Recovery Is Little, Late for African American Homeownership

One of the longest-lasting wounds from the Great Recession has been the decline in homeownership, and African Americans have been among those who have suffered the most.

African American homeownership rates peaked in 2004 at 49.4% of households, and only began edging up in the last two years. It hit its lowest point at 41.7% in 2016. By the end of 2018 it had risen to only 42.9%.

The gap remains large compared with non-Hispanic whites, though the trend is similar: Homeownership peaked at 76.2% of households in 2004, fell to a low of 72.2% in 2015 and 2016, and rose to 73.6% by the end of 2018.

One reason why homeownership rates have been slow to recover is that a broad swath of homeowners from the early 2000s survived the Great Recession, but with lasting wounds to their credit from combinations of foreclosures, bankruptcies, and extended unemployment or underemployment.

“It’s made it very difficult for people to get back on that path,” said Cathie Mahon, president/CEO of Inclusiv, which was renamed last year from the National Federation of Community Development Credit Unions.

“The black community lost tremendous wealth because of the foreclosure crisis,” Karen Hoskins, acting vice president for national homeownership programs and lending at NeighborWorks America, said. “Whole families struggled through that process, and saw their friends and families lose their homes to foreclosure. In the wake of that, there’s been a loss in confidence in homeownership because they saw these awful things happening to their friends and family.”

Some credit unions have offered new mortgages that are more flexible than conforming loans and make it easier for people to buy their first home or return to homeownership.

While some of these loans might be to subprime borrowers, subprime lending does not equal predatory lending, Mahon said. Moreover, the longtime mission of credit unions has been to help those who banks will not, and that will always include people who are poor and have damaged credit.

African Americans’ disparities in income and wealth have been deep and persistent – in many cases deeper and longer than those for other minorities.

Data published by Filene Research Institute in its August 2018 report, “Reaching Minority Households Incubator,” showed:

• Median income for black households was $35,400 in 2016, compared with $61,200 for whites and $38,500 for Hispanics.
• The disparity of wealth is even greater: Median net worth was $17,600 for blacks, compared with $171,000 for whites and $20,700 for Hispanics.
• What little wealth minorities held, it was more concentrated in their homes. Homes accounted for 37% of assets for black and 39% for Hispanic households, compared with 32% for white households.

Adam Lee, incubator director for the credit union non-profit think tank in Madison, Wis., said the statistics also showed credit unions have an opportunity to build the movement by deepening their commitment to serving minorities.

“Credit unions can directly help households of color realize homeownership dreams by doing what they should be doing for all their members and community: Enable members to build a solid financial foundation to pursue their life’s goals, including homeownership,” Lee said. “Most Americans’ wealth is concentrated in homeownership. If credit unions want to see the racial wealth gap close, in today’s economy, helping households of color pursue homeownership is one step in solving that societal challenge.”

The black-white divide for median household income and wealth was about the same in 2016 as it was in the 1950s and 1960s, according to a study published last year by three economists at the University of Bonn in Germany.

The economists looked at historical data stretching from 1949 to 2016 from the U.S. Survey of Consumer Finances and found “no progress has been made in reducing income and wealth inequalities between black and white households over the past 70 years, and that close to half of all American households have less wealth today in real terms than the median household had in 1970.”

The study also stated, “The racial wealth gap is equally persistent and a stark fact of postwar American history. The typical black household remains poorer than 80% of white households.”

Those gaps in wealth and income remain the chief barriers to black homeownership, said Sheilah Montgomery, a cofounder of the African American Credit Union Coalition and president/CEO of Florida A&M University Federal Credit Union in Tallahassee, Fla. ($19.3 million in assets, 3,426 members).

“Lenders looking for a ‘quick buck’ deepened the divide as predatory subprime loans triggered the wave of foreclosures that led to the Great Recession that began at the end of 2007,” Montgomery said. “Predatory lending has literally taken disposable income out of the pockets of minorities from one generation to the next generation.” Despite that, she said, “Homeownership is still the American dream in the black community.”

Like Filene, CUNA said it believes improving minority homeownership is both part of its core mission and presents an opportunity.

The lending market is experiencing “significant and rapid demographic shifts,” and by 2043 non-whites will be the majority of the U.S. population, Senior CUNA Economist Samira Salem said. Already, Gen Z, which began graduating from college last year, is the most diverse cohort America has seen.

“It makes perfect sense for credit unions to be thinking about how to serve these populations,” she said. “The very foundation of credit unions is connected to the idea of inclusiveness.”

And then there is the likelihood that regulators will be looking more closely at racial lending patterns.

U.S. Rep. Maxine Waters (D-Calif.), created a Subcommittee on Diversity and Inclusion after becoming chair in January of the House Committee on Financial Services. Its first hearing on Feb. 28 was “An Overview of Diversity Trends in the Financial Services Industry.”

