Of the many social economic disparities that separate white and Black America, the wealth gap is the most profound and pervasive, and homeownership is at the root of that gap.
At the local level, affiliates of the National Urban League have been extensively involved in developmental endeavors to stabilize and rejuvenate distressed Black communities. Housing construction and rehabilitation projects, for example, spearhead these efforts, which emphasize the use of Black contractors and vendors. Across the affiliate network, the Urban League serves as a vital link between individual Black entrepreneurs and the broader business world. Promoting homeownership has been a policy priority in America since the Great Depression; and a number of policy efforts at the federal, state, and local levels have been directed toward this end. For most Americans, homes are their greatest assets, and homeownership is the strategy by which many households can build wealth.
Unfortunately, due to pervasive racial discrimination in both the real estate industry and government policy, Black Americans have largely been denied this opportunity. The racial homeownership gap remains at a 120-year high point. Black mortgage applicants are denied at a stunning 84 percent higher rate than white applicants. And homes in Black neighborhoods are appraised at about three-quarters of the value of comparable homes in white neighborhoods. Closing the wealth gap means boosting homeownership. Our challenge is confronting racial bias and creating equal opportunities.
Renters making the leap to homeownership need two distinct types of help: pre-purchase assistance, which explains to people the new responsibilities they’re taking on, and post-purchase counseling for those at risk of losing their home. The National Urban League helps purchases in both phases. We have long championed the key themes of “preparation” and “readiness” in helping clients make the leap from renting to the responsibilities and realities of ownership. Urban League pre-purchase counseling programs, for example, prepare and qualify prospective homeowners—particularly those who have low income, inadequate savings, or impaired credit histories—for the financial responsibility of a mortgage. Most Urban League affordable housing programs also include a compulsory financial literacy component addressing debt management, budgeting, and techniques to maximize saving. Community organizations like ours provide training to develop ‘’bankable’’ borrowers who can qualify for a mortgage and appropriately manage their debt. These programs typically provide homebuyer training, both before and after purchase, to more than 50,000 individuals each year.
An important part of the pre-purchase counseling process is collaborating with potential borrowers to remove barriers to homeownership, mainly affordability and credit problems. We work with potential homeowners to build or repair credit. Others may offer financial assistance to supplement down payments, closing costs, or monthly payments. Without such assistance the barriers to homeownership may be insurmountable for many low-income individuals.
Post-purchase education and counseling can stabilize homeownership in underserved communities. Post-purchase education and counseling refers to a range of services—from instruction on home maintenance, budgeting, and foreclosure prevention, to crisis intervention for delinquent borrowers, or counseling to prevent or assist victims of predatory lending. Intensive, one-on-one default and delinquency counseling reduces the incidence of default and foreclosure among low-income households. From 2018 to 2020, Urban League programs were credited with preventing more than 6,000 foreclosures.
Urban League counselors collaborate closely with borrowers to help them understand their options and function as intermediaries in negotiating between borrowers and servicers to put the best workout in place. Moreover, if a workout is not feasible or unsuccessful these agencies ease the homeowner’s transition to other affordable housing options.
While the achievements of the housing education and counseling industry are exemplified by the steady, albeit slow, increase in the number of low-income and minority first-time homebuyers over the last decade, the increasing threat posed by predatory lending, and the recent trend of increasing foreclosures, clearly indicate that a strong housing counseling industry is needed to sustain the gains made in homeownership among low-income and minority consumers.
A deeper public-private commitment must be made especially to post-purchase education and counseling, with state, federal, and local governments working in collaboration with private industry and community organizations. More resources are needed to support non-profit organizations and to stimulate research within the industry. Homeownership education and counseling must be a requirement for affordable loan products aimed at low-income and minority consumers. Pre-purchase education and counseling has been credited with expanding homeownership in underserved communities.
Good counseling may potentially reduce predatory lending in low-income and minority communities, but counseling in and of itself will not stop it. Only by changing the laws governing mortgage lending—to stop lenders from financing high points and fees, charging exorbitant prepayment penalties, refinancing special loan programs for first-time buyers into high-cost credit—can we fully address the problem of unscrupulous predatory mortgage lending. For example, U.S. Senators Sheldon Whitehouse, Jack Reed, Elizabeth Warren, Bernie Sanders, and Jeff Merkley, in early April, introduced the Empowering States’ Rights to Protect Consumers Act, which would restore states’ ability to limit consumer loan interest rate.
