Over the weekend, Democratic presidential candidate Kamala Harris unveiled a $100 Billion plan to decrease the homeownership gap between white and Black and Hispanic families by providing up to four million households with grant assistance for down payments and closing costs for the purchase of a new home. Here are the details:

We’ll invest $100 billion to provide down-payment and closing-cost assistance to four million homebuyers who rent or live in historically red-lined communities.

  • Our plan will create a 100-billion-dollar U.S. Housing and Urban Development (HUD)-administered grant to provide up to $25,000 in down payment assistance and closing costs. According to research from the Urban Institute, in early 2018, first-time homebuyers bought houses worth $245,320 with an average down payment of $22,561, and an interest rate of 4.43%.
  • This $100 billion investment will provide at least 4 million families/individuals living in federally-supported or renting housing in these historically red-lined communities with down payment and closing cost assistance.
  • In order to qualify for the program:
  • The grantee must be purchasing a principal residence.
  • The grantee must have lived for at least the preceding 10 years in a historically red-lined community that remains low-to-moderate income.
  • Grantee families cannot have an annual income of over $100,000 or $125,000 in high-cost areas.
  • Grantee individuals cannot make over $50,000 or $75,000 in high-cost areas.
  • The max grant is capped at either $25,000 or 20% of the loan value plus closing costs.
  • The maximum home price to qualify for the grant is $300,000 for consideration of high-cost areas.
  • Consistent with our more inclusive credit-calculation proposals below, an individual or family would need to demonstrate an ability to pay the mortgage with the lender.

Read the entire plan here

Why this plan could fail

  1. The ten year requirement. Lower income households are often very transient, and lower income renters even more so. It’s extremely likely that many households will who may otherwise qualify will get snagged for either having spent some portion of the past ten years outside of a low income neighborhood, or not being able to prove residency, especially if they lived with family or other non-traditional arrangements. Additionally, I’m not sure how this is means tested for people who attended college or other schooling somewhere else and those families in which one adult may have lived in a low-income community and another didn’t. While I get that this is an attempt to steer the benefit toward people that have lived in these communities for a long time, it looks like a huge red flag which will trip people up. It also doesn’t help Black and Brown people who have lived in neighborhoods that have already gentrified into higher cost areas or those that have simply lived in neighborhoods with higher incomes. Many of these families are the ones being boxed out by gentrification and runaway home price increases.
  2. Income and Home price requirements. This program has effectively zero value to anyone living in a high cost, coastal city. As of the time of this post, there are 36 listed fee simple houses available in DC under $300,000.  I ran a simple search and at least three of those are actually parking spaces, and a couple are condos, so probably closer to 30. Forget about San Francisco, where the median home price is north of a million and a half. 
  3. Program Complexity. Given the means testing, an overtaxed Housing and Urban Development (HUD) office, and the natural confusion and bureaucratic traps of running a new program, it’s likely that home sellers simply won’t be interested in accepting contracts that are contingent on these grants.  For those that do, it will likely be for the homes that are impossible to sell otherwise. This could potentially saddle program users with homes that are least likely to appreciate and are most in need of repairs or improvements.

 

A couple of initial thoughts here. This plan falls under the tent of programs designed to address racial wealth gaps and make up for the harm done to Black and Hispanic communities by previous government programs without…actually addressing race. As the Harris campaign itself notes, the root of much of the homeownership wealth gap is intentional discrimination against Black and Brown families, not some accident or oversight:

One major cause for this is historic redlining – the Home Owners’ Loan Corporation’s practice of identifying neighborhoods, often majority Black neighborhoods, where traditional lenders should not lend.  Redlining has resulted in households of color receiving just 2% of the FHA loans extended between 1934-1962, and formerly redlined neighborhoods are sites of deep racial disparities in home value and lending activity.

The second main cause was the G.I. Bill, which is credited with providing millions of low-income returning veterans with access to wealth-building opportunities that helped to create the American middle class.  Veterans of color, however, were largely excluded because, under the G.I. Bill, private lenders were free to refuse mortgages and loans to Black borrowers.

Black and minority families were also disproportionately impacted by the subprime mortgage crisis and the subsequent Great Recession. Throughout the subprime market, Black borrowers were subjected to higher cost and higher risk loans than white borrowers, even when both had similar levels of creditworthiness.

Since it’s both illegal (and a political non-starter) to create a program that specifically benefits one (or more in these case) racial group, the program creators have to use proxies for race, notably tenure in a low to moderate income community, and income. While there’s certainly some correlations between individuals that meet the requirements of the program, it’s certainly not a catch-all for Black and Brown, and there’s no reason that white renters can’t use this program to buy homes. Additionally, the limits here effectively would keep many lower and moderate income individuals in lower and moderate income neighborhoods.

Far more interesting here is the Harris campaign’s plan to overhaul credit scoring:

We’ll require lenders to calculate debt to income on a monthly basis and expand the sources of income for purposes of the calculation.

  • Lenders currently calculate debt to income as total debt against one year of income. The resulting ratio tends to disproportionately negatively impact Black and Latinx
  • We’ll require mortgage underwriters, when using Federal Housing Administration (FHA) loans, to calculate a borrower’s debt-to-income ratio by using monthly expenses against monthly income.
  • Mortgage underwriters will also be required to include in their income calculations non-W2 income like earnings from non-traditional work, and Black and Latinx workers are more likely to participate in the gig economy.
  • This change to a debt-to-income ratio using monthly expenses against monthly income will impact 7.5 million Black households and nearly 5 million Latinx households.

If properly implemented, this could open up access to credit to millions of people unfairly left out. It could also have the opposite effect of being late on a $25 cell phone bill forcing someone into subprime loans forever.

Overall, having presidential candidates pay attention to and thinking about policy to address racial wealth gaps is a good step. How this particular policy would play out is yet to be determined, and I’m interested to see what concrete proposals other candidates propose. Senator Warren has proposed a plan that is heavy on entrepreneurship. Let’s see what happens.

 

Faraji