Fed PolicyPolitics & Money

New mortgage rule could harm efforts to close racial homeownership gap

Critics call plan a 'structural tax on lending money' to Black and brown prospective homeowners

A Federal Reserve plan to make low-downpayment loans more expensive for banks could negatively impact the Biden administration’s efforts to combat housing inequality, experts told Politico. 

Civil rights and housing groups have formed an unlikely alliance to oppose the plan, claiming that increased costs for banks could mean fewer home loans for lower-income borrowers, the report said.

The plan seeks to tighten rules on the kinds of mortgages that led to the financial crisis in 2008. It’s part of a bigger effort to implement international standards by raising capital requirements, which could shield banks from a host of risks, including fraud and market volatility.

The housing component, however, would make it more expensive for banks to originate mortgages, “with higher capital charges scaled to how much a borrower puts down,” going beyond the international standards, the report said.

On the ground, the plan could disproportionately affect Black and Hispanic borrowers, critics said.

“The system is building in a structural tax on lending money to the majority of Black and brown prospective homeowners,” Marc Morial, president and CEO of the National Urban League told Politico. “[The rule] is limited in its application to the type of product that most Black and brown homeowners can afford.”

Others suggested the plan, as implemented, could further cut off access to financial services in underserved communities.

“If we’re asking banks to build and maintain branches in underserved communities, why are we penalizing them for serving those communities?” said David Dworkin, president and CEO of National Housing Conference.

The Biden administration has made addressing the racial homeownership gap a key priority of its housing policy across multiple areas of government, including the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA) and the Federal Housing Finance Agency (FHFA). 

The new plan could throw a wrench into the administration’s strategy, and could also affect special-purpose credit programs, according to Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition.

“It will have an impact on banks’ ability to do unique and innovative things and not be punished for that by the regulators,” he said.

As nonbanks vie for a bigger piece of the mortgage market, regulators need to consider how these plans may push banks out of that space, analysts said.

“If you want a more balanced mortgage market, you need to address some of these issues that are pushing banks out, not push them further away,” said Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association.

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