Does Affirmative Action in Mortgage Lending Really Help Black Americans?

N o one should be surprised that the secondary-mortgage giant Fannie Mae has announced an explicitly race-conscious approach to its business. What might be termed affirmative action for housing — including support for low-down-payment mortgages — clearly has advocates in the Biden administration. Fannie’s regulator, the Federal Housing Finance Agency, has explicitly pushed for such an approach, urging Fannie and its bond-market cousin Freddie Mac to “promote sustainable homeownership and rental housing opportunities for traditionally underserved Black and Latino communities nationwide.” The Federal Reserve governor responsible for bank regulation, Lael Brainerd, has set the same tone, stressing that regulated banks “must address systemic inequities in access to credit and financial services for (low-and moderate income), minority individuals and communities.” Or, as Fannie has put it, “the initial focus of our Plan will be on the needs of Black homeowners and renters.”

The potential for taxpayer exposure to loans made for less-than-financially sound reasons was made clear by the $187 billion federal bailout of Fannie Mae and Freddie Mac in the wake of the 2008 financial crisis, which the two lending giants’ tolerance for lax credit standards helped to cause. But beyond such risk lies another question: Is race-conscious lending good for those it’s meant to benefit? There is good reason to believe that it’s not — and no good reason to believe that it is.

It may seem a favor to potential first-time homebuyers of limited income to extend them credit despite their failure to meet traditional underwriting standards. But doing so not only poses the risk that such borrowers will become delinquent and lose their homes; it also poses a risk to their neighbors — to the communities supposedly being helped. Little is more damaging to a neighborhood than vacant homes or homes whose owners can’t afford to maintain them. Therein lies the risk of extending credit to the marginal borrower.

We’ve seen this movie before. The 2008 financial crisis and its widespread mortgage foreclosures disproportionately affected black Americans. Some 240,000 black homeowners lost their houses in the crisis, and home equity among their neighbors plummeted. In predominantly black and affluent Prince George’s County, Md., the median home price dropped from $343,000 to just $245,000 between 2008 and 2009.

A combination of factors undoubtedly contributed to those losses. But, as Edward Pinto, my colleague at the American Enterprise Institute, has written, “the financial crisis had a single major cause: the accumulation of an unprecedented number of weak mortgages in the U.S. financial system.” Pinto convincingly links the proliferation of such mortgages, whose foreclosures would broadly undermine home values, to Fannie Mae’s “affordable housing goals,” which encouraged lenders to extend credit to those who might not have the capacity to provide an adequate down payments or make monthly payments. Fannie’s new equitable-housing plan risks repeating the same mistake.

Nor has a similar approach proven free of such risks in the banking industry. The Community Reinvestment Act has, since 1977, required banks to lend on the basis of social goals — including extending credit to low-income neighborhoods and borrowers. In practice, banks have every reason simply to check this box and write off any losses that result as a cost of doing business. Federal regulators have never insisted on a separate report card for CRA loans, so we have no way to know how they have performed and whether they might actually hurt neighborhoods they’re meant to help. Instead, the “success” of the program has been measured in terms of lending volume, not performance.

When reporting is required, the results are not encouraging. The same culture of relaxed mortgage underwriting plagues the Federal Housing Administration, which extends low-down-payment, highly leveraged loans to low-income borrowers. The default rate on such loans is perennially high; it reached 17.5 percent in early 2022. And as one industry newsletter observed, “Homeowners who live in these markets of higher-risk mortgages tend to have a lower-income and are largely members of minority groups.”

There are less race-conscious and more practical ideas being offered to improve minority-homeownership rates. Notably, the Neighborhood Homes Investment Act — passed by the House, pending in the Senate, and backed by a wide range of homebuilders and advocacy groups — would provide for a federal tax credit for investment in one-to-four-family homes in designated distressed neighborhoods. The proposal has bipartisan support, and it offers a far better approach to encouraging homeownership and wealth creation than the public- and subsidized-housing schemes that have so often failed in the past.

But there is a broader point here: The very process of striving and saving, including for a down payment, is an end in itself — one that requires steady employment and that rewards two-earner households and frugality. It’s worth noting that the homeownership rate for married black couples is 21 percent higher (48 versus 27 percent) than the rate for unmarried black Americans. Good personal choices lay the foundation for the higher credit scores that lead to affordable, traditional mortgage loans. Such choices should not be devalued through policies that lower the bar for prospective loanees; they should be appreciated and rewarded, because they are and have always been the key to upward mobility for Americans of all races.