Homeownership, Race and Risk

Earlier this month I participated in a seminar for first-time homebuyers hosted by Calvary Christian Center in Sacramento. Nearly 150 people attended, mostly minorities seeking advice on how to become homeowners. They have seen affordable housing dry up due to rising costs and gentrification. In Sacramento alone, homeownership rates have dropped to 27% for African Americans. These are hardworking people who are being shut out of the market due to factors outside of their control. I applaud the efforts of Pastor Goudeaux and Calvary Christian Center to help their community achieve homeownership.


Historically, African Americans have had the lowest homeownership rates in the country. Despite 50-plus years of federal policy and programs designed to improve this situation (ie. FHA, the Fair Housing Act), the homeownership rate for African Americans hasn’t changed. One exception was the period leading up to the Great Recession in 2008, when rates showed a steady gain. The recession, however, wiped out all of that progress.




Unfortunately, a movement launched by well-meaning federal officials threatens to further limit homeownership opportunities for the most disadvantaged among us. (See recent WSJ article.)


Here’s how. FHA and federal policy have always allowed family members to gift the 3.5% required for a down payment on FHA loans. That’s great, but what if you come from a family that lacks the ability to gift you the $10,000 or more needed for the average purchase price? White households have 10 times the net worth of African American households. In recent years, state and local government programs have begun helping people without access to family wealth clear the down payment barrier. But if actuaries within the federal bureaucracy have their way, the ability of government entities to provide down payment assistance may be severely curtailed.


These actuaries are concerned that borrowers receiving down payment assistance from a government entity are riskier than borrowers who receive a gift from mom and dad. Recent data from the FHA’s report to Congress does indicate a slight difference over the last decade, although that difference has vanished in recent years. Naturally, a higher default rate leads to higher claims rates to the FHA insurance fund, hence the concern.


But a careful reading of the FHA report to Congress shows the Home Equity Conversion Mortgage (HECM) program for wealthier seniors is draining the FHA insurance fund at a much higher rate than slightly higher defaults from those receiving down payment assistance from any source. Page nine of the report shows that the HECM program has a negative capital ratio of over 18%, while the single-family insurance capital ratio is a positive 3.93%, up from 3.33% a year earlier. Federal law requires this fund to be 2%. The combined capital ratio for the FHA insurance Fund improved year over year.


At the close of the Obama Administration, FHA published the intent to reduce the mortgage insurance premium on single family homes. The move was opposed by the incoming Trump Administration, and officials ultimately declined to reduce the premium, citing concerns about the health of the FHA insurance fund. To this day, FHA homebuyers are paying higher insurance premiums due to the poor performance of the HECM program. In essence, minorities are being shut out of the market while the government subsidizes a senior, wealthier, home-owning class.


There’s something seriously wrong with this picture. While this article is not questioning the merits of the HECM program, it is troubling that FHA apparently intends to shore up the FHA insurance fund by limiting programs that provide down payment help to those seeking to buy single-family homes. FHA officials would not likely limit the ability of family members to provide down payment assistance, but they are making efforts to restrict the ability of government entities to determine who they can help, and where they can help. If the actuaries at FHA get their way, they will sacrifice the minorities on the altar of an insurance fund propping up an HECM program that serves wealthier, senior homeowners.


Research shows that minorities typically lack the access to wealth enjoyed by white households. Democrats and Republicans will argue over why that is. But one truth is undeniable: our nation’s legacy of slavery continues to exert negative effects on African American household wealth. Federal policy should seek to increase homeownership in these minority communities, including allowing responsible government entities to provide down payment assistance, just as wealthier white families do for their children now. Any efforts to limit access to down payment assistance only hurts those most in need and perpetuates the wealth, social and educational inequalities that continue to divide the races.


On a personal level, I’ve been troubled by a statement shared by a woman at the Sacramento homebuyer seminar. She was probably in her fifties and had never owned a home, but had come to the seminar to try and become a homeowner. She told me that she had never thought of herself as “worthy” of buying a home, a statement that moved me considerably. To think that someone didn’t see enough value in herself or believe she deserved to own a home? That is tragic.


The truth is, everyone deserves to own a home. Some may have issues to address before they are ready, like poor credit histories or the need to secure stable employment, but such barriers can be overcome. The worth of every individual is great, and each among us deserves to enjoy the peace and security that come from homeownership.


Could the past be causing an entire race to feel they are not “worthy” of buying a home – the cornerstone of the American Dream? I hope as a society that we have learned from the past, that policymakers avoid limiting opportunities for those most in need, and, that in the realm of homeownership, we may assure millions of our countrymen and women that they, too, deserve to own their own home.