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Don’t Diminish the Importance of Homeownership in CRA Reform

A significant reduction in attention paid to home mortgage lending on CRA exams would be neither economically efficient nor equitable.

Photo by American Advisors Group via flickr, CC BY-SA 2.0.

home with sold sign

home with sold sign

Photo by American Advisors Group via flickr, CC BY-SA 2.0

As the reform to the Community Reinvestment Act (CRA) enters its next phase with proposed changes to the regulation expected in late summer or early fall, we must all remind federal bank agencies not to diminish the importance of home mortgage lending in CRA exams.

Some industry stakeholders have suggested that because stagnant wages, the high cost of housing, and bottlenecks in housing supply have created significant barriers to homeownership, CRA exams should diminish their attention to home mortgage lending.

Some stakeholders would rather have CRA exams emphasize community development financing over traditional home mortgage lending. Community development financing supports affordable rental housing and economic development projects such as shopping centers. While community development financing is critical, CRA exams must maintain their current attention to home mortgage lending if our country wants to narrow the growing inequalities in wealth and income.

It would be economic suicide otherwise, because reducing CRA’s attention to home lending would result in less economic activity and reduced wealth building in low- and moderate-income (LMI) communities. Moreover, there is no objective reason to do this, as many banks continue to make significant volumes of safe and sound home mortgage loans.

The Office of the Comptroller of the Currency (OCC) issued an Advance Notice of Proposed Rulemaking (ANPR) last fall that asked a question about whether home mortgage lending should continue to be considered on CRA exams. For those of us in the community development field, the answer is yes.

CRA’s Original Intent

The original impetus for CRA was as an antidote to redlining—the systematic refusal of banks to extend loans in lower-income neighborhoods. This was prominent in the mind of CRA’s legislative architect, Sen. William Proxmire (D-WI), who, during CRA hearings in March of 1977, stated:

“When the committee did a survey of banking services here in Washington, we found one bank with a policy of making no home mortgage loans. This same bank was making a great volume of loans to the outside real estate interests of its own board. We found a savings and loan chartered in Washington with [ninety-nine] percent of its mortgage loans in the suburbs, and this story is repeated throughout the country.”

Sen. Proxmire was responding to generations of redlining practiced by both the public and private sectors. In fact, the Roosevelt Administration codified the practice of actively discouraging lending in lower-income and minority communities. More than 80 years ago, the Home Owners’ Loan Corporation (HOLC), a federal agency, created “Residential Security” maps of major American cities. These maps document how loan officers, appraisers, and real estate professionals evaluated mortgage lending risk during the era immediately before the surge of suburbanization in the 1950s. On these maps, neighborhoods considered high risk or “hazardous” were often outlined in red by lending institutions, denying them access to capital investment which could have improved the housing and economic opportunity of residents. Redlining buttressed the segregated structure of American cities. Most of the neighborhoods (74 percent) that the HOLC graded as high-risk or hazardous eight decades ago are low- and moderate-income (LMI) today. Additionally, most of the areas HOLC graded as hazardous then (nearly 64 percent) have populations that are predominantly of color today.

Rectifying Discrimination and Disparity in Wealth

A societal obligation remains to rectify the devastating impacts of redlining that persist as formidable handicaps to build equity and advance economically for large segments of the nation’s population. CRA is one of the best tools for fulfilling that obligation and promoting home mortgage lending to traditionally underserved populations.

A report released this spring and co-authored by Dedrick Asante-Muhammad, NCRC’s chief of Race, Wealth and Community, concluded that the largest barrier to wealth creation among people of color is the lack of inherited wealth. Homeownership across generations is a major means of passing along inheritances and people of color have had lagging homeownership rates. Moreover, the study reveals that median Black family wealth was $3,600 in 2018—2 percent of the median white family wealth of $147,000. The median Hispanic family holds assets of $6,600—4 percent of the median white family’s assets.

To compound matters, homeownership among African Americans has plummeted to its lowest level since the passage of the Fair Housing Act in 1968. In 2004, almost half of African Americans owned homes, which was one third less than whites. However, by 2017, the African American homeownership rate had fallen to 43.7 percent.

CRA Lending Boosts Homeownership

Now that we have established a societal obligation to increase home mortgage lending to modest-income communities and communities of color, the next question is whether CRA is an effective tool to help satisfy that obligation. In recent years, some very large banks have retreated from Federal Housing Administration (FHA) lending, which is effective in reaching minorities and LMI borrowers. In reaction to these trends, some stakeholders have suggested that banks should not be pressured to make home mortgage loans but instead should focus on serving LMI communities in other ways such as through increases in community development lending, including the financing of multifamily lending.

