The dawn of a new presidency draws fresh hope and promise for the direction of our country. Catalyzing this optimism for many is President Biden’s housing plan to address the racial wealth and homeownership gap in the U.S.
While many Americans are encouraged by the recent executive order redressing our nation’s — and the federal government’s —historical discriminatory housing policies, it’s time we reflect on the racially biased policies for homeownership that brought us here in the first place.
In 1934, Congress and President Franklin D. Roosevelt enacted the National Housing Act, and in so doing, established the Federal Housing Administration. At the time, FHA’s goal was to provide federally backed mortgage insurance to expand Americans’ homeownership opportunities.
While on the surface, FHA appeared to act in all Americans’ interests, in reality, it precluded African Americans and other non-whites from equal access to its insurance programs, and subsequently, homeownership.
For decades, FHA regulations encouraged and mandated segregationist policies prohibiting African Americans from enjoying the same homeownership rights and opportunities as their white counterparts. Over time, the results of these policies were devastating. White Americans benefited from multi-generational wealth transfers through home equity, resulting in gross disparities of wealth and perpetuating African Americans dwelling in substandard and high-density rental housing.
In the last few years, the number of existing single-family homes for sale has decreased. But home prices have increased. To make homeownership a possibility for everyone, there needs to be a higher supply of affordable homes.
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Later, enactments of the Civil Rights Act (1964) and the Fair Housing Act (1968), FHA policies under the same guise of equity and fairness, further distanced African Americans from homeownership. While African Americans were allowed access to the same FHA-insured mortgages as their white counterparts, whites and blacks weren’t on equal financial footing given historical disparities. This fundamental difference concerned the main component of qualifying for an FHA-insured mortgage — the down payment.
For most homes purchased with FHA financing, FHA insures 96.5% of the loan, with the remaining 3.5% required for the borrower’s down payment. Current FHA regulations allow borrowers to receive a gift in money from family members to satisfy down payment requirements.
For many Americans who benefit from generational wealth, receiving a familial gift to cover the 3.5% down payment is a rite of passage, further advancing equity through the generations. However, due to the lack of inherited or generational wealth within the African American community, a gifted familial down payment often isn’t possible. Therefore, it perpetuates inequitable access to homeownership and further expands the racial wealth gap.
In some ways, this disparity is analogous to the “legacy” programs that give family members preferential treatment in college admissions. This FHA “legacy” amendment similarly gives a much higher percentage of white Americans access to FHA-insured mortgages and hence homeownership than it does for others — notably, African Americans.
Thankfully, there are still options for African Americans to participate in the American Dream of homeownership. The FHA allows government-sponsored programs to provide down payments for borrowers lacking adequate savings or a family gift.
The program has stringent overlay requirements predominantly used by minority borrowers, including income limitations and credit score requirements greater than standard FHA guidelines. However, unlike a family gift, which is statutory, these government programs are subject to regulatory changes based upon the current HUD administration. This policy dynamic creates uncertainty for borrowers and mortgage lenders subject to vast program changes based solely upon a current administration’s policy whims.
Given the history of FHA and the resulting inequitable access to homeownership for the African-American community, there is no rational basis for recipients of “legacy down payment” to be given statutory protection — or preference — over those who need down payment assistance loans from government agencies.
While some within the mortgage industry have voiced concerns about the loan performance of borrowers who receive government down payment assistance compared to familial gifts, the claims are unfounded. The FHA annual performance report shows the default rate of government-sponsored down payment assistance is less than loans that have the down payment provided by a family gift.
After 85 years of racially biased history and 25 years of legacy down payment law, the bottom line is that it’s time for genuinely equitable access to homeownership for all Americans, regardless of race, creed, or socioeconomic status.
We must ensure that hard-working and credit-worthy Americans that need down payment assistance access it as a matter of law. If a family gift is statutory, it is incumbent upon FHA to provide these same protections to those Americans who require government-sponsored down payment assistance to become homeowners.
After all, the American Dream of homeownership should be accessible to all Americans — not just those with family wealth.
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