The Unequal Costs of Black Homeownership (Compounded By Bank Regulations And QM Rules)

by confoundedinterest17

Ed Golding, formerly of Freddie Mac and now of MIT’s Golub Center for Finance and Policy, has an interest paper on “The Unequal Costs of Black Homeownership.”

“As Keynes noted, a small difference in interest rates can compound to a large number. A new study by the GCFP’s Executive Director, Ed Golding, and two co-authors, Michelle Aronowitz and Jung Choi, demonstrate that Black homeowners on average will pay $67,320 more for their houses because each month Black homeowners pay slightly higher mortgage rates, mortgage insurance premiums, and property taxes. If we eliminate these extra costs paid by African Americans, the $130,000 black-white gap in liquid savings at retirement would drop by half. This report will soon appear in the National Association of Real Estate Brokers 2020 Report on State of Housing in Black America.”

Then, on the other hand, black homeownership rates are at an all-time high as is black median weekly real earnings growth.

But Golding et al refer in their paper to “Black homeowners pay higher mortgage rates at origination.”

Why? How about the 16% mortgage denial rate for blacks compared to 9% for whites and Asians?

Let’s start with Laurie Goodman’s mortgage denial research at the Urban Institute. Their analysis revealed that % of loans to low credit households has decreased from 53% in 2006 (peak of the housing bubble) to 24% in 2017.

How about Fannie Mae’s and Freddie Mac’s average credit score of loans acquired? They rose over 25 basis points.

  • Thanks to my GMU FNAN 421 students for using Python to download and analysis Fannie and Freddie on-lined data.

While it is easy to blame Fannie Mae and Freddie Mac for increasing credit standards versus 2006, there are other mitigating factors … like the CFPB’s Qualified Mortgage (QM) ruling.

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All qualified mortgages should generally meet the following mandatory requirements:

1.The loan cannot havenegative amortization, interest-only payments, or balloon payments.

2.Total points and fees cannot exceed 3 percent of the loan amount.

3.The mortgage term must be 30 years or less.

Qualified mortgages must also satisfy at least one of the following three criteria:

1.The borrower’s total monthly debt-to-income (DTI) ratio must be 43 percent or less.

2.The loan must be eligible for purchase by Fannie Mae or Freddie Mac (the government-sponsored enterprises,or GSEs) or insured by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA),or the US Department of Agriculture Rural Development (USDA), regardless of DTI ratio.

3.The loan must be originated by insured depositories with total assets less than $10 billion but only if the mortgage is held in portfolio.

DTI of 43% or less?

Lender have increased lending standards and that has been problematic for black households. In that respect, Senator Warren’s Consumer Financial Protection Bureau (CFPB) and The Federal Reserve have deferentially-impacted black households given that black households have lower average incomes and lower credit scores than white households.

Lenders deny mortgages for Black applicants at a rate 80% higher than that of white applicants. And values of homes owned by Blacks are still 17.6% below the typical U.S. home.

So, making the financial market “safer” negatively impacts black households. We need to rethink QM and bank capital rules.