October 26, 2021|Affordable Housing, Consumer Behavior, Fair Lending, GSEs, Mortgage Industry, Virus Response
I just returned from the MBA’s Annual Conference last week in San Diego. It was great to be together again, and the MBA delivered a great in-person conference after a year of virtual gatherings. Aside from how vaccines enabled this meeting, a lot has changed in a year. Notably, the same top mortgage lending positions now held by the 3 women in the photo above, a year ago were held by 2 white men and Ben Carson[1]. Today, the (Acting) Director of the FHFA (Sandra Thompson), Chair of the Mortgage Bankers Association (Kristy Fercho), and the Secretary of HUD (Marcia Fudge), are all Black women. That’s a picture that says a thousand words.[2]
The time is now for new ideas
I have written often in these Musings about the persistent racial gap in homeownership (most recently, here in March 2021, and here in February). The gap has remained virtually constant for over 50 years with Black Americans having homeownership rates of around 40% whereas white Americans are over 70%. In an interview with National Mortgage News reporter Kate Berry after her installation as Chair, MBA’s Fercho said,
“The time is now the industry to collaborate on developing policies and best practices to close the racial homeownership gap, remove the barriers to sustainable and affordable housing, and support strategies to increase diversity within our organizations.”
Another Black woman housing leader who spoke at MBA’s conference, Theresa Bryce Bazemore[3], CEO of the San Francisco Federal Home Loan Bank, agrees and is seeking new ideas too, (see, e.g., Bazemore: ‘We Have to Believe It’s Possible’ – MBA Newslink). The momentum behind all of these new superstars of mortgage industry leadership to achieve real progress, in particular on the pernicious problem of the racial gap in homeownership, is genuine and encouraging.
Let’s think bigger
So, what are these women and the rest of the industry going to do with this opportunity? It seems we are just getting started. Fercho and MBA announced (another) MBA initiative in that regard at the Annual Conference. MBA Urges Members To Take ‘Home For All’ Pledge – NMP (nationalmortgageprofessional.com).Similarly, Berry reported on the activities of Thompson and Fudge, noting,
“The industry also is embracing policy changes by the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, and the Department of Housing and Urban Development, that appear to be loosening credit requirements, to close both the homeownership and racial wealth gaps. So far the changes have been mostly at the margins.” [emphasis added]
Initial steps, such as committing to inclusion and GSE underwriting changes to qualify more borrowers (such as looking at rent payment history through bank records to augment credit reports to demonstrate housing payments) are great, but we need to address deeper problems embedded[4]in the manner in which mortgage loans are granted to bridge the homeownership gap. We need to try out some big and bold ideas and perhaps reconsider the federal government’s role in the housing markets entirely[5].
The old enforcement playbook
Unfortunately, over at the CFPB and Justice Department, the predictable playbook says greater enforcement of fair lending against mortgage lenders is the ticket. But will these enforcement efforts lower the gap? Well, over 50 years of fair lending enforcement hasn’t led to racial housing equity or done anything to close the racial gap, which remains at over 30%. Still, mortgage lenders ignore the following Housing Wire headlines coming out of the MBA’s conference at their peril: Mortgage execs better prepare for redlining enforcement – HousingWire,New Director Rohit Chopra intends to hire 20-30 new fair lending and redlining enforcement staffers, and DOJ, OCC, CFPB pledge to combat “modern-day redlining” – HousingWire..
Again, fair lending enforcement, whether regulation by enforcement type “pushing the envelope” theories are offered or not, has not moved the needle on the racial homeownership gap in 50 years.[6]I think the arguments about whether racism by mortgage lenders is driving the homeownership gap are misplaced in these fair lending enforcement efforts.[7]My observation is that most mortgage lenders will crawl all over each other (especially when refinances dry up) to lend to qualified borrowers regardless of race. The problem is how “qualified” is determined and the lack of incentives to seek borrowers who are unlikely to qualify. CFPB’s and the Justice Department’s redoubled enforcement efforts and expanded interpretations, in my view, fail to address the primary source(s) of systemic discrimination[8]that perpetuate the housing gap.
Can the government solve this another way?
Despite being in conservatorship under federal government control for over a decade, the GSEs have continued to operate primarily with a profit motive and, in so doing, have returned billions of dollars to the US Treasury in a time of record deficits measured in the trillions. Yet, with the GSEs under full government control and with over 95% of all residential loans still subject to FHFA or HUD controlled guidelines, perhaps the federal government can help solve the problem of the racial homeownership gap by dramatically altering how it requires lenders to underwrite and service loans. Have we really thought through why the federal government is (still) in the mortgage business?
