Richard Ferguson: What We Can Do to Help Close the Homeownership Wealth Gap

Richard Ferguson is president of CBC Mortgage Agency, South Jordan, Utah, a nationally chartered housing finance agency and a leading source of down payment assistance that helps low-income consumers, often in minority neighborhoods, achieve homeownership. He can be reached at richard.ferguson@chenoafund.org.

The nation’s growing spotlight on racial inequities has been impossible to ignore. One of the biggest inequities is the wealth gap that exists between white and minority households. And one of the starkest reminders of this gap is the fact that Black and Hispanic homeownership rates are significantly below that of white households.

But even when minorities do become homeowners, research shows that homeownership delivers fewer benefits than it does for white families—including significantly less home equity. Yet there are steps we as an industry can take toward leveling the playing field.  

How Homeownership Benefits Are Different for Minorities

Financially, the biggest advantage of homeownership is the accumulation of home equity. In fact, according to the U.S. Census Bureau, home equity is the top source of the average household’s net worth. When homeowners have equity in their homes, it opens up other opportunities not available to renters – such as the ability to pay for home improvements that enhance a property’s value, pay for a child’s college education, or invest in a second home or rental property.

On average, however, minority homeowners have less equity in their homes than whites. In fact, according to research gathered by the Urban Institute, the median home equity of Black households is $60,000, which is about half of the $118,000 median equity of white households. Meanwhile, the median equity of Hispanic households is $74,000, about 63 percent that of white households.

The impact of this disparity is that minorities have dramatically less wealth to tap into, a situation examined in the Urban Institute’s August research report, “Before the Pandemic, Homeowners of Color Faced Structural Barriers to the Benefits of Homeownership.” The report found that one of the primary factors behind lower home equity among minority households was that minorities had higher loan-to-value (LTV) levels—and thus more mortgage debt—than white households.   

Another major factor behind the home equity gap is that typical property values of minority homeowners are considerably less than their white counterparts. According to the report, in 2018, the median value of homes owned by white households was $220,000, while the median value of Hispanic-owned homes was $200,000 and $155,000 for Black households. In addition, more white households own their homes outright compared to minorities. According to the 2018 American Community Survey, 61 percent of white homeowners have mortgages, compared to 67 percent of Black homeowners and 66 percent of Hispanic homeowners.

These numbers, of course, predate the COVID-19 pandemic. But there is evidence that the economic crisis fueled by the pandemic has worsened the impact of the wealth gap between minority and white households. According to the Urban Institute report, minorities who have less equity in their homes are less able to weather the financial crisis. In fact, before the pandemic, many Black homeowners still had not recovered from the Great Recession and still had a negative equity level in their homes.

Improving Minority Home Equity and Sustaining Homeownership

While it’s true that minority households haven’t been able to achieve the same benefits from homeownership as whites, according to the Urban Institute’s report, there are several ways to help turn this situation around. Two methods in particular are within our industry’s power to do something about.

According to the report, minorities have less access to familial wealth than their white counterparts. For example, according to Federal Reserve Board statistics, white families have a median net worth that is eight times higher than Hispanic families and almost 10 times higher than African American families. Because of this, the report says, expanding down payment assistance programs is key to helping minorities access the benefits from owning a home.

Coming up with a down payment remains one of the biggest hurdles minorities face when buying a home. On the other hand, robust down payment assistance programs have been proven to help minorities who would otherwise struggle to clear the down payment barrier to get into homes and start generating wealth of their own. But down payment assistance programs also do much more.

Without down payment help, many first-time minority homebuyers are forced to use most if not all of their savings to get a mortgage. Even when they are able to save up for a down payment, buying a home often erases their entire liquid assets, placing them in a precarious financial position. Accessing down payment assistance, on the other hand, enables minority homebuyers to hang onto their savings for emergencies or critical home repairs, which could otherwise wipe them out financially.

The Importance of Pre- and Post-Purchase Counseling

On that note, minority homebuyers – like all first-time buyers – are frequently shocked at the amount of money it takes to maintain homeownership. On average, however, minority families have much tighter budgets than white households, in addition to less home equity because of higher LTV ratios. So when those unexpected costs and repairs arrive, they are at greater risk at falling behind financially and not making mortgage payments.

According to the Urban Institute report, strengthening pre-purchase and post-purchase counseling programs can be of enormous benefit to first-time minority homeowners as well. Before buying a home, for instance, pre-purchase counseling can help minorities understand and prepare for all the additional costs that come with owning a home, so they are better able to sustain homeownership.

Post-purchase counseling is equally important, even more so in the current COVID-19 environment. As just one example, my company, CBC Mortgage Agency, has partnered with Money Management International (MMI), a HUD-approved, nonprofit credit counseling organization, to lead our post-purchase Borrower Success Program, which helps borrowers transition from being renters to homeowners. This counseling consists of monthly check-ins with the borrower by phone, email and text to assess their situations and provide help should needs arise. Since a majority of our borrowers are minorities, first-generation homeowners of color have been the primary beneficiaries of this program.

When the pandemic hit, MMI began reaching out to all borrowers of our down payment assistance programs to provide counseling and advice designed to help them better manage their finances during the crisis and improve their ability to build home equity.  We also made the decision to extend our counseling for borrowers from one year to 18 months, so that our customers would be better able to navigate any financial hardships created by the pandemic. These counseling services are provided at no cost to our borrowers. Clearly, the challenges minorities face when it comes to building wealth do not stop after they become homeowners. But expanding access to down payment assistance programs and enhancing pre- and post-purchase counseling to minority homeowners can make a real difference. And if we truly believe in helping people enjoy the fruits of homeownership, they deserve our support.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)