “The Unequal Costs of Black Homeownership.” For more details, see the full paper at gcfp.mit.edu/wp-content/uploads/2020/10/Mortgage-Cost-for-Black-Homeowners-10.1.pdf}

^{2 http://www.faculty.haas.berkeley.edu/morse/research/papers/discrim.pdf}