“We have a sense there will be more scrutiny on this issue,” Salem said. “Wealth is very much connected with homeownership. It’s driven by homeownership.”

So far credit unions seem to be doing slightly better than banks, she said. And HMDA data showed credit unions originate a higher percentage of mortgages to African Americans and a higher percentage to Hispanics than banks. The 2017 rate for blacks was 6.6% at credit unions and 5.2% at banks.

Credit unions also received a higher proportion of minority applicants. Credit unions received 5.7% of their loan applications from blacks in 2017, compared with 3.2% for banks. One reason, Salem said, is that “people think they have a better chance for approval.”

Location is critical to serving the underserved because many lack cars and live where mass transit is scarce or nonexistent.

Another advantage of credit unions is that they tend to be smaller and more tightly connected to their communities, Salem said. “They know their members. They can rely on more alternative underwriting methods.”

Both strategies to increase black homeownership are being employed at Hope Federal Credit Union ($295.9 million in assets, 47,967 members), which is based in Jackson, Miss., and has 27 branches in Arkansas, Alabama, Mississippi, Tennessee and Louisiana.

“We are doing our best to make a dent in those numbers,” Hope FCU SVP of Lending Sandra Patterson said.

Locating branches close to its members in the rural Mississippi Delta is one of its key strategies. It also reaches out to the community through media and five program officers who visit schools, community centers and other gathering places.

One of the credit union’s messages is that it can help people who are trying to buy their first home. Hope FCU offers a mortgage with 100% financing and no mortgage insurance. Many programs to help first-time homebuyers offer up to 95% or 97% financing, but even that 3% down payment is often too steep for buyers who lack a wealthy relative to give it to them as a gift – a common practice in wealthier families.

Hope FCU manually underwrites each mortgage, allowing the considering of non-traditional credit, including rent payments, utility payments, cell phone payments or payments to an appliance store to buy a washing machine. It can also look to bank statements to see how well a potential borrower handles their cash.

After looking at a member’s situation, sometimes Hope FCU can see they’re not ready for a mortgage yet. In those cases, they guide them on the steps they need to take to get approved down the road. “We tend not to let go of anybody,” Patterson said.

In one case, a woman moved in with her father. He owned the house, but soon moved away with the understanding that she would continue to pay the mortgage. However, the mortgage included a balloon payment, and when it arrived, the woman was not able to afford it.

The lender demanded full payment and was not willing to work out a compromise. The woman was on the verge of losing her house when a friend suggested she consult Hope FCU.

The credit union was able to arrange a purchase mortgage for the woman that allowed the balloon mortgage loan to be paid off, and the woman to buy the home from her father with a 30-year fixed rate mortgage through Hope FCU.

Hope COO Pearl Wicks said the credit union strives to “be creative and innovative.” Hope’s mortgages have performed well, in part because the new homeowners are paying less than they were as renters, and in part because the credit union has strengthened its bond with the members.

“When you’re meeting members where they are, you’re not going to take losses, because members are committed to the credit union because the credit union is showing commitment to them,” Wicks said.

NeighborWorks America trains HUD-approved housing counselors through a network of agencies that helped 25,000 people last year. Many are referred to the counselors through credit unions or other responsible lenders.

One advantage these counselors offer to people struggling with housing decisions is that it has no interest in selling them a mortgage, Hoskins said. If remaining a renter is the best option, the counselor has no interest in telling them otherwise. Those who emerge from counseling with the ability to buy a home are better credit risks.

“A well-educated consumer is going to be a sustainable homebuyer,” she said.

Mahon, of Inclusiv, saw some of the foreclosure losses firsthand in the early 2000s when she was working with low-income advocacy organizations in New York.

Mahon said predatory lenders targeted equity-rich, income-poor households for a host of mortgage schemes.

Finance companies often lured the homeowner into a new or refinanced mortgage, emphasizing the features that would entice them – usually focusing on low monthly initial payments – while downplaying the significance of a balloon payment down the road, and hiding terms and servicing practices designed to ensure that a profitable percentage of borrowers would fail, and thereby generate more fees.

Sometimes they encouraged homeowners to shift their unsecured credit card debt to a mortgage – allowing them to bet their homes on consumer debt.

“They were going after homes that were owned by predominantly African Americans,” Mahon said. “People literally had their homes stolen from them.”

She remembers an elderly couple in Brooklyn’s Bushwick neighborhood who lost their home. They were retired civil servants who had lived in the same home for the past 40 years. They owned it outright, but had tax liens and were lured into a predatory mortgage.

“They finally had a jumbo payment, and couldn’t come up with the money,” she said.