PolicyCast: Solutions for Minority Homeownership

Kirk Willison  00:00:04   On our most recent Arch Mortgage Insurance Policy Cast, the Urban Institute’s Alanna McCargo described a plethora of obstacles standing in the way of more Blacks and Hispanics becoming homeowners. For our fifth episode, Alanna is back with us for part two of our look at minority homeownership, potential solutions to the problem. Welcome back to the Policy Cast Alanna. Thank you very much for joining me again today. On the previous episode of Policy Cast, we discussed the barriers to minority homeownership and you talked about just an array of burdens. There’s income inequality, there’s just a history of racial bias and now, over the last two decades, we’ve had a great recession and a pandemic currently that’s really taking a toll on increasing minority homeownership. I hope today we can end on a more optimistic note. You’ve written about a five point strategy at the Urban Institute to address these. Would you walk us through those?

Alanna McCargo  00:01:13   Thanks again for continuing to talk about this important issue. We did do a big brief, and we’ve done a body of work at the Urban Institute over the last couple of years around reducing the Black homeownership gap specifically. We’ve also looked pretty intently at the Hispanic homeownership gap as well, because that is also an area of concern. So these racial homeownership gaps persist and with Ed Golding, who’s now at MIT and my colleague Jung Choi, we wrote a paper. It was a foundational piece that really stemmed from a series of conversations we have with major stakeholders called Building Black Homeownership Bridges, it’s a five point framework for reducing the Black homeownership gap. The five point framework, it’s pretty simple. It’s basically looking at a framework that is grounded in five principles, and there’s a lot of depth underneath each one of those pillars. And it really all stems from evidence and information that we have been studying on this topic to really try to understand what the deep systemic and structural barriers are and how we might be able to break through. So I’ll start, I’ll just kind of rattle them off. And then I think throughout this conversation, we can talk more deeply about probably each of them in some way. One of the first pieces of the five point framework is to not only think about federal intervention and federal policy, but to advance policy solutions at the local level state and local laws that pertain to housing policy are truly unique. And depending on the jurisdiction that you’re in and also have a big role to play in terms of what happens at the local level. So we do have to look at things from a local, as well as what’s happening at the federal lens and do a lot more to try to align those things towards advancing equity. The second piece is tackling housing supply constraints and housing affordability. We know that our nation’s housing stock is growing older. We have not had enough new construction at the affordable level over the last decade and our housing supply needs are great. So there’s a lot of opportunity on the housing supply front. We have to think about property in place as part of any solutions for reducing these homeownership gaps. Third is accelerating outreach and counseling for renters and mortgage ready millennials. And what we mean by mortgage ready millennials is essentially people who are now renters, probably in high cost markets who have the income and the credit scores and the wherewithal to be, you know, great potential homeowners and potentially buy homes. And so we really need to be able to figure out how to reach those people, and also to sort of explore some of the barriers they may have, mental barriers in some cases that they don’t want to be homeowners because of a lot of legacy issues that they’ve seen and really kind of do that outreach and educate people and equip them with the knowledge they need. The fourth is all about what I do kind of all day and what you’re in the business you’re in, which is promoting a more equitable and accessible housing finance system. And that really means looking at the whole of our systems that support access to credit for people of color looking at Fannie Mae and Freddie Mac, looking at the role of the Government through the FHA, VA and USDA programs looking at disaster relief and housing programs that come through the SBA. We’ve got a whole host of federal agencies that touch housing in different ways. And these are really important for access to housing, as well as sustainability, but what those agencies are doing, and I think a lot more coordination there and the promotion of more equity in those spaces is really key. And we’ll talk more about that. And then the final is just sustainability. And I harp on sustainability a lot. We talk often a lot because we’re, you know, a lot of people that are watching this are in the business and we’re interested in seeing new homeowners come in and creating new business opportunities. But when you think about housing, as you know, and homeownership opportunities, getting people into the home is, you know, one step and it’s a short part of the process. It’s the long game that really matters.

Kirk Willison   00:05:40    There are many reasons for the nation to be concerned about this issue, but even on just a pure business sense, doesn’t it make a lot of sense for the housing finance industry to really try to solve these problems?

