Expert Commentary

Improving low-income and minority access to mortgage credit after the housing bust

2012 report from Harvard on the impact of government housing policies on home-ownership rates of minority individuals and disadvantaged communities.


Although year-over-year levels of U.S. mortgage foreclosures are trending downward, February 2013 saw another increase, with default notices reported on more than 150,000 properties and foreclosure starts beginning on more than 70,000 homes. This news comes despite a 2012 agreement between the major banks and the government that aimed to curb lending abuses and help homeowners; as the New York Times notes, many homeowners are still facing default, despite nominal help from lending institutions.

The 2007-2008 financial crisis in the United States is often referred to as the “great recession,” the implication being that while severe, it wasn’t as profound an economic contraction as the Great Depression, which lasted from 1929 to 1939. Yet the collapse of the U.S. housing market, beginning in 2006, cut 33% off prices, more than the 31% lost in the 1930s. As of 2011, 23% of Americans had no liquid assets and 23% had houses that were “under water” — worth less on the market than the money owed on the mortgage. This stress has resulted in fewer Americans owning their own homes — by the start of 2012, just 65% did, the lowest level since 1997. Of course, lower-income households and racial minorities have been particularly hard hit.

A December 2012 report published by the Joint Center for Housing Studies at Harvard University, “Getting on the Right Track: Improving Low-Income and Minority Access to Mortgage Credit after the Housing Bust,” examines the impact of government housing policies on home-ownership rates of low-income and minority individuals and also how the financial crisis affected such disadvantaged communities.

Key findings include:

  • The U.S. government began to make strong efforts in the 1990s to expand homeownership to minorities. As a result, between 1993 and 2001 home purchase lending to Hispanic borrowers grew by 159% and to African Americans by 93%, “while lending to Whites grew just 29%.”
  • Despite government policies, and the mortgage boom in the 1990s, there was still a significant racial and ethnic gap in homeownership. Although African-Americans experienced a 7% increase in homeownership between 1995 and 2005, their rates of ownership were still 27 percentage points less than that for whites. The gap between Hispanics and Whites was similar, at 26 percentage points.
  • “High-cost lenders disproportionately targeted minority (particularly African-American) borrowers and communities, resulting in a notable lack of prime loans among even the highest-income minority borrowers.”
  • “In 2001, only 70.8% of refinancing for African Americans with incomes above 120 percent of area median, living in predominantly high-income African-American neighborhoods, were prime loans…. In contrast, the share for lower-income white borrowers living in predominantly white lower-income communities was 83.1%.”
  • What actually fueled the growth of low-income and minority lending was a dual mortgage delivery system. The mortgage products these groups were given typically had higher interest rates and less favorable terms than conventional “prime mortgages.”
  • The profitability of subprime loans led to a surge in mortgage-backed securities and the “mass securitization of nontraditional mortgage products.”
  • Lower-income individuals and minorities “bore a disproportionate share of the aftershock” after the housing market collapsed because they were the primary market for subprime loans.

To help repair the housing market, the authors suggest that U.S. government should focus on eliminating “vestiges of the discriminatory lending practices that played such a prominent role in the build-up to the recent crisis.” They suggest this be done through “developing liquidity that provides broad access to mortgage credit that borrowers understand and have the ability to repay” in which the government’s role is smaller and more defined. In addition, “mortgage markets should be free from the counterparty risks present in large systemically important financial institutions and the problems associated with ‘too big to fail.'”

A related 2013 report from the Congressional Budget Office, “Snapshot of Guarantees of New Residential Mortgages,” notes that the percentage of federally-guaranteed mortgage loans will drop sharply in coming years under current law, as the effects of the financial crisis continue to subside and the private mortgage market recovers.

Tags: financial crisis, subprime loans, African-American, Hispanic, Latino