Last year, millions of Americans who were either in or at-risk of foreclosure became the impetus for a hard-fought consumer victory. The historic Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant financial reform that Congress has passed in many years. Now, as regulators hammer out specific implementation of the bill, consumer and civil rights advocates are again fighting for the hopes of many low and moderate income families to fulfill their own American Dream of homeownership.
A key issue is a proposed down payment requirement on mortgages. Several federal financial regulators are calling for mandatory minimum down payments of 10-20 percent of a home purchase price and also barring borrowers who would be spending more than 28 percent of their income on their mortgage. Regulators claim these rules are necessary to produce quality loans. But they overlook the fact that the Dodd-Frank bill already includes safeguards to prevent a recurrence of reckless lending.
In fact, the proposed rules would impose arbitrary and unnecessary barriers to buying a home for creditworthy families, especially those in lower-wealth communities of color.
A new analysis by the Center for Responsible Lending reveals that if the government were to require a 10 percent down payment, it would take the average consumer 13 years to save the $25,995 required to purchase a median priced home of $173,300. And this estimate assumes a prospective homebuyer would devote all his/her savings to accumulating down payment while saving nothing for retirement, college or an emergency funding during this time.
When CRL examined the impact to communities of color, the figures were even more troubling. As both median Black and Latino-American earnings are less than those of the general population, the proposal to mandate higher home down payments would pose more severe challenges. Consumers of color planning to transition from renters to homeowners will face an almost insurmountable financial challenge, despite the continued drop in home prices.
Among renters of color, only 25 percent have more than $2,000 in cash assets. By comparison, white families have an average of $5,000 in cash savings. While the nation's median income is $49,777, the median gross income for African-American households is only $32,500.
If the proposed federal rules go into effect, it would take the average African-American household 19 years before amassing enough cash for a 10 percent down payment and closing costs; average Latino families would need 15 years.
This lengthy savings time poses a barrier that simply is not necessary for credit-worthy families. For every year that these same families continue to dedicate spending to rent that denies them any financial benefit, they could be building wealth instead through homeownership.
Although median income dropped for all Americans from 2000 to 2009, the sharpest drops in earnings occurred in communities of color. Real median income for Latinos dropped from more than $41,000 down to $38,000. For African-Americans, the decline was roughly $37,000 down to $32,500. During these same years, the nation's poverty rate rose. Today, an estimated one in four African-Americans and Latinos live in poverty.
If this nation allows policies to keep mortgages out of reach for qualified families, full economic recovery will remain out of reach for everyone. The mortgage market must expand ownership opportunities to spur sustainable economic growth.
The opportunity to reverse the ill-advised down payment requirements has a short opportunity to further mobilize opposition. The comment period for these proposed rules ends on August 1. Between now and this key date, more citizens and organizations should formally express their own opposition.
When we consider our nation's history – particularly the post-World War II economy -- much of the expansion of the nation's middle class was fueled by returning veterans who took advantage of federal home buying programs. In many cases, these homes were modest and newly-constructed tract homes that came to characterize suburbia.
Just as it took federal policy to successfully welcome home a nation's service men and women, it will take a renewed and balanced federal effort to ensure the American Dream continues for this and future generations.
Charlene Crowell is the Center for Responsible Lending's communications manager for state policy and outreach.