Many studies have investigated how disparities in homeownership rates among Black and Latino Americans, as compared with their white peers, contribute to the country’s broader racial wealth gap.
But new research finds that even among those Black and Latino Americans who are able to achieve homeownership, the return on their investment pales in comparison to that of white homeowners. And that can have serious implications for retirement and generational wealth for people of color.
A new working paper from researchers at the University of California, Berkeley, and the National Bureau of Economic Research found that Black homeowners’ returns are 3.7 percentage points lower than those of their white neighbors, while Hispanic homeowners see a 2-percentage-point gap in the return generated from owning a home.
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The cause for that difference, the paper’s authors say, is differences in distressed sales. Black and Hispanic homeowners were found to be more likely to experience a distressed sale — meaning either the home was repossessed and sold in a foreclosure by their lender, or it was sold via a short sale where the lender allows the owner to offload the home for an amount smaller than the size of the mortgage if they are delinquent on their payments.
“Black homeowners enjoy a return on their investment that’s 3.7 percentage points lower than that of their white neighbors.”
“Minority homeowners are substantially more illiquid and face more income instability than white homeowners,” the authors wrote in the working paper. “Moreover, controlling for liquid wealth and recent income shocks explains one-third of the raw black-white difference in mortgage delinquency, and nearly half of the Hispanic-white difference.”
Plus, even Black and Hispanic property owners who don’t face financial hardship themselves could feel the adverse effects of living in a neighborhood with a high prevalence of distressed sales that lead to large price discounts, the paper said. Homes sold via foreclosure or short sale are more likely to be bought by investors in general, but this is especially true of Black- and Hispanic-owned homes.
Furthermore, the report noted that Black and Hispanic homeowners who did enjoy a rapid pace of home-value appreciation did so because of gentrification. Within normal sales, Black homeowners typically see returns that are only slightly lower than those of white homeowners, while Hispanic homeowners actually experience a slightly better return.
That’s evidence, the authors wrote, that “homes owned by minorities appreciate at least as quickly as those owned by non-minorities.”
The role of loan modifications
The report’s findings are notable in light of the expected wave of homeowners exiting forbearance in the near future. Since the start of the pandemic, homeowners with federally backed mortgages were able to pause making their mortgage payments. As of Sept. 26, 2.89% of mortgagees nationwide were still in forbearance, equating to some 1.4 million homeowners, according to data from the Mortgage Bankers Association.
“This number is expected to drop sharply over the next few weeks as many are reaching the 18-month expiration point of their forbearance terms,” Mike Fratantoni, the chief economist for the Mortgage Bankers Association, said in a report released Monday afternoon. “Most borrowers exiting forbearance through a workout are opting for a deferral plan, which allows them to resume their original payment, while moving the forborne amount to the end of the loan.”
“Roughly 1.4 million homeowners are still skipping mortgage payments amid the pandemic.”
Loans insured by Ginnie Mae, which include Federal Housing Administration (FHA) and Veterans Affairs (VA) mortgages, were more likely to be in forbearance still. Because these loan programs have lower credit-score and down-payment requirements than mortgages backed by Fannie Mae
FNMA,
and Freddie Mac
FMCC,
they are more commonly used by homeowners of color.
This increased reliance on FHA loans is itself a reflection of the financial hardships many people of color face. Black and Latino Americans on average have lower incomes and credit scores due to systemic inequality, educational disparities and employment discrimination, which can make qualifying for mortgages difficult.
The new working paper suggested that loan modifications could serve as a short-term solution to reduce the frequency of distressed sales in Black and Hispanic communities, and thus increase their housing returns.
“Our findings suggest that policies that offer payment flexibility, and thus help minorities keep their homes when they become financially distressed, are important complements to policies that aim to narrow the wealth gap by promoting minority homeownership,” the authors wrote.
Thus far, most homeowners who have exited forbearance have managed to secure a loan modification from their lender, which allows them to lengthen the mortgage’s term or to reduce the size of the monthly payments in order to be able to still afford to stay in their homes.
The success of these exits from forbearance could serve as proof of the effectiveness of modifications in preserving homeownership and housing wealth across the country.
However, the new study’s authors contend that in the long term, other changes are necessary to close the housing wealth gap fully.
“Since higher rates of illiquidity and income instability underlie higher rates of distressed home sales among minorities, fully closing the gap likely requires addressing labor market disparities,” they wrote.