The homeownership boom that began in the mid-1990s was remarkable for its depth and breadth, but these gains were not evenly shared. Even in the mid-1990s, there was growing concern about the significant gaps between the homeownership rates of racial/ethnic minorities and non- Hispanic whites. Census Bureau figures for 1995 indicated that the homeownership rate was only 42.9 percent among African-American households and 42.0 percent among Hispanic households, nearly 30 percentage points lower than that of non-Hispanic whites. The housing boom did little to change this disparity - the gap in homeownership rates between the minority households and non-Hispanic whites narrowed by about 7 percentage points as policymakers failed to confront the underlying structural factors-growing income inequality and the vestiges of discrimination- perpetuating the gap.
The Harvard Joint Center of Housing Studies recently released a study on the impact of the housing crisis on low-income and minority communities and what can be done to improve their access to mortgage credit going forward. The paper, Getting on the Right Track: Improving Low-Income and Minority Access to Mortgage Credit after the Housing Bust looks at some factors, particularly leading up to the crash, that are not normally brought forward in the seeming endless discussions of the topic, or at least not in quite the same way.
Expansion of homeownership opportunities has been viewed as an important step in reducing inequality in the distribution of income and wealth, but the study says what actually fueled the growth of lower-income and minority lending was a bank/non-bank dual mortgage delivery system. Low income and minority borrowers were targeted by different types of lenders and steered to a different mix of products than commonly found in higher-income markets; products that typically had higher interest rates and less favorable terms than the conventional prime loans available in the mainstream market.
These loans were highly profitable for both primary and secondary market participants, prompting a surge in private label asset-backed securities (PLS) which opened the door to mass securitization of nontraditional mortgage products. Particularly in the case of nonprime residential mortgages, the PLS market suffered from weaker lending standards and more limited counterparty controls and loans were sold to investors that, unless they had capital requirements, did not have to hold any particular level of funds to cover losses.
When house price appreciation slowed and mortgage defaults mounted the collapse of the PLS market triggered a mortgage market meltdown that rocked the world. The resulting constriction of mortgage credit and the mounting wave of foreclosures quickly eliminated the homeownership gains achieved earlier in the decade and bought widespread devastation to the many lower-income and minority communities where subprime lending had been concentrated.
Despite the view of homeownership as the American dream, its direct and indirect contribution to numerous positive outcomes and that it can enable a household to secure decent housing for a relatively low monthly payment, homeownership is not necessarily the best choice for all individuals and families at all times and many households fail to weigh the benefits and costs of ownership. For example, a basic tenet of financial management is that families should diversify their assets; homeownership does the exact opposite by concentrating assets into the purchase of a home while putting the homeowner into a highly leveraged position which could magnify the risk of price declines.
While the paper is a comprehensive account of the growth of the housing boom, and interweaves narratives of how seemingly unrelated actions on the part of all market participants were interwoven into what was finally a devastating collapse. The paper is long but worth attention.
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