Getting on the Right Track: Improving Low-Income and Minority Access to Mortgage Credit after the Housing Bust

William Apgar

During the past decade, the housing finance system contributed to a boom-and-bust cycle that triggered the greatest economic crisis since the 1930s. A brief but disastrous explosion of nonprime—and often predatory—lending in the early to mid-2000s was followed by a dramatic tightening of underwriting standards and a housing market collapse that rapidly spread to the broader economy. In the words of the President’s Working Group on Financial Markets, the boom turned to bust so quickly because the shock of mounting subprime delinquencies uncovered and exacerbated weaknesses in the global financial system. The Great Recession then left millions of homeowners out of jobs and in foreclosure, millions more seriously delinquent on their loans, and the private mortgage and banking sector in shambles.

Lower-income and/or minority communities were among the hardest hit by the mortgage market meltdown. Unfortunately, because policymakers have failed to address longstanding issues— including persistent racial and ethnic discrimination and growing inequality in the distribution of income and wealth—these same households and neighborhoods may not fully benefit from the emerging housing recovery. Although initial efforts to reform the mortgage finance system and enhance consumer protections seem promising, these initiatives are complex and will take years to implement. Moreover, the potential beneficiaries of these reforms may not readily understand the implications of the policies designed to enhance access to affordable and sustainable homeownership opportunities, while the powerful interests that benefited from the very policies that triggered the mortgage market meltdown are fully armed to resist the changes. As a result, the era of toxic mortgage products and abusive lending practices has evolved into an era of toxic public debate.

This paper examines lending patterns during the housing boom and subsequent bust and current efforts to create a new mortgage market. The primary focus is on how all the changes washing over the housing finance system will affect future lending to lower-income and minority borrowers and communities, and what policies and programs will be needed to promote sustainable homeownership opportunities in these areas over time.