Importantly, while the Urban League privileges both pre- and post-purchase counseling, only a fraction of the organizations that provide pre-purchase housing counseling and education also aid established homeowners. Due to the dearth of available funding, very few organizations can provide pre-refinance counseling or assistance to victims of predatory lending. Many of the homeowners most at risk—particularly the elderly—are longtime homeowners with substantial amounts of equity accrued in their homes. They are not the traditional clients of housing counseling organizations (who often focus on first-time homebuyers), and they are not likely to seek assistance prior to signing a loan. Aggressive outreach and effective public education campaigns are necessary to get these potential victims to seek help before crisis strikes.
The capacity of non-profits to offer default and delinquency counseling or predatory lending assistance must therefore be expanded to stem the alarming increase in the foreclosure rate since the pandemic-related moratorium ended on July 31. Foreclosure filings rose more than 11 percent from January to February of this year, following a 29 percent increase from December 2021 to January 2022. The homeowners who are most at risk of foreclosure are low-income consumers, suffering the effects of the downturn in the economy and targeted by predatory lenders. The U.S. Department of Housing and Urban Development (HUD) is mandated under program guidelines to reduce defaults and foreclosures. However, there is much more that HUD can do to fulfill this mandate.
The homeownership education and counseling industry has evolved over the last 30 years to address the needs of traditionally underserved populations in the housing marketplace. At its inception, the industry’s efforts were focused on reducing the substantial number of defaults under HUD’s Section 235 program through post-purchase counseling aimed at delinquent borrowers. However, with the advent of affordable loan products in the late 1990s, encouraged and supported by federal policy and designed to increase homeownership rates among traditionally underserved populations, the industry’s focus shifted dramatically to pre-purchase homeownership education. The result has been a marked increase in homeownership among low-income and minority Americans.
Unfortunately, the demand for default and delinquency counseling and predatory lending counseling has also exploded since the onset of the COVID-19 pandemic.
This is absolutely necessary, but there are myriad barriers to providing effective default and delinquency counseling. First of all, it is time intensive and expensive. To provide effective assistance, counselors must meet with homeowners face-to-face, review relevant paperwork such as letters from the lenders, foreclosure notices, and the like, discuss their budgets thoroughly, help them apply for public assistance, and provide other services to increase their income or decrease expenses. The counselor will then engage with the homeowner and the lender or servicer to craft an appropriate plan. As most cases are referred to them after months of default, counselors deal with the most difficult cases, which cannot be performed effectively from afar by telephone or online.
Even fewer non-profit agencies provide pre-refinance counseling or services to assist victims of predatory lending. Such counselors must be skilled and trained to review mortgage documents that may contain complex or hidden terms disadvantageous to the homeowner. The demand for counseling to prevent foreclosure or assist victims of predatory lending has clearly outstripped the capacity of non-profit and other agencies to provide such assistance. Given the susceptibility of low-income borrowers to predatory lending and foreclosure, HUD must encourage the growth of default, delinquency, and predatory lending counseling programs in the industry.
It is also important that HUD funding be targeted to legitimate non-profit organizations that provide the most effective services to low-income consumers. Community-based non-profit housing agencies have consistently been found to provide the most successful—but the most time intensive—types of education and counseling services. However, non-profit housing counseling agencies are competing with too many other organizations (both non-profit and for-profit) for a small pool of funding and resources.
Recently, credit counseling agencies have increasingly begun to also offer housing counseling services. However, there are countless types of credit counseling agencies, some good, and many not so good. Legitimate and honest credit counselors are, however, often uniquely qualified to help consumers as they can provide a holistic service by assisting consumers with delinquent secured and unsecured debt.
Unfortunately, aggressive firms exploiting non-profit status have deceived or gouged consumers. Massive cuts in creditor funding for agencies has exacerbated this trend, leaving many well-intentioned organizations without sufficient funding to provide appropriate services. To make up these funding deficits, traditional credit counseling agencies have increasingly sought out housing counseling dollars. Some of these agencies have done so with the best of intentions and are developing quality housing counseling programs. Others are only chasing available dollars.
