Fight looms over down payment aid to close racial wealth gap

Democrats are pushing to spend billions of dollars to help first-time homebuyers afford down payments, setting up a clash with industry groups and GOP lawmakers, who are warning about racial targeting of the aid and risks to the housing market.

A $10 billion proposal by House Financial Services Chair Maxine Waters (D-Calif.) would give homebuyers up to $25,000 for a down payment. President Joe Biden’s top housing official, HUD Secretary Marcia Fudge, says such assistance is a priority for the administration.

Waters' plan has triggered concern in the mortgage industry because it would require lenders to identify and direct aid to first-generation buyers — those whose parents don’t own homes — and “socially and economically disadvantaged" groups. The move is also stirring broader criticism about how much it would help buyers and whether it could even put them at risk.

Democrats are in a “rush to put families in homes they can’t afford,” said Sen. Pat Toomey of Pennsylvania, the top Republican on the banking and housing committee.

Other critics say it would worsen the affordable housing problem by driving up demand for homes at a time when supply is already at historic lows. “This is adding demand on top of already strong demand, so you will push up housing prices even further,” said Lawrence Yun, chief economist at the National Association of Realtors. “That’s a gain for current homeowners, not homebuyers.”

The fight illustrates the daunting challenges Democrats face as they try to make good on pledges to combat racial inequity in the Biden era. In trying to remedy past discriminatory policies by focusing on specific groups, they run the risk of creating new lopsided policies that alienate other Americans and could be challenged in court.

But homeownership may be the most glaring area of economic disparity in the U.S., and housing advocates are zeroing in on down payment assistance as a means of offsetting intergenerational wealth disadvantages.

“We are simply providing first-generation homebuyers, largely people of color, what white, first-time homebuyers have been receiving for years in the form of the ‘Daddy Down Payment’ loan — family assistance that is almost never repaid,” said David Dworkin, president and CEO of the National Housing Conference, an advocacy group.

The median wealth of young white adults’ parents, $215,000, dwarfs that of parents of young Black and Hispanic adults, at $14,400 and $35,000, respectively — giving white adults buying their first home a much bigger resource to tap for the first upfront payment. The difference in parental homeownership and wealth accounts for between 12 percent and 13 percent of the homeownership gap between Black and white young adults, according to research by the Urban Institute.

Now Democratic lawmakers and housing advocates are circulating proposals to help first-generation buyers purchase their first homes, just as banks like JPMorgan Chase and Wells Fargo roll out programs with forgivable down payment loans.

One estimate from the Urban Institute found that giving down payment assistance to first-time, first-generation homebuyers who earn up to 120 percent of the area median income would reach about 5 million people, fairly evenly distributed among Black, Latino and white households.

The plan with the most traction — the $10 billion proposal in a housing infrastructure bill by Waters — would give state housing finance agencies grants to award up to $20,000 in down payment assistance to first-generation homebuyers below a certain income threshold and up to $25,000 if the homebuyer is from a “socially and economically disadvantaged” group. Waters’ bill includes the provision alongside massive investments in public housing and the national Housing Trust Fund.

The California lawmaker has cast down payment assistance as a necessary corrective to the “grave injustices against people of color” produced by U.S. policies of the past.

“It is an unfortunate truth that such injustices persist today, including in the form of barriers that systematically exclude people and communities of color from fair access to housing and homeownership,” she said this month.

While the housing industry is broadly supportive of the plan — boosting homeownership is good for their bottom line — lobbyists are raising concerns about its implementation and the way a prospective homebuyer’s eligibility would be determined.

There’s no standard way to verify who counts as a first-generation homebuyer, for instance, because there’s no central database tracking that information.

The bill defines socially disadvantaged homebuyers, who would qualify for a larger credit, as individuals identifying as Black, Hispanic, Native American or Asian American, but “such presumption may be rebutted with credible evidence to the contrary,” according to a discussion draft of the legislation.

The eligibility requirements have made some mortgage lenders uneasy.

“We’ve been arguing for a safe harbor to make sure that people have the comfort of doing that kind of identification, whether it’s for race or first-generation homebuyer,” said Bill Killmer, senior vice president for legislative and political affairs at the Mortgage Bankers Association. “We want to make sure that lenders have protections so they’re not held liable for any mistakes that happen in that process of determining who qualifies.”

Republicans are challenging racial targeting outright, and it’s not limited to housing.

On May 18, a white male restaurant owner, with the backing of former Trump adviser Stephen Miller, notched a legal victory in a lawsuit against policies in a federal small business grant program created by Democrats in March that also gave priority to socially and economically disadvantaged individuals. It underscored the potential legal perils if Democrats pursue a similar approach for housing aid.

“This is exactly what [the Federal Housing Administration] was set up to do, to redline,” a Senate GOP aide said, referring to the ugly history of government policies discouraging mortgage lending in Black neighborhoods. “Now to engage in the same practice — to determine who is a certain race and see who should get what money — as a policy matter, that is just something we absolutely oppose.”

GOP lawmakers have also voiced alarm with easing down payment requirements, which serve as a way of ensuring that borrowers have “skin in the game” when they receive a loan. They’re beginning to warn that billions of dollars in down payment assistance would potentially put homebuyers at risk as well as taxpayers.

Toomey, who leads housing oversight for Senate Republicans, warned in a hearing last month that “relaxing underwriting requirements or expanding down payment assistance programs for low-income families, especially in an overheated housing market, is a recipe [for] disaster.”

Mortgages with higher loan-to-value ratios — meaning the borrower has put down less money up front — default at higher rates, according to the government’s own data.

The serious delinquency rate — where a borrower hasn’t made a payment in more than 90 days — for FHA-backed mortgages was 10.5 percent in fiscal year 2019, according to the agency’s 2020 annual report. For loans with government-provided down payment assistance, the serious delinquency rate was 14.6 percent that year.

But supporters of down payment assistance reject the argument that government-backed financial support would endanger first-generation homebuyers. They say young white adults get help with down payments, too, but from family members.

“When we talk about skin in the game, we have to be recognize whose skin we are talking about,” said Dworkin, who supports the Waters down payment proposal.

Thanks to new post-crisis regulations, the loans made today are much safer than those in the run-up to the subprime meltdown, Dworkin said.

“The environment we live in now looks nothing like 2008,” he added. “The toxic loans that did 95 percent of the damage do not exist.”

The biggest challenge — even in the eyes of advocates for down payment aid — may be that there are simply not enough homes on the market. It’s a problem that Biden is also trying to address with his $2.3 trillion infrastructure bill, which includes funds to expand affordable housing.

The National Association of Realtors supports linking a down payment assistance program to proposals that would boost the supply of homes, saying the two policies “must come hand in hand.”

“Homebuyer assistance, technical assistance, down payment assistance — we are working on all of those issues because we know that there are so many impediments to purchasing housing,” Fudge said at a Senate hearing Thursday. “But the biggest issue really is a supply issue. So that’s the biggest thing we’re working on and that is a part of the jobs bill.”