Financing Homeownership
Two new research reports will inform the Trust’s strategy to advance equitable and safe financial solutions to increase and sustain Black and Latine homeownership.
Homeownership is an essential wealth-building tool for Black and Latine households. For households of color, home equity is a larger – if not the largest – portion of their wealth-building portfolio in comparison to other ethnic groups. White families have a more diverse portfolio of assets, which helps them weather financial setbacks and economic downturns.
Financing Homeownership
Increasing access to homeownership has long been a priority for The Chicago Community Trust. With our current focus on closing the racial and ethnic wealth gap, homeownership has emerged as a priority that spans our strategies to close the gap at the household, neighborhood, and community levels.
The availability of flexible, safe, and affordable capital is a huge obstacle for Black and Latine households to purchase and sustain their homes. By improving our understanding of homeownership capital flow and innovative financing solutions, new research by Urban Institute’s Housing Finance Policy Center and New America’s Future of Land and Housing program informs our strategies to improve financial support for homeowners and advocate for structural change in the lending industry.
Measuring Lending Gaps in Mortgage and Small Business Loans in Chicago’s Communities
28%
Key Finding
Mortgage lending in Chicago’s predominantly nonwhite neighborhoods, 28.0 percent of all lending in the city, is not keeping up with the share of homeowners that these areas represent (36.4 percent). The implication is that predominantly nonwhite neighborhoods are falling further behind in accessing homeownership.
14.5%
Key Finding
Racial differences in lending are driven mainly by disparate service to Black households, who comprise 22 percent of Chicago’s homeowners but receive only 14.5 percent of purchase mortgage lending.
39.6%
Key Finding
Low and moderate-income (LMI) neighborhoods (home to 47.2 percent of homeowners) and middle-income neighborhoods (home to 20.1 percent of owners) in Chicago both receive mortgage lending disproportionate to their share of homeowners (39.6 percent and 18.4 percent, respectively). This disparity in LMI and middle-income areas is driven entirely by lending gaps in predominantly nonwhite areas. Demographically mixed and predominantly white neighborhoods at these income levels receive lending greater than their homeowner share.
4/10
Key Finding
Latine households have a lending share (21.9%) approximately equivalent to their homeowner share (21.3%). Still, lending gaps to Latine borrowers persist in four of the 10 community areas with the most Latine households (South Lawndale, Lower West Side, Logan Square, and Humboldt Park), which suggests ongoing displacement.
The Urban Report
Urban Institute’s study takes a deep dive into patterns in lending between 2019 and 2021. The study finds that in Chicago, the distribution of mortgage and small business lending is shaped in part by race and place. This report quantifies those two categories of lending relative to consumer demand by race, neighborhood location, and demographics. In addition, it provides a qualitative analysis of the challenges and needs among communities of color and communities with low incomes and puts these challenges in the context of new legislation aiming to promote lending in these communities.
Disparities in lending affect the financial well-being of individual people and households and the economic resilience of broader communities. Limited capital, wealth, and financial security constrain community members’ abilities to invest in their futures and contribute to their local economy and tax base.
Urban’s report was funded by the Kresge Foundation through the Shared Prosperity Partnership.
Addressing the Racial Homeownership Gap: Increasing Affordable Financing Options for Communities of Color
Despite persistent obstacles, many banks, credit unions, local governments, and Community Development Financial Institutions (CDFIs) have created innovative financial products to help LMI families in Black and Latine communities for whom homeownership has been out of reach.
To scale these solutions and move the needle on closing the racial and ethnic homeownership gap, we need to coordinate efforts across the public and private sectors and focus on systemic changes. In addition to bridging the gap between what LMI buyers can afford to pay and the price of home on the private market, equally important is grappling with how credit markets perceive risk, unlocking financing for entities providing credit access, and exploring permanent affordability and shared-equity models that exist outside of the speculative housing market.
New America’s Future of Land and Housing program conducted a national scan of financial products and flexible lending pools designed to address one of the most common barriers that LMI communities of color across the United States face: affordability.
Findings from the Report
1
Key Finding
In 2019, 72 percent of white households in Chicago owned homes, compared to 48 percent of Latine and 42 percent of Black households. That is mainly because Black and Latine buyers have historically been excluded from traditional credit markets. That lack of access, combined with rising housing prices and the low supply of affordable housing, has locked an untold number of buyers out of the homeownership market.
2
Key Finding
While there are several vehicles to increase affordability, doing so in safe and sustainable ways is critical. Homeownership programs and products typically offer or require a variation on what is considered the safest and most predictable financing vehicle: a 30-year, fixed-rate, fully amortizing mortgage loan with fair terms.
3
Key Finding
There needs to be a higher volume of programs or products that bridge the gap between what a LMI buyer can afford to pay and the price of home on the private market, through down payment and closing cost assistance or through some combination of low or no interest rates; eliminating the need for private mortgage insurance; and the elimination or reduction of points and fees that can be charged by lenders for buyers perceived as a higher risk.
4
Key Finding
Securing sufficient capital to subsidize affordable homeownership is one of the biggest challenges faced by local lenders and CDFIs. That is especially true when serving Black and Latine communities, given that some of the conventional ways lenders address what they perceive as higher risk (e.g., lower credit scores or down payment amounts) is to increase costs borne by the buyer, thus increasing the need for consistent funding.
Recommendations
Many affordable homeownership programs are explicitly designed to impact those on the brink of homeownership, whose only barrier is the lack of savings or intergenerational wealth for a down payment. Lenders should develop programs with the target community in mind, notably what level of financial assistance and additional resources it would take to meaningfully impact access to sustainable homeownership.
One way to generate revenue for affordable homeownership is by recycling capital from ongoing loan payments to generate additional lending by selling loans on the secondary market. However, secondary market investors such as Fannie Mae or Freddie Mac typically have their own criteria for the kind of loans they are willing to purchase, which can jeopardize lending flexibility.
The New America Report
When low and moderate-income buyers have access to safe and affordable financing to buy and sustain a home, homeownership can offer a way to build wealth and economic stability that can be passed down to future generations. The opportunity cost of lost wealth amounts to much more than differences in assets over time: wealth buys better health, education, and financial security and allows families to plan for the future they want, not just the one they can afford.
Get Involved
To learn more about the Trust’s Protecting & Advancing Equitable Homeownership initiative or partner with us, please contact Shandra Richardson, Program Director for Strategic Initiatives, at srichardson@cct.org.
Growing Household Wealth
Growing household wealth is about much more than income equality. It’s about leveraging opportunities over the course of a lifetime—from paying for a college education to buying a house and saving for retirement—that allow individuals and families to build assets, have financial security, and pass wealth along to the next generation.
Learn MoreClosing the Racial & Ethnic Wealth Gap
We’ve made a 10-year commitment to closing Chicago’s racial and ethnic wealth gap. The work will not happen overnight, but in partnership with donors, nonprofits, community members, business leaders, and local government, it can be done.
Learn More