Black Communities Need a Small Dollar Mortgage Market. America Doesn’t Have One.
Homeownership is essential to community development and is the key to wealth building in our society. Unfortunately, our financial system does not support homeownership in low income areas. According to a report from the Urban Institute and the Chicago Fed, commercial banks seldom give mortgages to homes worth less than $70,000. Only around 25% of homes purchased worth $70,000 or less received a traditional mortgage. In contrast, close to 80% of homes worth between $70,000 and $150,000 were financed through a mortgage.
Banks choose not to provide this line of credit for a myriad of reasons. Conventional economic thought argues that banks are for-profit enterprises and do not see a high return on small dollar mortgages. The foreclosure crisis has also made banks more hesitant and regulators more stringent. However, economics doesn’t always tell the entire picture. Our financial system has a long history of neglecting communities of color. Not only do banks seldom lend to black communities, they fail to see their value.
The Brookings Institution recently found that homes of similar quality in majority black neighborhoods are worth 23% less than their white counterparts, even when controlling for amenities such as school quality and walkability. Across black majority neighborhoods, owner-occupied homes are undervalued by $48,000 per home on average, amounting to a cumulative loss in wealth of $156 billion dollars nationwide.
This devaluation of black neighborhoods impairs the development of rebuilding communities. In Detroit, only 1,072 mortgage loans were made in 2017. These mortgages went largely to wealthier areas of the city. 139 of 297 census tracts in the city of Detroit did not receive a single mortgage loan, and another 91 saw no more five. Only 9 census tracts of the 297 in Detroit saw 20 or more mortgages. For communities that are not part of the city’s strategic development plans, it is near impossible to get financing.
There is a real estate market in these neighborhoods. Most homes in low income Detroit neighborhoods are sold via cash transfer. However, Detroit’s housing stock has aged and many of these structures have sat vacant for years. Most are in need of repair. The Detroit Land Bank, the largest property owner in the city, makes these renovations a mandatory condition for any home purchase. Most people use equity within their own home to finance any renovation, but this is not an option for homebuyers. The lack of financial assistance in making these repairs prices out many potential homeowners from settling in the city of Detroit.
Community Development Financial Institutions are designed to fill in this credit gap. CDFIs offer credit to low and moderate income individuals when commercial banks do not. Local Initiatives Support Coalition, one of the largest CDFIs in the country, operates the Detroit 0% Home Repair Loans Program in partnership with the City of Detroit and Bank of America. There is a very high demand and a limited supply of this line of credit. CDFIs offer a valuable lifeline to individuals who are otherwise forgotten from the financial system.
In 1977, Congress passed the Community Reinvestment Act, giving banking institutions the affirmative obligation to provide credit access in the communities they serve. Many legislators believed banks held a responsibility to offer credit to the communities from which they collected deposits. Another goal of the law was to end redlining practices that excluded low income communities from credit access. Most banks satisfy their CRA requirements by investing in CDFIs, and commercial bank investment is a critical source of funding for CDFI loan funds. Still, our CDFIs face a shortage of available capital to lend to our hardest hit communities.
The CRA is regulated by the Federal Reserve, the OCC, and the FDIC. In response to the tragedies of 2020 disproportionately affecting the black community, these regulators have an important task of fostering greater social and economic justice. In addition to the recently published report detailing the lack of a small dollar mortgage market, the Chicago Fed held a symposium addressing the problem in South Bend, IN. In his plan for racial economic equity, Democratic nominee Joe Biden calls for significant investment in CDFIs and a revisit to CRA legislation.
In his Brookings Institution report, Andre Perry details that children who grow up in black communities devalued by our financial system face harsher life outcomes and a smaller chance of social mobility. Our country has a huge racial wealth gap, where for every dollar a white family has, a black family has six cents. Our financial system makes it even more difficult for black families to build wealth by excluding their neighborhoods from credit. This is the active legacy of racist policies. In order to correct this injustice, our government and our banks must create meaningful change in how they view black people and black land.
