Mortgage reserves can help Black borrowers sustain homeownership: report

The new report by the Urban Institute takes a close look at the use of mortgage reserve accounts to sustain homeownership levels among Black mortgage borrowers

The continuous development of loss mitigation tools and practices in the mortgage industry will play an essential part in preventing future foreclosures, but additional safety nets — particularly for those mortgage customers who belong to historically disadvantaged populations — will play a critical role in thinning the racial wealth gap. One such tool rests with mortgage reserve accounts (MRAs).

This is according to a report published late last month by the Urban Institute, funded by the Federal Home Loan Bank of San Francisco.

“Borrowers who have more liquid assets to fall back on are better able to sustain homeownership when they face temporary financial setbacks,” the report said. “Helping less affluent borrowers establish mortgage reserve accounts (MRAs) — ‘sidecar’ savings accounts that can be tapped to weather a financial shock — are one promising solution.”

There are a lot of questions that arise from the use of such tools including those surrounding implementation, achieving scale and making mortgage outcomes more equitable, the report says. With MRAs, however, variations on the concept “are under early-stage development by retail mortgage lenders and the secondary market actors Fannie Mae and Freddie Mac,” the report explained.

MRAs account for only one such tool that could impact the foreclosure rate among homeowners of color, as other approaches — including those in the insurance space — could be scaled to meet the needs of potential beneficiaries.

“Whatever the approach, if the foreclosure rate for Black mortgage borrowers decreased to the average foreclosure rate among white mortgage borrowers, an estimated 300,000 more Black homeowners would keep their homes and have the opportunity to build generational wealth,” the report explained. “Additionally, making mortgages less risky for lenders, insurers, and investors, in addition to families, should lead to an expansion of the credit box and allow even more households with modest incomes and resources to access and realize the benefits of homeownership.”

While several new loss mitigation tools have been developed in recent years, particularly in response to the economic shock caused by natural disasters in 2017-18 and the COVID-19 pandemic for many mortgage borrowers, there are “limited solutions that target the triggers of default and help Black homeowners avoid missing their mortgage payments in the first place,” the report said. “Research has shown that having financial reserves can help households avoid default.”

In comparison to other alternatives, MRAs are a viable option for preserving homeownership among vulnerable homeowners due to a unique combination of product features and flexibility, the report explained.

“Mortgage reserves do not necessarily require a subsidy, nor do they increase the costs of homeownership because they can be financed with money that would otherwise go toward the borrower’s down payment,” the report said. “Additionally, mortgage reserves can add substantial flexibility to a borrower’s finances, as the borrower’s residual income can cover a nonmortgage expense at the time it is incurred, while the reserve fund covers the mortgage.”

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