This article is the fifth in our series—Community Development: National Leaders’ Visions—that NPQ, in partnership with the CEO Circle, an informal network of BIPOC community economic development leaders, is publishing in the coming weeks. The series focuses on identifying what is required to address key transformational challenges and to help the field of community economic development better accomplish its twin missions of racial and economic justice.
As of May 2021, the median US home price, as reported by the National Association of Realtors, stood at $350,300. Even with low interest rates, that’s a high barrier for many people. Nationally, the gap in homeownership rates for Black households compared to white households is large and growing. At present, 44.6 percent of Black Americans live in homes they own, compared to 74.2 percent for white Americans. That’s a stunning gap of nearly 30 percentage points.
And when Black households do own, their equity is lower; the median housing equity for white families is $118,000, compared to $60,000 for Black families. On top of this, families of color are more likely to live to inadequate housing, 5.8 percent of Black homeowners compared to 3.1 percent of white homeowners.
This lower rate of Black homeownership is a direct result of limited access to the financial market. Only five percent of conventional market were loans to Black borrowers, compared to 15 percent of the federally subsidized Federal Housing Administration and Veterans Affairs loans. In 2019, a group of 10 lenders were responsible for originating 24 percent of mortgage loans to Black borrowers; of those 10, only three were traditional depository banks. Black applicants are more than twice as likely to have their loan applications rejected.
Barriers to BIPOC Homeownership in Low-Cost Cities
While national home prices have reached record highs, homes are not expensive everywhere. In Detroit, Michigan, for instance, the median home costs about $70,000. Yet even here families of color struggle to buy homes. Why?
Well, banks often refuse to lend to potential homeowners in these lower valued homes for many reasons. Two critical ones: the cost of servicing the loan is the same whether the loan is for $50,000 or $500,000—the larger loans are more profitable; the low-cost loans are money-losers. Also, the lower price means that people who need a mortgage compete with people paying cash, and, as the saying goes, “cash is king” (or queen). This flawed system perpetuates and exacerbates racial inequalities with a vast percentage of Black households hitting said roadblocks when attempting to obtain financing for affordable housing.
What can be done? The nonprofit I direct, the Center for Community Progress (CCP), seeks to align mission-driven and flexible lenders, with public funding and philanthropic dollars, to mitigate the challenges that exist with small principal mortgages and incentivizing their widespread adoption. This means working not just with banks, but also community development financial institutions (CDFI), credit unions, and others. Recognizing the varied characteristics of each institution, and how they can aid in helping to address the gap between financing tools and lower valued inventory is important to properly address the problem. Part of the solution is partnering with a fund for land banks to rehabilitate properties to increase the quality of available inventory. This, in conjunction with generating affordable first residential mortgages that are less than $100,000, can make a real difference in helping millions of BIPOC families become homeowners.
A Small Principal Loan Program Solution
CCP, in its work, focuses on developing community-based strategies to revive vacant, abandoned, and deteriorated properties. In the course of our work in this field for over a decade, a network of public, private, non-profit, and philanthropic leaders has developed. By leveraging this network, we believe it is possible to address this unsung, but widespread, weak market homeownership problem.
An Urban Institute report found that in 2019, an estimated 26.7 percent of home sales nationwide were for homes priced below $100,000. Since about 5.5 million homes were sold that year, that means that in 2019 nearly a million-and-a-half homes were sold for under $100,000. Of these homes, only 23.2 percent were purchased with mortgages. The same Urban Institute report noted that 53 percent of all renters stated that qualifying for a mortgage was a major barrier to homeownership. The gap to fill, in short, is large, leaving millions of families in weak markets unable to purchase their own homes.
Across the country, there are over 200 communities that have a history of vacant, abandoned, and deteriorated properties that negatively impact the market. These communities could benefit from a platform that provides five-digit mortgage loans to turn a number of these properties into productive use. Existing scans of the field show early promise in several places; however, the broader challenge still exists. As the community development field works to identify steps to address this issue on a larger scale, early solutions are beginning to emerge. Important action steps include:
- Build on lessons learned from existing pilot sites to develop appropriate financial tools to ease the transfer of more land into the hands of potential homeowners.
