By Jillian Olinger, Research Associate,
Affordable homeownership and access to credit are on the chopping block—whether it be through increased down payment requirements in the proposed Qualified Residential Mortgage rule under the Dodd Frank Act, the GSEs Fannie and Freddie, or the Federal Housing Authority (FHA); or through the concentration of lending in the Too Big to Fail banks, that will surely drive out smaller, community banks from the market—banks that are most responsive to localize needs. But the Administration claims that affordable homeownership continues to be a priority. Their suggestion is to funnel affordable housing through the Federal Housing Authority.
In a nutshell, this overreliance on the FHA as the source for affordable housing is problematic because a) there is a well-documented history of FHA failing to provide fair and affordable lending to communities of color; b) FHA loans are more expensive than conventional market loans because of upfront premiums; and c) recent changes to FHA policy could further lock out marginalized borrowers (such as minimum FICO scores and the down payment requirements). If this siphoning of marginalized borrowers through the FHA moves forward we will turn back the clock of homeownership policy about seventy years, and continue the dual market that has ill-served marginalized borrowers for decades.
For our marginalized communities and borrowers, the story goes like this. First, there was near-complete inability to access housing and credit (except on extremely expensive terms) prior to the New Deal. The creation of the Federal Housing Authority in 1934 was to stabilize the defunct housing market following the Great Depression by insuring mortgages, and thereby expanding homeownership. It was recognized that a healthy homeownership market was vital to the economic health of the nation. But this was highly racialized in effect; it was FHA policy, and therefore private market policy, to avoid lending in areas that were integrated, urban, or majority minority.
Following the urban riots of the 1960s, legislation directed the FHA to re-focus its policies from the white middle class suburbs to the inner city, underserved communities of color. But the cost of this new “access” was high; it brought along with it rampant abuse and fraud. Real estate brokers and mortgage companies were able to exploit this new market risk-free because FHA loans are 100% government guaranteed; in other words, they had no ‘skin in the game’ and regulation was lacking.
Hence, we had what would amount to government-sanctioned reverse redlining of FHA lending, where communities of color and inner city communities that had been cut off from mainstream lending were suddenly flooded with FHA loans. Because of the rampant abuse, FHA loans in these neighborhoods had extremely high foreclosure rates and contributed to massive neighborhood blight. As a result, areas where FHA loans were concentrated were again redlined by private institutions as high risk. Fast forward to the 1990s and subprime lending which essentially substituted for FHA loans. Again, abuse and fraud were rampant and the racialized nature of the subprime boom and bust is indisputable. And again, neighborhoodblight has ensued.
In 2007 the collapse of the subprime market and housing finance market in general reverberated around the country, but communities of color in particular were ravaged and the equity homeowners of color had been able to acquire vanished. The private market retracted. The subprime market disappeared. Lending was anemic, at best, for anyone.
This brings us to the present proposals, where government wants to retract its role in housing finance. Its proposals are sure to make mortgages more expensive and less attainable, but they don’t appear worried, because hey, we can do affordable housing through the FHA (because that has worked out so well for marginalized borrowers and communities in the past…). One theme throughout this story is apparent– there has always been, and continues to be, a clear dual delivery system of housing and credit, and the Administration’s proposals do nothing to change this in the future.
But let’s not take the wrong lesson away here. This does not mean that government should get out of the housing finance market.
Lesson One: Federal government policies designed to expand homeownership is still a good idea. It was as true in the 1930s as it is today—a healthy housing market is vital to the economic health of the nation. This has only been possible through the support of Government in the housing finance market.
Lesson Two: Government policy that focused on extending lending to marginalized borrowers and communities is still a good idea. The alternative, leaving the provision almost entirely up to the private market, is simply unacceptable. We know that the private market ruthlessly exploits marginalized borrowers and colors.
Lesson Three: We know how to do lending to underserved populations and areas right. We just seem to forget that we do. This is extremely problematic as far as reforming the housing finance market goes. Because if we refuse to talk about race and place and how they are connected, and if we fail to make an affirmative commitment to promote housing integration and fair credit—a position we as a country have continued to move away from—then yes, we will continue to see poor outcomes from government involvement. No matter how many regulations are set in place, or how large or small the QRM market is, or how “modernized” the FHA becomes. The point is if we do not dismantle the dual system, then we are doomed to fail again.