However, lowering expectations for bank home mortgage lending will merely reconfirm and reinforce trends of large banks’ retreat from mortgage lending. Instead, increasing expectations for performance in home mortgage lending will likely motivate some of them to return. For example, NCRC has successfully negotiated community benefits agreements with large banks that commit them to increase their home mortgage lending.

In addition, robust data analysis suggests that it is feasible to continue to expect a commitment from the banking industry to make home mortgage loans to LMI borrowers. NCRC has found that overall, a greater percentage of banks made a greater percentage of loans to LMI borrowers and census tracts than did non-banks and credit unions. While some large banks might be retreating from the FHA space, many others continue to make both FHA and non-FHA home mortgage loans to LMI borrowers and communities.

Federal Reserve research confirms that CRA has and can continue to promote home mortgage lending to LMI borrowers and communities. Federal Reserve economist Daniel Ringo found that when a census tract gained eligibility as a LMI tract due to a metropolitan area boundary change, lending by a single bank increased between 2 and 4 percent from 2003 to 2004. Also, bank lending increased further over time as banks intensified their efforts in these newly eligible LMI tracts. Similarly, Lei Ding and colleagues at the Philadelphia Federal Reserve Bank updated Ringo’s analysis and applied it to Philadelphia when the Office of Management and Budget changed metropolitan area boundaries in 2013. They concluded that when census tracts lose CRA eligibility because they are no longer considered LMI, the number of home purchase loans decreases between 10 and 20 percent. A decline of this magnitude can make the difference between a viable and an economically distressed neighborhood.

Impact of CRA Lending on Wealth Building

Surprisingly, the literature on the mortgage lending impact on equity building for LMI borrowers is scant. I had an opportunity a few years ago to conduct a report for MANNA, a nonprofit housing developer and counseling agency, on African-American and LMI borrowers equity-building from purchasing homes Manna developed.

The total equity accumulation for the 700 MANNA homeowners in the survey was $162 million and the median equity gain was $171,343. The great majority of these households had little or no wealth before buying their first home. Accumulating close to $200,000 in equity for the typical MANNA homeowner is a benefit that cannot be overstated. This equity can help finance college educations and/or be passed on to children. In addition, the homeownership was sustainable, and thus produced permanent wealth gains. Manna homeowners had a lower foreclosure rate than homeowners throughout the District of Columbia. The cumulative foreclosure rate for the city from 1995 through 2012 was 8.4 percent, in contrast to 3 percent for Manna’s homeowners.

Home mortgage lending will be more successful in LMI neighborhoods experiencing comprehensive revitalization through job creation and mixed-use development, so CRA exams need to evaluate community development financing as well as home mortgage lending. However, significantly diminishing the attention CRA exams place on home mortgage lending will impair revitalization initiatives because without some level of private homeownership, property appreciation will be stunted. Finally, the shortage of the supply of rental units, which drives up rental cost, is best addressed by helping tenants qualify for mortgage loans and buying homes.

How to Evaluate Home Mortgage Lending

Currently, CRA exams for large banks over $1 billion in assets have a lending test, an investment test, and a service test. The lending test is weighted at 50 percent, which means half of the CRA rating depends on this performance. Retail lending including home mortgage, small business, and sometimes consumer lending are integral parts of the lending test.

Not only must home mortgage lending remain a central part of the lending test, but the criteria used to evaluate it must be retained and slightly enhanced. Currently, a CRA exam will evaluate the percent of a bank’s loans to LMI borrowers and to LMI communities. Lending to LMI borrowers and communities must remain separate criteria in order to preserve opportunities for LMI borrowers and to prevent possible displacement associated with gentrification. If LMI borrowers and communities become one criterion on the CRA lending test, banks might be encouraged to focus on lending to middle- and upper-income borrowers in LMI neighborhoods.

In addition, another criterion of lending to economically distressed tracts should be added to the retail portion of the lending test. These would be census tracts that experience low levels of retail lending and/or experience higher levels of unemployment or poverty. By including this criterion on the lending test, CRA would encourage banks to make loans to populations with the least access to homeownership, including some communities of color, and would also relieve the pressure on LMI neighborhoods experiencing high levels of gentrification.

Don’t Turn Attention Away Now

A significant reduction in attention paid to home mortgage lending on CRA exams would not only excuse banks from an activity that they are perfectly capable of undertaking but also retard overall economic growth by denying wealth-building opportunities to populations experiencing neglect and/or discrimination. It would be neither economically efficient nor equitable.

A version of this post originally appeared on the NCRC blog.

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