With her popularity on the rise following the Democratic presidential debates last month, California Senator Kamala Harris has announced a $100 billion housing plan aimed at closing the gap in household wealth between whites and African-Americans and Latinos. But her proposal—to provide up to 4 million households with a $25,000 federal grant toward closing costs or down payments on homes—risks doing just the opposite. Previous federal housing programs and the damage wrought by the 2008 financial crisis show why.
Harris is understandably concerned about the black-white gap in household wealth. In 2017, a Federal Reserve report found that average family wealth for white families totaled $933,000; for black families, the average was just $138,200, less than 15 percent of the white figure. The Latino average was $191,000. Levels of home ownership represent a significant part of these differences. And the case for helping black families in the housing market has some historical justification: blacks faced discrimination in getting mortgages ensured by the Federal Housing Administration, were locked out of certain housing markets, and suffered the loss of homes that they did own to the eminent-domain policies of urban renewal and public housing.
Still, the Harris proposal is the wrong way to go. In building household wealth, it’s important to protect the wealth of current homeowners in a given neighborhood, and to increase the likelihood that new buyers will be able to keep their homes. Among the greatest threats to neighborhoods is mortgage delinquency and foreclosure, which results in vacated or deteriorating homes. That’s exactly what happened in the wake of the financial crisis, when foreclosures hurt blacks and Hispanics disproportionately. As the National Low-Income Housing Coalition reports, “since 2007, nearly 8 percent of African Americans and Latinos have lost their homes to foreclosure compared to 4.5 percent of non-Hispanic whites at similar income levels. The disparity ratio shows that African Americans are more than 70 percent more likely to have been foreclosed upon than non-Hispanic whites.”
Those foreclosure rates were, in part, the result of home purchases that required low down payments, or even “zero down.” Loose lending practices enabled unqualified buyers to borrow large sums of money without demonstrating that they could pay it back. These “no doc” and “liar loans” encouraged speculative buying and brought people into the property market who probably had no business being there. The go-go environment of fast money, house flipping, and dodgy mortgage terms left many unqualified buyers unable to keep up with payments when the economy turned south, and they lost their homes. That environment hurt those who scrimped and saved to accumulate housing wealth the old-fashioned way. After all, when your neighbor defaults on his mortgage and his house is repossessed by the bank, nearby home values—the cornerstone of household wealth—decline. Vacant houses are magnets for crime and vagrancy. The key protection against foreclosure—which Harris wants to remove from the equation—is a down payment, based on thrift and savings, the traits that typically make for successful homeownership. New owners whose down payment came from a government grant have no skin in the game. If payments become burdensome or unforeseen and costly maintenance issues arise, they’re more likely to walk away. It’s all house money, anyway.
We’ve seen this movie before. Historically, default and delinquency rates among borrowers with loans insured by the Federal Housing Administration—which has long required low down payments—are higher than those for so-called conventional borrowers. In fact, “serious delinquency rates” for FHA loans currently run at three times the rate for conventional loans. Such delinquencies are just one step from foreclosure.
History provides other sobering lessons about what happens when down payments are deemphasized. In 1967, in the wake of the urban riots of that era, a group of Boston banks—known as the Boston Banks Urban Renewal Group (BBURG)—collaborated to make $50 million in no-down-payment mortgage loans available to the city’s African-American population. Select neighborhoods where blacks had previously faced discrimination were targeted—just as Harris has proposed to focus her housing plan on “formerly red-lined” neighborhoods. When mortgage money flooded Boston’s black community in the late sixties, it proved a recipe for rapid foreclosure—and realtor scare tactics that panicked white owners into selling. This “blockbusting” led to a vicious cycle of white flight and predatory lending to first-time black homebuyers and worked to increase neighborhood segregation. By 1974, half of the BBURG mortgage loans had been foreclosed. The household wealth of black homebuyers did not rise; in fact, it went down. The BBURG fiasco became the subject of congressional hearings.
The right path then—and now—involves wealth accumulation through employment, savings, and financial acumen. One may wish that a jumpstart by federal government could redeem a sad history. But the record of such interventions shows that they have only made things worse. Harris’s plan would do the same.
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