The government could influence the private mortgage industry to remedy the ongoing racial, ethnic, and geographical disparities in the availability and quality of loans for would-be homeowners, according to a new report from the Center for American Progress and the National Council of La Raza.
By shifting the incentives faced by financial firms that package and resell home loans in the secondary mortgage market, lawmakers can take a big step towards reducing the persistent wealth gap between white families and everyone else. Racial disparities in lender behavior are not a relic of the past, despite a variety of federal laws designed to eliminate the most flagrantly prejudiced housing policies and lender actions. The report draws on a 2011 finding from the Center for Responsible Lending that even higher-income black and latino borrowers were more than twice as likely as high-earning whites to face foreclosure, and that minority borrowers with high credit scores were three times as likely to receive a high interest rate loan as their white counterparts.
The secondary mortgage market drives the decisions loan originators make on the ground. When the secondary market expressed an insatiable appetite for mortgage-backed securities during the inflation of the housing bubble, that drove originators to crank out as much mortgage paper as possible, with decreasing regard for the sustainability of the loans. This drove plenty of bad innovation — so-called NINJA loans, extended to people with “No Income and No Job/Assets,” for example — and the CAP/NCLR paper suggests ways the government could instead encourage good innovation.
CAP and NCLR suggest a model, pulled from a UNC Center for Community Capital analysis of 46,000 loans, for the sort of access-expanding mortgage innovation the secondary market could encourage. UNCCCC found that when lenders helped “nontraditional yet creditworthy borrowers buy homes they could afford with mortgages they could manage,” these low-down-payment, long-term, fixed-rate, flexibly underwritten loans actually had a substantially lower rate of serious delinquency than prime adjustable-rate mortgages.
The future of housing finance seems likely to rely upon private capital rather than the government institutions that already have incentives to expand credit access to the sorts of nontraditional yet successful borrowers identified by the UNCCCC study. CAP and NCLR therefore propose a tiny tax on securitized mortgages to raise money for a “Market Access Fund,” a sort of innovation bank that would field and fund proposed pilot programs to improve access to home loans for underserved populations.
The borrowers of the future will be less economically secure and less white, reflecting ongoing earnings stagnation and demographic shifts. As the structure of the secondary mortgage market evolves, the incentives it offers to lenders must evolve to. Otherwise, the report argues, America will miss a key opportunity to redress the inequality that’s undermining the nation’s economic future.