When it takes a long time to create a problem, it often takes even longer to fix it. In Black Wealth/White Wealth: A New Perspective on Racial Inequality, Melvin L. Oliver and Thomas M. Shapiro illustrated how various American tax, property and financial policies and practices precluded generations of African Americans from building wealth and created intergenerational poverty, the effects of which continue to reverberate today. The gains that some African Americans and other people of color made in wealth creation through home ownership, small business development and educational attainment during the late 1990s and early 2000s were all but wiped out by ongoing the financial and foreclosure crisis. If left unaddressed, the racial wealth gap will continue to grow.
Key policies of the last decade, such as the Bush Administration’s “Ownership Society,” sought to expand homeownership opportunities without putting in place effective safeguards against unchecked and unscrupulous lenders targeting communities of color with unsustainable mortgage products. Rather than correct this regulatory failure, many critics have chosen to question the viability of homeownership as a wealth-building vehicle and suggest that many people are better off renting their home. Others suggest that we should revise our tax policies that convey enormous benefits to higher-wealth home owners through the real estate tax deduction. All of these issues bear on and complicate the issue of how a “qualified residential mortgage,” or QRM, should be defined in new rules required by the Dodd-Frank financial reforms. Under Dodd-Frank, lenders will be subject to a new five-percent risk retention (“skin in the game”) requirement designed to reduce the likelihood that lenders will make loans that pose excessive risk and sell them off to the secondary market. Only loans consistent with the QRM definition will be exempt from the risk retention requirement.
Although many aspects of our financial system will continue to change over the next several years, I think we need to view the proposed QRM rule in the context in which it is likely to be implemented under current laws and practices and those mandated under Dodd-Frank. This means that we should assume for now that the mortgage deduction will continue as is, that most of the lending practices that led to the foreclosure crisis will be curtailed, and that communities of color will continue to face significant barriers to accessing fair and sustainable financial products and services.
We should also assume for now that, for most people, equity in their home will be their largest financial asset. The fact that paying the mortgage each month is, in effect, a forced savings mechanism that cannot be easily dropped or changed (like contributions to a retirement plan) means that in a recovering or stabilized housing market, owning a home builds wealth. Of course, homeowners and potential owners must understand that home values are not guaranteed to increase. The fact that potential homeowners could make more money by investing it in stocks or bonds than by investing in real estate does not mean that foregoing homeownership will in fact produce that result. Realistically, it is unlikely that most renters will invest sums equivalent to mortgage payments in the stock market through their retirement plans or otherwise.
So, we need to support access to affordable homeownership for communities of color so that they can build or re-build wealth and improve opportunities for future generations who will benefit from the wealth effect of their forbearers. That means we cannot support a QRM definition that requires a 20-percent down payment because few, if any, people and families of color currently have that kind of wealth. Some have estimated that it would take some lower-income, lower-wealth Latino families 14 or more years to raise such a sizeable down payment for an average size, modestly priced home. We have to admit that allowing a 20-percent down QRM rule would relegate those families and millions like them, as well as their children, grandchildren and future generations, to being renters without any substantial assets.
Woodstock Institute, the National Community Reinvestment Coalition, National Council of La Raza and many other community and civil rights organizations agree that a 20-percent down payment requirement represents an unfair and unnecessary barrier to home ownership and lowering the down payment requirement will have little effect on default rates while ensuring equitable access to mortgage credit. This recommendation is made in the context of new rules requiring lenders to verify ability to pay and in no way suggests that any mortgage loan should be made to borrowers who cannot sustain the loan burden and maintenance responsibilities of home ownership. I urge you to submit comments opposing the proposed QRM rule before the August 1 deadline.