While homeowners are turning in increasing numbers to credit and housing counseling organizations, little data is available about how these services are delivered, the numbers of homeowners served, and whether the agencies that provide these services have sufficient resources and funding to meet the need. There are many reasons for the lack of research on this industry. However, one of the main hurdles is funding. Given the reliance of HUD on this industry to assist low-income homeowners, HUD must fund more research on the industry and encourage the private sector to sponsor exploratory studies and make data available for review and analysis.
It would also be useful to fund an analysis of how best to take advantage of Earned Income Tax Credit (EITC) outreach and free tax preparation to promote financial and homeownership education. At present, there is much talk among policymakers and advocates about the need to do this, and experimentation is going on in many urban communities, but it is not clear that the most effective models have been documented and promoted.
Financial education has been shown to help households manage their finances more prudently and it has been shown to reduce the likelihood of default. Calling for more financial education is not a new idea, but challenges remain in funding educational programs and developing appropriate curricula and delivery channels for diverse audiences.
Though financial education and housing counseling services are important tools, they alone cannot solve the crisis. First, we need to expand access to affordable homeownership opportunities. The gap in homeownership affordability—especially in states like New York and California—is as high as it has ever been. As long as an adjustable rate, interest-only or high loan-to-value subprime loan is their only way to afford a house, low-income families will continue to take on loans that they cannot sustain over the long term and may be at greater risk of falling prey to unscrupulous lending practices. In stark contrast to the subprime market, most new homeowners who have gone through affordable homeownership programs have not defaulted on their loans.
This evidence also speaks to a much greater need for savings options for low-income families, both owners and renters. Helping families save for a down payment and ensuring that they have a savings buffer to help them weather adverse economic events may lead to better outcomes overall than mortgages that make homeownership affordable only through risky loan terms.
Strategies to increase the supply of affordable homes are also needed. For example, we must be more proactive in thinking about innovative ways to convert foreclosed properties into affordable rental or homeownership opportunities. Other potential strategies, such as housing trust funds and community land trusts, can create long-term housing affordability.
Second, to be successful, policies that help low-income and minority households enter homeownership must be linked with broader community development strategies. Low-income households, and particularly low-income minority households, may be especially vulnerable to buying homes in disadvantaged neighborhoods, where job opportunities are limited, schools are often subpar, and the financial benefits of homeownership may be more limited. Stimulating neighborhood economic development, increasing local employment opportunities and wages, and improving neighborhood-linked amenities such as schools and transportation options, are critical to transforming the opportunities available to low-income and minority households.
Finally, we need to think more broadly about how homeownership fits into the overall asset-building landscape for low-income and minority households. In one study of low-income homeowners, researchers found that two-thirds of households that refinanced their homes did so to pay down other debt, including higher-cost credit card debt. Others borrowed against the equity in their homes to pay for medical and educational expenses. It should be troubling to us all that so many low-income families are having to use home equity to help manage their overall debt load, or to bridge a gap in health-care insurance. We need to help households learn how to manage their finances and to create safety nets that offer protection against economic shocks, so that low-income and minority families are less vulnerable to losing their homes.
The racial reckoning that followed the 2020 death of George Floyd gave rise to the notion that the antidote to racism is not simply the absence of racism, but anti-racism. Similarly, the antidote to the racial homeownership gap is not simply the existence of opportunity, but the active building of bridges to carry people to those opportunities. And that won’t just give Black Americans a bigger share of the pie. It would—to borrow a phrase—make the pie higher. In The Sum Of Us: What Racism Costs Everyone And How We Can Prosper Together, author Heather McGee uses the metaphor of “the drained pool” to illustrate the desolation that racism wreaks on entire communities: When public pools and parks were shut down in response to desegregation orders in the 1950s and 1960s, white families were just as deprived of these amenities as their Black neighbors. A study released last year found that racism had cost the economy more than $50 trillion over the last 30 years. That’s a lot of pie—or swimming pools—that no one, Black or white, is getting to enjoy.