Amid unprecedented prosperity, and despite years of efforts to level the playing field, the gap between white and minority homeownership rates has barely narrowed.
This is a conclusion of a report, “The State of the Nation’s Housing: 2000,” prepared by the Harvard Joint Center for Housing Studies, and funded by the Ford Foundation and the housing and lending industries.
The soaring housing prices and rents that are manifestations of this prosperity have made homeownership a bigger challenge, and have increased the share of lower-income renters who are having to cope with ever-increasing housing costs.
“Mortgage industry innovation and outreach to low-income and minority borrowers have helped extend homeownership opportunities to many,” said Nicolas P. Retsinas, the center’s director and former assistant secretary of the Department of Housing and Urban Development.
However, “while minorities contributed almost 40 percent of the net growth in homeowners over the past five years, the gap between white and minority ownership rates has barely narrowed,” Retsinas said.
That gap — 25.8 percentage points — narrowed only slightly more than one percentage point since 1994.
The gap between whites and African Americans — 26.6 percentage points — narrowed even less than for minorities as a whole, according to the joint center’s research.
Latino homeownership lagged 23 percentage points behind whites. In the five years researchers used to make their comparisons, 6.9 million Americans became homeowners.
Of those, whites accounted for 4.34 million; the number of African Americans totaled 917,700; Latinos accounted for 1.05 million; and Asian Americans and others, about 600,000.
Low-down-payment loans have helped all borrowers. Cash-strapped households have flocked to these products, with 30 percent of buyers in 1999 putting down 10 percent or less, 16 percent putting down 5 percent or less, and 4 percent providing down payments of 3 percent or less.
“These loans do little, however, to aid those with both wealth and income constraints,” said Eric Belsky, executive director of the joint center.
What Belsky means is this: If you bought a median-priced house costing $133,300 in 1999, and made the traditional 20 percent down payment of $26,600, you would pay $762 in principal and interest each month — assuming a 30-year fixed-mortgage rate of 8 percent.
If you put 10 percent down, that would cut the up-front cost by half but raise the monthly payments by $126, including mortgage insurance. A 3 percent down payment would add $96 more.
With a 20 percent down payment, a borrower would have to earn $31,525 a year to qualify for a mortgage; $39,100 for a 5-percent-down-payment loan, and $43,360 for a no-down-payment loan.
To compensate, many borrowers have switched to adjustable-rate mortgages, especially over the last year as fixed-rates have risen to about 8.5 percent.
In 1998, when fixed rates sank to 6.5 percent, only 12 percent of home purchases were financed with adjustable loans. Last year, it was 21 percent.
Recent reports from the Mortgage Bankers Association puts the ARMs’ share at 17.5 percent.
Adjustable rates typically change every one, three or five years after initial fixed periods that range from one to 10 years.
The joint center reported that many lenders have been reaching out to borrowers with impaired credit histories. A survey by Freddie Mac last year found that 30 percent of 20-to-40-year-olds making less than $75,000 a year had poor credit records.
A similar survey in 1999 by Fannie Mae found that 31 percent of respondents didn’t believe that three consecutive late utility payments would affect whether they received a mortgage.
The need for mortgages for buyers with impaired credit has resulted in a dramatic increase in the number of sub-prime lenders — those who lend money at higher rates to riskier borrowers, especially in metropolitan areas with large minority populations.
Between 1993 and 1998, the share of mortgages by sub-prime lenders increased to 5 percent from less than 1 percent, while their share of refinancings reached 12 percent of all such loans originated in 1999.
The influence of sub-prime lenders in low-income and minority markets is growing. In low-income neighborhoods in 1998, sub-prime lenders made 9 percent of home-purchase loans and 27 percent of refinance loans, up from only 1 percent in 1993.
Sub-prime lending activity has raised concerns because of the higher fees and interest rates involved, according to Belsky.
There is growing evidence that some lenders — sub-prime and prime alike — are engaging in predatory lending practices, including excessive front-end fees, single-premium credit life insurance, and exorbitant prepayment penalties, according to a report issued in June by the U.S. Department of Housing and Urban Development.
In addition, according to research in 1996 by Freddie Mac, between 10 percent and 35 percent of sub-prime borrowers could have qualified for prime loans.
Another study showed that, although most white borrowers are able to assess their creditworthiness accurately, only 49 percent of African-Americans with good credit thought their credit was good.
Belsky said these findings suggested that many sub-prime borrowers “are unaware that they can qualify for lower-cost loans, underscoring the importance of home-buyer counseling and financial-literacy campaigns in low-income and minority communities.”
According to Belsky, a growing number of banks and thrifts, as well as Fannie Mae and Freddie Mac, are offering products tailored to borrowers with slightly impaired credit.
“Lenders are becoming more adept at identifying these borrowers, and in developing products that help them repair their credit histories and or decrease the premium they pay for missing the prime market,” Belsky said.
In addition, HUD has asked Congress to make it easier to combat predatory lending, by requiring lenders to recommend that high-cost-loan applicants avail themselves of home mortgage counseling, to disclose credit scores to all borrowers upon request, and to give borrowers more timely and more accurate information as to loan costs and terms.
HUD also is asking Congress to make mortgage brokers document the appropriateness of a loan for high-cost-loan applicants. Lenders who report to credit bureaus should be required to provide “full-file” payment histories for their mortgage customers.
The joint centers’ study also found that low-income and minority buyers were joining the more affluent buyers and whites in gravitating toward the suburbs. The trend continues as home buyers travel expressways toward the distant reaches of metropolitan areas.
Throughout the 1990s, about 7 in 10 home-purchase loans made in metropolitan areas were for houses in the suburbs.
Although they are less likely to buy there than whites, 6 in 10 minority-group members also bought in the suburbs, and this share is also increasing, Belsky said.
Minorities in the West and South are more likely to buy in the suburbs than those in the Northeast and West, but are less likely to buy in white suburbs.
Seattle; Portland, Ore.; Tampa, Fla.; and Atlanta stand out as exceptions in those regions.
Low-income buyers favor suburban locations 2-1, and not just the lower-income neighborhoods there. Belsky said the vast majority of low-income buyers who bought in the suburbs in 1998 bought units in moderate or high-income areas.
The Northeast leads the country, with 72 percent of low-income buyers purchasing houses in the suburbs. In the West, the share is just 60 percent.
Hartford, Conn.; Miami; and Atlanta top the list, with 85 percent or more of low-income borrowers buying suburban houses.
Although the majority of high-income borrowers also buy houses in the suburbs, 28 percent purchased homes in center cities. Affluent families that do buy houses in cities overwhelmingly favor middle-income and higher-income neighborhoods.
In contrast, the share buying houses in lower-income central-city neighborhoods has held at less than 4 percent for the last five years, the study showed.