Presently, through the GSEs and Treasury purchases of housing debt, the federal government subsidizes the US housing market with cheap(er) interest rates for the conforming loans upon which the mortgage industry depends. The government’s role in housing finance is poorly understood by the popular press and, I suspect, most policymakers, but the net effect of the government’s involvement is to mostly subsidize housing for disproportionally white and upper middle-class borrowers. That same disproportionate group was granted forbearance for COVID-19’s impact by the government, unlike most renters (source of first time homebuyers) whose credit will suffer from failing to pay rent during the same period without the same grace. So, through the GSEs and other federal programs, the federal government is presently exacerbating the homeownership gap for would-be homeowners.
Idea: Change how we use credit scores
I’ll admit that I have a habit of offering novel ideas in these Musings that generally fail to resonate with policymakers. Take, for example, my idea for an LEP UDAAP safe harbor using the new price-based QM standard[9](since QM under that standard means the borrower wasn’t ripped off), or my idea to have a RESPA exemption for lender to lender referrals (because all lenders now are licensed/regulated just like real estate agents[10]were when RESPA was enacted)[11]. Yet, despite my dismal resonance record, I remain undaunted in quixotic creativity[12]and so submit another idea below to reduce the homeownership gap.
Specifically, why do we define a qualified borrower based on their past credit history? Remember, Rafiki in Disney’s The Lion Kingwhen he reminds Simba not be trapped by his past? Rafiki clubs Simba on the head and when Simba asks why he did that, Rafiki responds, “It doesn’t matter, it’s in the past.” To be clear, I’m not suggesting we club the industry over the head (see discussion above regarding fair lending enforcement). Rather, let’s create a lending program where we define the borrower’s qualifications based on capability to succeed (income, employment, stability, education etc.). Then let’s use that program to help borrowers who mismanaged their credit previously learn from the past how to be better credit managers and to ensure successful outcomes.[13]
Even setting aside all of the more valid reasons for credit score disparities[14], there is no question that credit scores disparately impact minorities contributing to the gap.[15] With my idea, however, credit scores would no longer be used to determine eligibility, but rather, would merely determine who needs help with managing their credit after closing. Loan pricing and different uses for government retained profits could be used to fund the costs of servicers providing that help as part of the servicer’s obligations post-closing…, or we can just keep clubbing some unfortunate members of the industry over the head.
[1]Not that there’s anything wrong with being a white guy or a brain surgeon, but I am sure those 3 women have a very different perspective they bring to their respective offices. (See e.g., https://mortgagemusings.com/f/edition-10-jerry-levy-and-perspectives-on-freedom-justice)
[2] I usually try to keep these Musings to about 2,000 words or less, so I am probably over my word limit as a result.
[3]Teresa is a personal friend who I have known since she was General Counsel of Sears Mortgage back in the early to mid 1990’s. We have both come a long way since then, but her star just keeps getting brighter.
[4]Some people might say that “deeper problems embedded” is another way of describing “systemic racism.”
[5]Congress had over 10 years to do something with the GSEs and housing policy and has utterly failed to move forward. There are limits on what can be done purely at the administrative level by government leaders such as the women noted in this blog, but that doesn’t mean that experiments can’t be played out locally to provide evidence for what might work on a broader scale.
[6]Perhaps punishment and scalps should be only the goal of enforcement, but we should be clear on why punishment is warranted when there appear to be no racial animus.
[7]Reminds me of Maslow’s Hammer, i.e., if the only tool you have is a hammer, everything looks like nail.
[8]I do not mean to ascribe any racist motivations in referring to “systemic racism” in this context. Rather, I am referring to neutral rules and processes (such as credit scores, pricing and eligibility requirements) that have a clear discriminatory impact.
[9]Non-mortgage industry readers have my most sincere apologies for not explaining all of these acronyms, but they are second nature to mortgage folks.
[10]Realtor to realtor referrals were exempted when RESPA was enacted in the 1970’s.
[11]The concerns I have about RESPA risk in wholesale lending continue to escalate with the latest announcements and developments occurring with the largest wholesalers. See e.g., Rocket Pro TPO rolling out several enhancements to its broker tech | National Mortgage News
[12]Faithful readers will recognize another alliterative effort in this sentence.
[13]Perhaps simply a required paycheck deduction akin to tax withholding would be sufficient to ensure mortgage payment discipline and mitigate risk of default.
[14]Education (financial and otherwise), poverty, family stability and wealth, trauma etc.
[15]See e.g., https://www.washingtonpost.com/business/2020/10/16/how-race-affects-your-credit-score/