Alanna McCargo   00:05:54    Yes, it always has, right. And solve them in ways that are safe and also consumer friendly. And, you know, there was a big boom as you know, back in the nineties, and you know, big, you know, fill the homeownership gap, close the gap. First time home buyers, you had, you know, presidential mandates coming out of the Bush administration and the Clinton administration. So there was a lot of focus at the highest levels of our government, and that really led to market activity and people trying to figure out ways and new products and all of that. But what happened as we all know, in the crisis was just that went a little too far. Risk management fell by the wayside, and really horrible products were being originated and people were hurt by that. And so I think it’s important to do this, and again, we can do it in a way that’s safe and we also just need to sort of revisit and relook at all of the systems and structures that support housing finance, and find ways, understand where there are biases and issues that need to be addressed that will help us to kind of get over some of those barriers in the future.

Kirk Willison   00:07:01    It would probably be easy for the two of us to have a conversation, an entire show on each of the five topics. But for today let’s dig into just a few of them. Let’s start with housing supply. We have seen increasing demand, but we are not seeing an increase in supply, and in fact, there’s been a contraction in many places. Can you talk about some things that policymakers might do to address this, or what may be being done already in some areas?

Alanna McCargo   00:07:37   As I mentioned, our nation’s housing supply, it’s aging. So Laurie Goodman on my team, she did a study last year and we actually have an entire housing supply chart book, as an aside that you can type up Urban Institute, housing supply chart book and you’ll see an entire book full of information about what’s happening with our nation’s housing supply. One of the things Laurie, you know, looked at was, you know, on average, our housing stock is 45 years old. The majority of our specialty on the East Coast, our housing stock is incredibly old and a lot of our naturally occurring affordable housing in this country is much older housing. We know that we’ve had an insufficient amount of new construction at the affordable level. And that is a problem that has caught up to us. And there are a lot of people that are looking at different ways to try to accelerate, whether it’s townhome construction or some of the more affordable housing types, but also looking at alternative housing types to our traditional construction. So I’ll mention things like manufactured housing, and there’s a whole boom of discussions happening in localities all around the country, around accessory dwelling units as an affordable housing type. So looking at ways to develop new homeownership and rental opportunities at the affordable level, traditional ways have become very, very expensive as you know, in the construction business, whether it’s, you know, lumber labor, things are just very costly. Yes, it costs a lot of money to build a house. And so that means it’s going to cost a lot for someone to get into it. And also,I want to mention in a lot of the places, especially since we’re talking about this along racial lines, you know, looking at it through a race dimension, a lot of places where Black and Hispanic families live are older cities with older housing stock. Some of it is dilapidated, think about places like Detroit. But even in places like Louisville, Kentucky, and Pittsburgh and other cities where there is affordable housing for sale, those places need repair. So preservation strategies thinking about how you can get in and renovate and retrofit housing, make it more energy efficient and more sustainable. All of those things are things that cities and states need to be thinking about when they’re kind of dealing with and trying to grapple with it. You’re not going to construct your way out of our housing supply challenge. We were just net. We just do not have enough housing and we’ve got to, it’s constructing our way through. It is not going to be the answer, it’s going to be looking at these new innovations and housing supply. It’s going to be looking at options like manufactured housing and the like, and it’s also gonna involve a lot of renovation, retrofit and rehab of existing properties to get them, you know, continue to keep them affordable, find ways to keep them affordable and find ways to make them available to people to buy.

Kirk Willison   00:10:46    I think Zillow recently said that 5 million homes after the great recession were taking essentially off the market for sale and converted into single family rental. How can policymakers address that type of issue?

