Today’s skyrocketing home prices, coupled with the uneven economic recovery from the COVID-19 pandemic, continue to push America’s haves and have-nots further and further apart. And sadly, the pandemic has only made it worse — especially for minority communities. As we come out of the fog of the pandemic, these groups face a particular challenge in pursuing the American dream of homeownership: the lack of intergenerational wealth to assist them with a down payment.
Current homeownership rates reflect a deep and increasing inequality between black and white families that are eerily similar to what we saw at the height of the civil rights debate and the enactment of the Fair Housing Act in 1968. Without government-provided down payment assistance, the path to homeownership would be even steeper for many borrowers. While some can rely on family members to help with their down payment, such gifts are not widely available to all borrowers, especially those who lack access to intergenerational wealth, which includes a great many minorities.
DPA programs are a clear answer to closing the gap between the haves and the have-nots. Early in my career, I sought to help prospective buyers qualify for a home mortgage through DPA. We didn’t always get it right. In the early 2000s, the practice of allowing someone selling a home to contribute to the buyer’s down payment began as a way to assist families. This method of helping borrowers became known as seller-funded down payment assistance. Providers of SFDPA did not have an interest in the underlying first mortgage — almost always a loan insured by the Federal Housing Administration. As a result, many SFDPA providers did not take measures to ensure the underlying FHA mortgages performed well or that borrowers had the support they needed.
In 2002, to protect borrowers and assure that the underlying FHA mortgages would perform well, I co-founded an industry association called HAND, whose mission was to educate the mortgage industry on the proper utilization of SFDPA and limit risky practices. Unfortunately, the speculative buying hysteria that led to the housing crash in 2008 overwhelmed any efforts to institute appropriate underwriting controls. In addition, regulatory deficiencies allowed many appraisers to inflate home valuations artificially to cover the down payment assistance, driving housing prices to impossible-to-support highs, from which they eventually crashed.
Although they could do nothing to address the issues with inflated appraisals, SFDPA providers failed to support the borrowers they were assisting properly or to impose appropriate credit standards that would create sustainable homeownership and acceptable loan performance levels. Ultimately, SFDPA was eliminated in the Housing and Economic Recovery Act of 2008, and two years later, the Dodd-Frank Act addressed many issues with appraisals and eliminated unsustainable loan programs such as subprime mortgages, no-income verification loans, interest-only mortgages, and other products with deceptively low initial payments that burned so many homebuyers.
Last month, Sen. Pat Toomey, a Pennsylvania Republican, sent a letter to Marcia Fudge, the new Department of Housing and Urban Development secretary, advocating for broadening the SFDPA prohibition to cover all existing DPA programs — a position that, if adopted, would dramatically reduce access to affordable housing for minorities.
Given that Congress eliminated SFDPA more than a decade ago, Toomey’s letter creates unnecessary confusion by drawing inaccurate comparisons with SFDPA, which is now prohibited, and government-provided DPA, which operates within the confines of the law. Moreover, HUD has repeatedly rejected invitations to interpret existing federal law as banning government-provided DPA, a fact that Toomey must have missed.
Today’s DPA programs are nothing like SFDPA programs. On the contrary, the performance of the underlying FHA first mortgage is critical to the long-term success of these programs.
The Chenoa Fund is one such down payment program I helped create and manage that is funded by CBC Mortgage Agency, the housing finance agency of the Cedar Band of Paiutes. Using lessons from the past, I have striven to develop the program in a manner that fosters long-term homeownership and sustainable, well-performing mortgages. Among the innovations found in the Chenoa Fund program are several that are specifically designed to encourage and support borrowers in making their mortgage payments. For example, some borrowers qualify for a loan for their down payment that can be forgiven if they make timely payments on their FHA mortgage.
In addition, borrowers are offered extensive financial education to help them stay current on their mortgage, including 18 months of post-purchase counseling — a benefit that has been especially critical over the past year as borrowers struggled with the pandemic. We’ve developed a safe method to provide much-needed DPA to deserving borrowers by learning the lessons of the past.
Today, we face a wide racial homeownership gap and a glaring need for people without legacy wealth to receive the down payment assistance needed to buy a home. We need to protect the avenues that have evolved to assist these homebuyers, especially programs offered by government entities that help a large percentage of minority borrowers. I’m proud of the fact that more than half of the borrowers that CBCMA helped last year were minorities, 1 in 3 representing the first generation in their family to own a home.
The bottom line: Governmental DPA responsibly helps borrowers become long-term homeowners without having to spend many years waiting just because they lack generations of inheritance. It brings to scale and capacity the ability to support a significant shift in homeownership outcomes. It’s a proven system that works — and it’s essential to helping people realize the American dream.
Richard Ferguson is the manager of CBC Mortgage Agency.
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