Recap of Part I: Kamala Harris has proposed a $100 billion housing plan to increase low-income and minority homeownership. The plan would provide up to $25,000 down-payment assistance for eligible families and change the way credit scores and debt-to-income ratios are calculated.  Harris’s rationale for the plan is that the legacy of housing discrimination (mainly redlining and government policy), flawed implementation of the GI Bill, and unfair lending practices is responsible for the current white-black gap in home ownership, which accounts for most of the white-black wealth gap. And wealth facilitates social mobility.

This post is concerned mainly with the legacy of redlining, which was extensive from the 1930s until it was outlawed in 1968. The practice of redlining created barriers to homeownership for African-American families, as well as reduced the value of their homes. As explained on Harris’s website, racial disparities in home ownership were exacerbated by:

“…historic redlining – the Home Owners’ Loan Corporation’s practice of identifying neighborhoods, often majority Black neighborhoods, where traditional lenders should not lend.  Redlining has resulted in households of color receiving just 2% of the FHA loans extended between 1934-1962, and formerly redlined neighborhoods are sites of deep racial disparities in home value and lending activity.”

Since 1968, the US Department of Housing and Urban Development (HUD) has made it a core mission to increase homeownership among the victims of redlining, mainly through Federal Housing Administration (FHA) programs. As explained by HUD director George Romney: “FHA personnel were encouraged to begin to do what they had not been doing; namely, to put families into homeownership situations in the central city in areas that had previously been redlined.” In line with this mission, a much greater percentage of minority than white families have received FHA loans over the past 50 years.

So the US government has been trying to fix the mess left by redlining for 50 years. Throughout those decades, HUD has been subsidizing downpayments and providing various loan products to make it easier for low-income and minority households to buy homes. And the results? Abysmal: the Black homeownership rate today is about the same as it was in 1968 - an ownership rate that had increased 20% in the 20 years before redlining was made illegal. What happened?

According to a 2006 HUD report covering the period of 1990 - 2003, close to half of low-income buyers did not sustain home ownership for more than five years. However, HUD found no evidence that first-time buyers were systematically using higher cost or riskier mortgage products during this period. Instead the report noted that “the share of low-income home buyers with severe payment burdens (over half of income) rose from 14.5% of buyers in the first part of the 1990s to 20.1% by 2003”. Another trend noted during this period was “the rise from 39% to 49% in the share of low-income first-time home buyers that consist of households with a single adult, with or without children. It is more challenging for these families and individuals to cope with unexpected crises and so they faced a greater risk of losing their homes.”  

Turns out that the FHA programs had a “national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times.” (John Wake, “50 Years of Failure – U.S. Affordable Housing Programs and the Black Home Ownership Rate”). The elevated foreclosure rates predated the emergence of a subprime loan industry. Nor is there evidence lenders had engaged in unfairly with African-Americans borrowers prior to 2006, according to a 2008 HUD report. Rather, the report noted that the “elevated level of foreclosure rate for the African American borrowers is no longer evident once other borrower and loan characteristics are controlled for.” Per HUD, these borrower and loan characteristics included:

Borrower’s Equity: Homebuyers with none of their own funds invested in the home had a 20 percent higher foreclosure hazard.  In other words, zero- or low-downpayment programs made it easier to walk away.

Comment: FHA loans in the 1930s-50s required home buyers to put up a minimum 20% downpayment of their hard-earned money - a likely factor in the lower foreclosure rate in the early days of FHA loans. Kamala Harris’s plan would help families buy home without investing much of their own money - a sure path to increased foreclosure rates.

Declines in house prices: Every additional one percent decline in house prices in the surrounding market area, relative to the peak price since 2000, increases the risk of foreclosure by 10 percent.

Comment: high neighborhood foreclosure rates lowers the value of nearby homes, leading to even more foreclosures. After 1968, homes bought with FHA loans had much higher foreclosure rates than home with conventional loans.

Mortgage-payment-to-income ratio:  Higher the ratio = greater chance of foreclosure.

Comment: Kamala Harris’s plan to change how income is calculated would achieve the appearance of a more favorable payment-to-income ratio. Such changes would likely lead to additional foreclosures, because they introduce noise into a signal that had been a pretty good predictor of foreclosure risk.

Marital status: Compared to the never-married, borrowers with similar characteristics, married couples had a lower hazard of foreclosure. Single persons are just more vulnerable to income shocks.

Comment: Two incomes are always better than one, regardless of credit rating and amount of income.

Number of dependents in the borrower’s household: Holding other factors constant, more dependents in household = higher risk. Each additional dependent increased the hazard of foreclosure by 14 percent.

Gift funds from nonprofit organizations: The hazard of foreclosure was higher (by 24 percent) for borrowers who had received gift funds to assist home ownership.

Comment: The less of one’s own money goes to downpayment, closing, and rehab costs, the more likely one will walk away from a mortgage. See “Borrower’s Equity”, above.

What predicted a lower foreclosure rate? Per the 2008 HUD report, local programs that administered HUD funds exercised some discretion regarding eligibility requirements and local programs “that set limits on homebuyers’ credit scores had 55 percent lower foreclosure rates”. In order words, strict credit standards resulted in fewer foreclosures. And that is exactly the opposite of what Kamala Harris plans to do.

The policy challenge is to help low-income and minority households buy the homes they can afford and keep the homes they buy.

Parting questions: To what extent is the legacy of redlining responsible for today’s black-white homeownership gap.? To what extent is the black-white gap explained by the legacy of well-meaning but misguided attempts to correct for redlining? Which legacy matters more? How do we know how much weight to give to each legacy? Ignore the questions, repeat past mistakes. Which is exactly what Kamala Harris’s housing plan would do.

Note: I won’t be addressing “unfair lending practices” in this series, as I’ve dealt with that issue before (see Behind The Headlines: How Much Did Predatory Lending Contribute to Wealth Inequality?). For a nice summary of the research on the relation between loan practices and the foreclosure crisis, I suggest: Fernando Ferreira and Joseph Gyourko  A new look at the US foreclosure crisis: Panel data evidence of prime and subprime borrowers from 1997 to 2012. NBER Working Paper No. 21261. Issued in June 2015 Here’s an excerpt from the Abstract:

“Utilizing new panel micro data on the ownership sequences of all types of borrowers from 1997-2012 leads to a reinterpretation of the U.S. foreclosure crisis as more of a prime, rather than a subprime, borrower issue. …Housing traits, race, initial income, and speculators did not play a meaningful role, and initial leverage only accounts for a small variation in outcomes of prime and subprime borrowers.”