Alanna McCargo   00:11:00   So that’s a big concern and actually we’re in a pandemic right now. I mean, that’s what we’re talking on the backdrop of COVID-19 and a real situation where people are losing their homes or at risk of losing their homes, going into forbearance, unable to pay. And we may see foreclosures in the future. So this idea that, you know, coming out of the last crisis, a lot of people who lost their homes to foreclosure those same homes ended up being bought by investors. And now our rental properties, a lot of people who lost their homes during the last crisis ended up becoming single family renters so that their families could stay in certain neighborhoods and schools and things like that. That is a big concern. If you think about that, I mean, it’s one of the things from the last crisis that we, it all happened very real time. We did not have as much single family rental. I mean, the single rental market has boomed since the last crisis. A huge number of renters now live in single family properties. It’s very attractive. You get more square footage, it’s very affordable. You can pick your communities a little bit more. So it’s an opportunity that I think a lot more families that are renting and choose to rent are looking at all that to be all that said, as we face this pandemic and the future potential outcomes, as we have, you know, millions of people that are currently in forbearance and a lot millions of people that are currently delinquent on their mortgages. If that does become more of a foreclosure crisis next year, and those people, you know, people are gonna lose their homes. And I do think that it’s smart for us to think about and get ahead of who will replace those lost homeowners and really do some things to ensure that, especially in highly concentrated ways, like a lot of things that we saw, you know, in the last crisis, there were huge neighborhoods in Atlanta and other cities around the country where the whole block became single family rental. It completely changed the whole dynamic of that neighborhood. And that has continued to be the case. And so I think, I do think that cities, I know California just passed a bill around investors, buying properties in bulk that were, that are distressed properties for single family rental purposes. And there’s a lot of work that can be done at the local level here as well, in terms of, you know, engaging nonprofits, community development, corporations, and other kind of local community-based organizations to help transition people out if they have to move and people are going to have to move, that’s just a fact, but ensure that hose properties can maintain their affordability and they put back in the hands of another homeowner.

Kirk Willison   00:13:44    Much of housing stock is locally controlled, looking on a federal basis, so on a national basis, are there thoughts, or do you have any ideas about housing as infrastructure? If we were to do a major infrastructure package?

Alanna McCargo   00:14:02    I mean, I do. I think there’s a lot of opportunity and I like the direction that conversation has gone, although it hasn’t really materialized yet, but I do think that the idea, I’ll just say this, I believe housing is infrastructure. It is the most critical infrastructure for people in this country. It’s as important as a road. We have roads because we have houses. So I think it’s important that we think about where there are massive investments in infrastructure that we start to treat and think about. And this goes back to what I was saying earlier, our housing stock is old, our roads are old, our bridges are old. And this is an opportunity I think, for jobs creation as well, putting ourselves back into a process of thinking about the future and thinking about how we can rebuild our critical infrastructure, and also do it in a way that considers the environment and considers energy efficiency and taking out costs for energy and things that are really expensive that make the overall ability to, you know, your homeownership options and rental options, even more affordable. If you can take out costs from your utilities, for example. So I do think that there’s a real window of opportunity, especially in infrastructure, but also as we think about climate change and energy efficiency and all of the things, you know, that are being discussed, green housing, green homes, all of those are opportunities, I think for the housing market to be integrated into, and it is also a really, really good way to get in critically needed investment capital and dollars directed towards cities, particularly our older cities with older housing stock. And a lot of places are also looking at how you might tear down an old commercial space or a warehouse and, you know, and create or essentially transition from a commercial use land use to residential. There’s a lot of opportunity for that. Especially again, we’re in a pandemic and everybody’s working from home and businesses are empty and a lot of commercial space is going to be, I think on the block in the future, and I think it’s going to be an important opportunity for the housing markets to really look at how might we be able to transition some of that to homeownership opportunity.

Kirk Willison   00:16:29    Let talk a little bit about the second part of this same goal, and that is the finance challenges. Now there’s a ton of issues out there, but I’d love for you to spend a few moments telling us about what you’re doing and Louisville from a very innovative standpoint.

Alanna McCargo  00:16:44    In Louisville, Kentucky, we’re doing a demonstration project called we call it the Micro Mortgage Project. We are essentially looking at small loans at scale in Louisville that would allow, it really takes out a number of the costs that are go into origination of a mortgage. And so we have reduced the appraisal by doing automated valuations. So we’ve removed that cost. We have streamlined the title process. There’s a whole host of things. It’s a hundred percent financing. It’s an opportunity for people that are very low income and low income to get into homeownership and start to build wealth. And as I mentioned earlier, the lowest home prices are accelerating the fastest, right, or the lowest cost homes are accelerating the fastest. So we’re seeing home price increases go up for the lowest cost part of the market. So this opportunity is, you know, it’s fading fast in terms of how many properties are available for sale at that level. But I think it’s really important to understand that a lot of people at the low end of the market, a lot of those properties are being bought by investors and rented out to people for two times more than what they could potentially buy them for. And the reason for that is because the financing is not readily available for these households. And a lot of these communities are Black neighborhoods. There’s a whole lot of work that’s been going on by colleagues at Brookings Institute, for example, that are looking at the devaluation of Black neighborhoods and Black assets and properties. So these lower cost homes are, you know, there’s a direct connection to the, kind of, to the racial homeownership gap as well. And making the financing available to purchase these homes is going to be a really critical piece of solving for the racial homeownership gap we think. And we’re testing all that out now in Louisville.

