Mel Evans/AP Photo
A key step toward racial equality is fixing a housing market that places obstacles in the way of minority homeownership.
Racial inequality in America starts with the home. The gap between white and Black homeownership rates today is the largest it has been since 1890. Because homeownership is perhaps the critical way in which Americans build wealth and transfer it to their children and grandchildren, the racial homeownership gap is a central component of the racial wealth gap. And because homeownership determines where we live, the homeownership gap also contributes to social segregation, which undermines social equality because differences in policing and all kinds of services directly relate to where people live.
Historically, federal housing policies played an important role in creating the homeownership gap. From the 1930s through the 1960s, the Federal Housing Administration refused to insure mortgages in predominantly Black neighborhoods, which made it difficult for Black buyers to get mortgages to buy homes. The effects of federal redlining are still discernible in the segregation patterns of major cities.
Federal redlining and other explicitly discriminatory policies ended with the Fair Housing Act of 1968, but today a supposedly neutral, but functionally discriminatory, federal policy undermines minority homeownership. Since 2007, the Federal Housing Finance Agency has required that Fannie Mae and Freddie Mac charge “loan-level pricing adjustments” (LLPAs) to lenders who sell them mortgages. This was intended to protect Fannie and Freddie from being stuck with ever-riskier loans from lenders, without being properly compensated for the danger.
LLPAs are fees that vary based on the borrower’s credit score, the mortgage type, and the down payment. These fees are substantial, as much as an additional 3.75 percent on a mortgage interest rate. Lenders completely pass through the LLPAs to borrowers in the form of higher mortgage interest rates, but because LLPAs are not separately broken out on lenders’ rate sheets, they are invisible to borrowers.
Because of LLPAs, even though mortgage rates are at historic lows—around 3 percent on average—many borrowers still have to pay more than twice that amount, if they can get a mortgage at all. Simply put, LLPAs are pricing many borrowers, disproportionately borrowers of color, out of the housing market. This is exacerbated by the recent ratcheting up of lending standards in response to the coronavirus crisis, which is now preventing access to mortgage markets for many first-time homebuyers.
There is no public data on the total amount of LLPAs charged, but Fannie and Freddie have purchased more than $11 trillion in mortgages since the LLPAs went into effect. Even if a small percentage of borrowers paid LLPAs, the total paid would be in the tens of billions. And even that would fail to account for those who put off a home purchase because the LLPA made the mortgage too expensive.
LLPAs may appear race-neutral, but their structure compounds existing racial wealth disparities. Because LLPAs are higher for low-down-payment mortgages, they fall more heavily on borrowers with less savings for a down payment. And because LLPAs are more costly for borrowers with worse credit scores, they fall disproportionately on those with low and moderate incomes, who are in turn disproportionately minorities. This creates a vicious circle: Because of the racial wealth gap, LLPAs are more likely to exacerbate the racial homeownership gap, which further reinforces the racial wealth gap.
In addition to this racial stratification, LLPAs actually undermine systemic stability in the housing system. The added charges mean that riskier borrowers get priced out of the market whenever the market is stressed. When this happens, there are fewer prospective homebuyers, which pushes down home prices across the spectrum. Therefore, LLPAs make the mortgage market more volatile, and more depressed during economic downturns. This affects everyone, not just risky borrowers. Moreover, because of the correlated nature of home prices, lenders respond to the risk of declining home prices by charging everyone higher interest rates. We are all in it together in the housing market.
LLPAs were a response to the rise of Wall Street securitization in the early 2000s, which forced Fannie and Freddie to lower their underwriting standards to compete for market share. It was worth protecting Fannie and Freddie at that time from losses generated through risky mortgages. But by 2008, the private securitization market was all but dead. Today, LLPAs are a solution to a problem that no longer exists.
It’s easy to ignore LLPAs as a wonky, technical detail in an obscure secondary market. The harm they do is not as visceral as that done by a police baton. Yet it is precisely this sort of functionally discriminatory pricing policy that forms the molecular structure of economic discrimination in America.
A key step toward racial equality is fixing the housing market. An impactful, concrete step that the federal government could take today to increase minority homeownership and decrease the racial wealth gap is to reform the LLPAs.