- Invest in existing sites where small-scale mortgage products exist and help expand availability to a larger portion of the country.
- Engage national partners to offer these new tools along with traditional financing options.
Where to Start? The Importance of Site Selection
Communities with a history of inequitable housing practices are prime targets for interventions, but these places also bear much of the weight of the history of exclusion described above. To change this narrative, it is important to show early wins in communities that can accomplish the program goals of making mortgages available for African Americans and communities of color who have been disenfranchised from financial systems and institutions. To overcome past barriers, a small mortgage program must garner the commitment of public actors and partner with nonprofit institutions.
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Building the Small-Dollar Mortgage Pool
The heart of solving the small-dollar mortgage challenge lies in gaining access to flexible capital. Obtaining a pool large enough to put in a dent in helping millions of Americans currently shut out of the traditional mortgage market will require a large and diverse group of funders to bring this program to life. The likely early sources include philanthropy, public agencies, and banks or credit unions that are willing to provide low-cost loans. This type of pool could both fund the mortgage loans themselves, as well as providing critical construction financing, all while being diverse enough to absorb the risk and positioned to survive expected fluctuations in interest rates.
It’s necessary to be flexible when seeking resources to bridge this gap, while recognizing that working with patient capital (low cost, long-term) is ideal. The four key components of a mortgage are principal, interest, term, and amortization. On top of that, when calculating affordability to potential homebuyers, it is important to account for taxes, insurance, and association dues. Multiple strategies are needed to employ a flexible and successful capital program that supports families who have the greatest need for small-dollar mortgages. Potential partners include mortgage brokers, mortgage bankers, and bank foundations.
Research shows that there are millions of Americans currently renting who if given the opportunity would become homeowners and could save in their monthly expenses. Each community that is selected will need local partners that can both identify potential homebuyers, as well as provide necessary counseling and assistance to ensure long-term success. National partners can help to pinpoint the local conditions necessary for a site, and then identify on-the-ground partners to help implement the program. Once connected, the process will be designed to be inclusive and will focus heavily on educational components.
Land Bank Inventory
National conversations around small principal mortgage programs have recognized challenges with keeping interest rates down, identifying funding for rehabilitation, and connecting existing inventory to new mortgage tools. Properties at the low end of the market tend to be old and in need of repair or up-front costs.
Founded in 2010, CCP got its beginning working with land banks. When CCP was founded, there were public only land banks in fewer than a dozen US cities. Now these entities exist in over 250 communities. These public institutions, CCP believes, can be vital partners in this work.
Many of the communities that formed land banks in the past decade have a history of disenfranchising Black residents and people of color. These land banks now have control of property in their existing inventory, sometimes thousands of parcels, but more importantly they have access to a pipeline of properties that they could acquire if there were a reliable pool of resources to aid in the land’s return to productive use.
The Cost of Doing Nothing
Properties with lower values are unable to attract conventional financing for mortgages, ultimately leading to being sold at cash sale. This in turn reduce the odds of attracting first-time homebuyers and increases the likelihood of speculative ownership. Even worse, with properties in cities with slow market turnaround, there is less incentive to invest in said properties. This lack of investment, in turn, leads to vacant, abandoned, and deteriorated conditions. And as vacant, abandoned, and deteriorated properties continue to negatively impact the market, tax foreclosures increase and land banks by default often become the largest property owners. It’s a vicious cycle that blocks homeownership in communities of color—and an entirely unnecessary one.
The time for action is now. We must create vital solutions. Creditworthy renters in weak markets desire affordable homeownership opportunities, and land banks operating in these same markets can acquire properties before they deteriorate beyond repair. The available inventory can be rehabilitated to move-in-ready conditions, if backed with blended sources of debt, patient capital, and philanthropic support. These catalytic investments would enable small mortgage tools to be successfully introduced and for communities to thrive.
Many renters of color in weak market cities have the income to qualify as homeowners. But they lack the financing tools to make homeownership possible. Small-dollar mortgages are an ideal financial vehicle to facilitate this transition—benefiting both countless BIPOC families and their home communities. Such mortgage products could play an important role in closing the nation’s racial homeownership gap, especially in low-cost cities where homeownership is both near, and yet—because of the lack of mortgage products—so far away.