Kirk Willison   00:18:37    Well, good luck to you. Do you think if it’s successful there, that it might be able to spread to other cities?

Alanna McCargo  00:18:41   We’re hopeful, we’ve built it such that it can scale to other places. And we are working with a local community development financial institution, CDFI in Kentucky, who has a footprint in other states. And so our hope is to, as we roll out the product to roll it out in other low cost markets around the country, and also to add to it a really necessary component, again, this goes back to our housing supply, chat earlier, but a really important piece of this is the renovation rehab piece with purchase, because a lot of these homes are older. If you find, you know, a $50,000 home in Louisville probably needs a little work and $80,000 home in Louisville probably had an investor in it that did some work to it. So it’s completely, it’s a nice house, but you may want to do a little bit, it may need a little bit more. So this ability to give a little bit more of it’s $10,000 or whatever towards renovation and some upgrades to the home at purchase that would go a long way for some of these really low cost houses, it would also help renovating and kind of revitalizing those communities that those homes are in as well.

Kirk Willison   00:19:52    Well, it’s a natural segue to your topic of strengthening government mortgage programs. Fannie Mae, Freddie Mac, FHA, VA, USDA, you mentioned. What are your thoughts on that? We seem to constantly be in a situation where folks want to reform the housing finance system. How does this play into making homeownership more affordable for people?

Alanna McCargo  00:20:18    It’s a huge part of this. I mean, a lot of the lending that goes on every single day in this country is backed by one of those governmental organizations you just mentioned and quasi governmental. We know that FHA, the Federal Housing Administration through HUD and the veterans program, housing programs disproportionately are the way that Black and Hispanic families get access to credit. And that’s where their mortgage has come from. Conventional lending does not support African-American and Hispanic households as well. And I think there’s a lot we could be doing and thinking about in terms of how we have this sort of bifurcation that just happens. And I think there’s a lot of reasons why it’s happening. Some of them are structural. Some of them have just historic legacy issues. And I, you know, I think it’s really important that we have a system conventional, FHA, USDA, VA all have their purpose, and I think it’s important that we really level the playing field quite a bit in the housing finance structure that we have in this country. I think there’s a lot of opportunities in places where we can push. I think part of it is just sort of what’s the mission, what’s the purpose. It is more expensive to get an FHA loan for a borrower. FHA, for example, has life of loan, mortgage insurance. So no matter what your LTV is, you’re paying life of loan if you’re going to be in that loan, that’s expensive. The cost of homeownership are higher if you’re Black and Hispanic, because of some of these different kinds of structures. And it’s really important that we start to unpack that, my colleagues at Golden and MIT and some of my colleagues here at Urban did a recent paper on the user cost of homeownership. And this is a real driver of why wealth does not accrue through homeownership, equitably for Black and Brown families, as it does for white families.

Kirk Willison   00:22:25    Last question Alanna. You were in an elevator with the housing policy maker and you have 30 seconds to provide two recommendations before you reach your floor. What are you going to tell him or her?

Alanna McCargo   00:22:37    I would say, we need to get relief to people. People are struggling, but also, you know, I guess just looking longer term and looking ahead, we’ve been talking about this concept, a lot of race conscious policy making. And I think that we’ve, you know, since the horrible sort of racial justice issues that we’ve seen with George Floyd and what we’ve all endured through this last period, there has been an awakening and eye opening of, you know, of people talking about how in their business and in what they control, how to start looking at things through a racial equity lens and what things might, I need to change in my business or in my policies to consider the potential unintended consequences that what I’m doing is having on certain populations.

Kirk Willison   00:23:36   This is great. Thank you very much for outlining some potential solutions. You’ve shown that there is a light at the end of the tunnel, if we’re willing to take the hard steps to get there.

Alanna McCargo   00:23:47    Not easy by any stretch, not easy at all, but I think that there’s a lot of opportunity and frankly, it’s going to take partnering. It’s going to take us working together across, you know, across the industry, a lot of collaboration and the commitment to breaking down these walls. And I think if we continue to be focused there, a lot of good things can happen in the future.