Many factors contribute to the ongoing disparity in affordable homeownership, three of which we have highlighted in this week’s blog and in our new perspective, The Ongoing Challenges of Affordable Homeownership for Black and Minority Families and How the Capital Markets Can Help Reduce the Homeownership Gap, distributed earlier this week. They include the COVID-19 pandemic, refinancing opportunities, and property taxes.
COVID-19 Pandemic
The COVID-19 pandemic disproportionately impacted minority communities both as a disease and as a disruptive economic force. Minority borrowers bore the brunt of COVID-19’s impact on the mortgage market, according to a report by economists at the Federal Reserves (Fed) of Atlanta, Philadelphia, and Boston.1 Even before the pandemic, Black and Hispanic workers had substantially higher unemployment rates at every level of educational attainment than white workers. But the disparity widened in 2020 due to the pandemic and related shutdowns, only exasperating mortgage non-payments for these minority populations.2 Minority borrowers were much more likely to experience mortgage distress during the pandemic period, leading to significantly higher nonpayment and forbearance rates. Based on borrowers who were current on their mortgages as of February 2020, 15.6% of Black borrowers missed at least one payment by February 2021, compared with 6.5% of white borrowers. In addition, minority borrowers have accumulated less housing equity over time than white borrowers, which could lead to a higher risk of foreclosures when the pandemic’s forbearance plans wind down.3 Bottom line, COVID-19 deepened long-standing disparities in the housing market.
Refinancing Opportunities
Interest rates were at their lowest levels in 2020, leading many Americans to refinance their homes. Even with these low rates, only 6% of Black borrowers refinanced their mortgages and 9% of Hispanic borrowers versus 12% of white borrowers. Of an estimated $5.3 billion of savings for all households that refinanced during the 10-month period examined in the Fed report, only $198 million, or 3.7%, went to Black households.4 A Freddie Mac Research Note observed that, on average, homeowners who refinanced their 30-year fixed-rate mortgage in 2020 saved more than $2,800 dollars annually and reduced their interest rate by a full percentage point.5 However, even though a higher proportion of Black and Hispanic borrowers have a financial incentive to refinance, they refinance their mortgages at substantially lower levels than white borrowers.6 Higher unemployment rates and higher missed mortgage payments deemed a number of Black and Latino borrower’s ineligible to refinance. For those Black and minority borrowers who were able to refinance, historical discrimination in the financial system, such as redlining and being sub-prime loan victims in the 2000s, may have discouraged them from negotiating with their lender for a better mortgage rate. Additionally, limited education on refinancing may have contributed to minorities missing out on the opportunity.7
Property Taxes
There is evidence that the property tax system has favored those who are better off — and as a result, contributes to institutional racism. Since the 1970s, local officials have overvalued the lowest-priced homes relative to the highest-priced homes across the U.S.8 By inflating home valuations in lower-income, minority-majority neighborhoods, these households are responsible for paying higher property taxes. This increases the likelihood for low- and moderate-income (LMI) homeowners, most of whom are Black and minorities, to lose their homes due to late payments on taxes. Meanwhile, tax assessments in affluent areas have shown to undervalue homes, reducing taxes for higher-income homeowners.9 A 2020 report from the Washington Center for Equitable Growth found that relative to market value, assessed property values are significantly higher for minority residents nationwide. Within the same tax jurisdiction, the researchers found, Black and Hispanic residents on average bear a 10% to 13% higher property tax burden than white residents.10
Disparities in affordable homeownership stem from a variety of causes, including those mentioned in this blog. Impact investors can invest in products and strategies financing affordable housing initiatives, some of which are specifically intended to help minority borrowers. The need for affordable housing persists across the U.S. and impact investors can seek out opportunities to help in this effort. To learn about a new ETF helping affordable homeownership, click here.
1https://www.bostonfed.org/news-and-events/news/2021/06/minority-borrowers-bear-brunt-of-covid-19-impact-on-mortgage-market.aspx
2https://www.wsj.com/articles/disparity-in-jobless-rates-suggests-black-workers-face-slower-recovery-11606645801
3https://www.bostonfed.org/news-and-events/news/2021/06/minority-borrowers-bear-brunt-of-covid-19-impact-on-mortgage-market.aspx
4https://www.wsj.com/articles/millions-of-americans-refinanced-last-yearbut-fewer-black-and-latino-homeowners-did-11624440601?st=8jkis1w37vjpd9w&reflink=desktopwebshare_permalink
5 http://www.freddiemac.com/research/insight/20210305_refinance_trends.page
6 Ibid
7https://www.wsj.com/articles/millions-of-americans-refinanced-last-yearbut-fewer-black-and-latino-homeowners-did-11624440601?st=8jkis1w37vjpd9w&reflink=desktopwebshare_permalink
8https://www.bloomberg.com/news/features/2021-03-09/racial-inequality-broken-property-tax-system-blocks-black-wealth-building?srnd=premium&sref=lF6ZJI36
9 Ibid
10 https://equitablegrowth.org/working-papers/the-assessment-gap-racial-inequalities-in-property-taxation/