Federal Housing Finance Agency Director Melvin L. Watt focused much of his speech to the National Association of Real Estate Brokers (NAREB) on its five-year goal of creating two million new Black homeowners.

The numbers don't lie, Watt said. In 2004 African Americans had a homeownership rate of almost 50 percent. This year the rate is down to 42 percent, almost back to 1994 levels.  "Because equity in homes has always represented a major part of African American assets, the impact of the economic and foreclosure crisis on African American wealth has been substantial."

There are the well-known historical reasons for low homeownership rates among African American households, he said, including disproportionate unemployment and under-employment, low and stagnant wages, non-existent and depleted savings and lower wealth in general, many of which were exacerbated by the economic meltdown.  Then there are new factors that casual observers may see or put into context. There were "The unsavory practices that set the stage for our homeownership rates to get worse, especially subprime and predatory lending that disproportionately targeted minorities with mortgages that were designed to fail," and the generally irresponsible practices in the real estate and mortgage finance sector that ultimately led to the meltdown.  That meltdown disproportionately reduced housing values and produced a disproportionate number of foreclosures, abandoned properties, destabilization, disinvestment and much slower rates of recovery in most African American neighborhoods. 

There are also, Watt said, newer and less obvious reasons for the decline in African American homeownership.  

• The foreclosure crisis left many people wary of homeownership. Even homeowners, who avoided foreclosure, witnessed their most valuable asset decline in value, sometimes to well below their mortgage balance. This led to a dramatic change in conversations about the value of homeownership. Parents became reluctant to talk up homeownership and children who saw parents lose their home or come close started seeing a lot more prestige and status in owning a car than in owning a home. "As in many aspects of our lives, it's hard to separate economic impacts from emotional impacts. In this case, unfortunately, both were devastating. While applications for conventional home loans have declined by 58 percent overall since the foreclosure crisis, the decline in African American applicants has been a whopping 77 percent compared to a 45 percent decline for white applicants."
• There is increasing value placed flexibility. In a difficult job market, the ability to move quickly can be important to get new job opportunities or accept advancement. Many people, especially recent graduates, are placing a higher priority on the flexibility of renting.
• There is a big impact from some cultural and social changes that are taking place in African American communities. For example, marriage, which has long had a high correlation to becoming a first-time homebuyer, is increasingly likely to be delayed.
• Watt said another factor adversely impacting minority homeownership, and one many are reluctant to talk about, is gentrification. After ignoring African American communities for years because of racial attitudes and stereotypes, the world now realizes that many are situated in the most valuable and convenient locations. Changing racial attitudes, the appeal of diverse neighborhoods and the convenient locations are doubly negative for African American homeownership. Families who have lived in these neighborhoods for years face escalating property taxes, and the temptation of rapidly escalating, often cash, offers from buyers. On the other hand, African Americans looking to buy homes are finding it increasingly difficult, if not impossible, to compete in these suddenly attractive, inner city neighborhoods.

Watt said that while the NAREB's goal for Black homeownership is ambitious, it is well worth taking on the challenge. He believes that some initatives of Fannie Mae and Freddie Mac (the GSEs) can assist in achieving those goals.  The GSEs, of which FHFA is the conservator, are not lenders and can't buy loans from lenders unless those lenders make the loans.  One of FHFA's biggest challenges has been getting lenders to make loans to creditworthy borrowers and it hasn't been easy.  As the credit of borrowers and the relationship between borrowers and lenders needed repair after the foreclosure crisis, so did the relationship between the GSEs and lenders. 

The uncertainty of the post-crisis mortgage market and the substantial litigation risks that followed made many lenders a lot more reluctant to lend and required ongoing dialogue between all parties about needed changes.  "There's no sense burdening you here with details about how revising the 'representation and warranties framework' helped," Watt said, "but, take my word, these revisions were critical to getting credit availability to move back toward normalcy." Now, after a lot of work and too much time, some lenders are finally showing more willingness to lend to borrowers who meet the broader credit criteria reflected in the GSEs' credit boxes, rather than their own narrower criteria that routinely limited credit primarily to borrowers with pristine credit. 

Another initiative the GSEs and FHFA took addressed what is perhaps the most difficult homeownership challenge faced by many African Americans, the lack of a down payment.  An analysis showed that many borrowers were creditworthy, could sustain paying a mortgage, but lacked funds for a large down payment and closing costs.  A program now allows the GSEs to purchase mortgages with only a 3 percent down payment and provides for reduced fees for borrowers with income at or below the area median income. 

Between 2015 and June 2017, the GSEs have purchased over 130,000 mortgages through the program, and it continues to grow. Over 95 percent of these borrowers were first-time homebuyers with an average loan amount of about $180,000.  Watt urged his audience to reach out to the GSEs and to their lenders to provide the option to more borrowers.

Watt said FHFA and the GSEs have also worked to assess the role of debt-to-income (DTI) ratios and creditworthiness. The Dodd-Frank Act "ability to repay" rule which gave rise to the qualified mortgage or QM standards established a regulation which lenders can meet in part with loans that have DTIs that do not exceed 43 percent.  However, the GSEs, while they remain in conservatorship, can purchase loans with higher DTIs and do so for otherwise creditworthy borrowers with DTI rations up to 50 percent.

The GSEs can also purchase loans originated through their automated underwriting system for some borrowers who do not have traditional credit or credit scores. The program allows certification of repayment history through non-traditional means such as rent or utility payments.

Progress is also continuing on an alternative credit score model.  FHFA started by evaluating the costs and operational impacts of different credit score options.  The project has now evolved to include other considerations about competition.  For example, how to ensure that competition leads to improvements rather than a race to the bottom.

Watt says it now appears that it would be a serious mistake to change credit scoring models before the Common Securitization Platform is operational and the GSEs implement the Single Security, probably in mid-2019.  It also seems that, regardless of the credit score model decision, the short-term impact on access to credit will not be nearly as significant as first thought.  Scores are only one factor used by the GSEs to evaluate loan applications and they currently use the same or even greater levels of credit data in their underwriting systems as the credit scoring companies use.  

To insure a correct decision about this issue, FHFA will be issuing a request for input this fall regarding the impact of alternative credit scoring models on access to credit, costs and operational considerations. This will include questions around competition and using competing credit scoring models to make mortgage credit decisions. 

Other efforts to increase credit access are underway and some have borne fruit. Fannie Mae has made several changes to calculating student loan debt in DTI ratios and both GSEs are considering how to better verify income for self-employed applicants and people who take part in the so-called gig economy.  Another research area is focusing on how to grow a pipeline of mortgage-ready borrowers over the long term by helping individuals and families build their financial readiness. 

Watt concluded by addressing a topic NAREB has championed, lowering guarantee fees. He said his and their objectives are the same, but their responsibilities are different. He reminded them that, early in his term, he suspended planned increases and ordered an extensive review of both upfront and ongoing g-fee amounts, concluding that the existing level, without the earlier proposed fees, was appropriate

FHFA removed the adverse market charge and made some small adjustments to the guarantee fees but left the overall fee structure largely the same. Watt said his agency constantly monitors the level of the fees and will adjust them if warranted.  "But, in addition to the statutory responsibility FHFA has to ensure liquidity and access in the housing finance market, we also have the responsibility to ensure the safety and soundness of the Enterprises.  We are constantly balancing these statutory obligations.  For now, I continue to believe that we have found the right balance."