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Zero-down payment loans to close the racial homeownership gap: What you need to know

AYESHA RASCOE, HOST:

You may have seen those sky high home prices in your area take a small dip over the last month. But overall, prices still remain unaffordable for many, and mortgage rates have almost doubled, which makes the goal of owning a home out of reach for many first time Black and Hispanic families. But recently, banks have begun offering mortgages that aim to close the growing racial homeownership gap for those who have faced a long history of discrimination in the housing market. Last week, Bank of America announced new zero down payment loans for first time homebuyers in predominantly Black and Hispanic neighborhoods. Those loans include grants of up to $15,000. JP Morgan Chase and TD Bank offer similar loans with grants of $5,000. And so far, we've seen a lot of questions and skepticism. We're joined now by Vanessa Perry, nonresident fellow at the Urban Institute Housing Finance Policy Center. Welcome.

VANESSA PERRY: Thank you. I'm delighted to be here.

RASCOE: A lot of people, though, you know, hearing about these loans and I've seen some things on social media, they bring up the 2008 financial crisis and they have some concerns. How will these loans be different?

PERRY: I think it makes sense to think back to the 2008 crisis because it's relevant. We did find ourselves in a situation where there were products that featured low down payments and other kinds of arrangements that turned out to be predatory and damaging for the market. What we've learned as an industry is, certainly from the regulatory perspective, a great deal since that crisis. And so we know how to prevent a remix of those kinds of concerns. In these loans, these are probably going to be relatively small scale programs. They're only offered in certain areas.

RASCOE: So my understanding is that there's zero down payments, but what they're going to do is give them grants. And these are grants that would not have to be paid back. Is that the case?

PERRY: That is my understanding that they are grants and so they wouldn't have to be paid back, which is great. It means that the borrowers start out with more equity than they would have otherwise.

RASCOE: Technically anyone can apply of any race, it's just, it's based on the area that they're buying into that the area is predominantly Black or Hispanic. Does that lead to a concern about gentrification?

PERRY: Absolutely. I mean, gentrification is always a concern when you do place-based kinds of targeting by itself. It's a great product. It doesn't have any mortgage insurance. And so anybody that can, that has interest in moving into these areas, my guess would jump in there and try to get access to these products.

RASCOE: Well, it sounds like that would be the opposite of what theoretically these programs are supposed to be doing, which is helping first time Black and Hispanic homebuyers who have been historically shut out of the market. Like, what other concerns do you have now about banks offering loans like this?

PERRY: My biggest concern is how much it costs. What I'm curious about is how these rates compare to other products that are on the market. So, for example, there are other loan programs offered by Freddie Mac and Fannie Mae, and those programs charge loan level pricing adjustments.

RASCOE: They charge higher interest rates to offset the other guidelines. Is that what you mean?

PERRY: Absolutely. They charge higher interest rates in order to compensate for the fact that they've had to waive some of their traditional underwriting requirements. Say you're allowing people to put down lower down payments or they're allowing borrowers to have lower FICO scores. It's not a huge premium necessarily. But for borrowers who are on the margin of just barely able to afford a loan, these additional charges can be prohibitive. Any mortgage where the down payment is lower than 20% - and there are some exceptions to that - but historically it was 20%, the borrower had to pay mortgage insurance. Either mortgage insurance that's provided by the government through FHA or VA or private mortgage insurance.

RASCOE: There has been a growing gap between home ownership along racial lines. I guess are you hopeful that these programs may at least make a dent in the issue? Or should there be other policies or programs to actually, you know, help address this issue?

PERRY: I think so. I am excited about this product and others because they finally address the real underlying barriers, at least some of them, which have to do with down payment and credit requirements. That said, we still have a problem of super high house prices. They are so high that this amount of down payment assistance is not necessarily going to move the needle significantly. The reason why house prices are so high, one has to do with sort of investor activity. But the other has to do with the fact that there's just not enough supply of affordable units. For as long as that is the case, there will still be a significant share of Black and Hispanic households that will not be able to afford to enter homeownership.

RASCOE: That's Vanessa Perry of the Urban Institute and also a professor at George Washington University. Thank you so very much for joining us.

PERRY: Thank you.

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RASCOE: A Bank of America spokesperson said that the loans would be offered at fixed market rates that may adjust with market conditions. Transcript provided by NPR, Copyright NPR.

Ayesha Rascoe is a White House correspondent for NPR. She is currently covering her third presidential administration. Rascoe's White House coverage has included a number of high profile foreign trips, including President Trump's 2019 summit with North Korean leader Kim Jong Un in Hanoi, Vietnam, and President Obama's final NATO summit in Warsaw, Poland in 2016. As a part of the White House team, she's also a regular on the NPR Politics Podcast.