Why HUD’s Pushback Against DEI Mortgages Is Good for Black Wealth

I t must be viewed as courageous for Housing and Urban Development Secretary Scott Turner to announce an investigation of Wells Fargo for alleged racial bias in mortgage lending — bias that favors minority buyers. The bank, after all, had said as much when it described its initiative in 2022 as one that “will help close the homeownership gap between white and minority families created by decades of systemic inequities.”

Turner, himself African-American, said the bank’s “practice of dividing Americans based on race is immoral, unethical and un-American.” Moreover, “Wells Fargo and all of its employees that engaged in race-based decision-making should be ashamed of themselves.”

Turner should expect to face criticism in seeming to oppose a private effort to boost the black household homeownership rate, which lags the white rate, 45 percent to 74 percent. But he is right to do so for a reason not immediately obvious: What amounts to race-based affirmative action in mortgage lending is not good in the long run for boosting black homeownership and wealth. The danger lies in the likelihood that, to fulfill its pledge to commit $60 billion toward 250,000 mortgages from 2017 to 2027, Wells Fargo has relaxed credit standards.

It’s important to note that Wells Fargo is not alone among major banks in pursuing this version of “fair lending.” In an industry in which consolidation and acquisition are key to profitability, dozens of major banks have signed what are called “community benefit agreements,” pledges to set aside pools of mortgage funding for low-income prospective buyers. Many of these are made with the National Community Reinvestment Coalition (NCRC), a nonprofit advocacy group, in order to fend off opposition to bank mergers, which must be approved by bank regulators such as the Federal Reserve.

The NCRC has made such agreements its calling card. These “CBAs” include a $1 billion racial economic equity commitment made in 2020 by Bank of America. That the pledge was made in the wake of the death of George Floyd strongly suggests it is meant to have a racially conscious dimension. It is far from an unusual agreement. The NCRC boasts that, since 2016, it “has facilitated the creation of CBAs with 22 bank groups worth a combined $687.96 billion for mortgage, small business and community development lending, investments and philanthropy in LMI [low- and moderate-income] and under-resourced communities.”

Such agreements are monitored by the NCRC to ensure that money is actually being dispersed. As was seen in the 2008 financial crisis, any initiative — such as the “affordable housing” goals of the secondary mortgage giants Fannie Mae and Freddie Mac — that eases mortgage qualification by such means as lower down payments or credit scores inevitably raises the risk of loan delinquency and eventual foreclosure.

Those who are committed to building minority ownership and wealth should be deeply concerned about the results of a study by the Urban Institute and the Federal Home Loan Bank of San Francisco, which found that black Americans “are more likely [than other racial and ethnic groups] to lose their home to foreclosure when they attain homeownership.”

There are undoubtedly numerous factors behind that dispiriting finding, including job loss or other setbacks that may disproportionately affect minority households. So, too, the fact that the percentage of black adults who are married (31 percent) trails that of whites (53 percent) — which means more black households must rely on one income.

But any program that lowers the economic bar to qualify for a mortgage in the first place does no favors for lower-income, minority buyers in the long run. Homeownership requires the financial wherewithal to survive transitory setbacks, to make repairs and keep up one’s property. The capacity to save, as reflected by traditional 10 percent or 20 percent down payments, serves as a proxy for maintaining one’s property over time. Government-insured loans, through the Federal Housing Agency, can require as little as 3.5 percent down.

Moreover, the wealth that homeownership can help build is not built in isolation. Owners are, in effect, engaged in a neighborhood-wide effort to maintain or increase property values, an effort that is based on the value of not just one’s own home but those of neighbors. When one house goes into foreclosure or, worst of all, is abandoned, the value of all homes is at risk.

Turner, to date, has called out only Wells Fargo. But he’d do well to look at all the “community benefits” promised by those NCRC agreements with banks. Racialized lending not only offends the antidiscrimination goal of fair housing. It also risks harming households that it purports to help. It’s important to the nation for black homeownership and wealth to increase — but it must be done sustainably. That means applying the same credit score requirements and down payments for any and all borrowers. The availability of 20-year mortgages, which enable a more rapid growth in equity, would help as well. What can appear to be barriers will, over time, prove to be the foundations of wealth.