Banks face stricter capital requirements – likely making mortgages more expensive for cash-poor buyers
“I just hope I can find what I’m looking for somewhere,” Caldwell said.
If regulators have their way, it could be even harder for her to find a home she can afford. An unusual coalition of big banks and some housing affordability advocates says the proposal, aimed at increasing banks’ financial stability, would make mortgages more affordable for cash-strapped homebuyers, especially people of color. They claim it will be more expensive.
“This is a time for all hands on deck,” said Odette Williamson, senior attorney at the National Consumer Law Center.
The proposed rule changes would force banks to hold more capital for mortgages with smaller down payments. The logic is that such loans are riskier, so banks should hold more reserves in case of default.
Practical impact: To provide a greater cushion, banks will demand higher mortgage rates from borrowers with smaller down payments.
Despite narrowing during the pandemic thanks to low interest rates and government stimulus, the racial homeownership gap has widened further in recent days and is now at 29 percentage points, the largest in a decade. It has become. according to to the National Association of Realtors. And working-class minorities hoping to buy their first home – a key means to building wealth that many have been systematically denied – have faced new obstacles in recent years.
Mortgage borrowing costs have more than doubled over the past two years as the Federal Reserve has fought inflation by raising interest rates, which hit a 22-year high earlier this year. That has forced current homeowners to hold off on selling and hold out until interest rates settle, constricting supply and locking in prices that have skyrocketed due to pandemic buying.
Rising financing costs are already putting homeownership out of reach for most of these borrowers who qualified just two years ago. Before the Fed began raising rates, 3.4 million Black Americans were considered “mortgage ready” based on their credit history and income, the financial institution said. Freddie Mac research. Thanks to rising financing costs, that number now stands at less than 1 million, the National Fair Housing Alliance found in a tracking analysis based on traditional underwriting standards.
Meanwhile, a recent study from LendingTree found that Black mortgage applicants in the 50 largest U.S. metropolitan markets are 1.6 times more likely to be denied than the overall population. found.
“This just shows what happens with this wealth gap,” said Lisa Rice, CEO of the National Fair Housing Alliance. “If you can’t build enough wealth to cover a down payment and don’t have family to fall back on, these high interest rates can be devastating.”
These concerns prompted regulators and industry executives several years ago to Making it easier for underserved people to buy a home Borrowers. After the killing of George Floyd sparked nationwide protests in the summer of 2020, companies across the business community took on projects aimed at combating systemic racism. Mortgage lenders have pledged to work with financial regulators to offer loans to fewer borrowers.
However, only a handful of companies have done so. A number of mortgage lenders have launched pilot programs over the past year and pledged to launch them together. tens of thousands According to the Urban Institute, 4.5 million more Black Americans would need to buy a home to get out of mortgage debt.
More broadly, major financial institutions It has withdrawn from lending to economically disadvantaged mortgage borrowers. The three major mortgage lenders, Bank of America, JPMorgan, and Wells Fargo, more than halved the percentage of mortgages they issued to low-income people in the six years following the 2008 monetary policy. did. Crisis, Federal Reserve in 2017 study found.
Critics say new rules from banking regulators could force banks to accelerate that trend. The proposal, announced in July by the Fed and two other agencies, Harmonize U.S. regulations with international rules Based on capital requirements would go as well Exceeds foreign standards for additional capital for major banks. Supporters of the change say it is an attempt to ensure the health of the banking system in the event of another crisis like the one that rocked the industry this spring.
The banking industry, with the help of an unlikely ally, launched an unusually aggressive lobbying campaign against the proposal. Traditionally progressive groups focused on promoting homeownership are also rallying against the proposal.
The Financial Services Forum, which represents eight of America’s largest banks, said it was spending a seven-figure sum on television ads touting the proposal as an additional charge to Americans already burdened by inflation. . Another group called Center Forward is airing ads with similar messages on national television, including during NFL games. And CEOs of major banks raised the issue in testimony before the Senate Banking Committee on Wednesday.
Meanwhile, the NAACP, National Fair Housing Alliance, National League of Cities, and Urban Institute stayed their own critique.urban research institute study Regarding the proposal’s impact on low-income minorities, the proposal is “particularly sinister given efforts by bank regulators and other government agencies to encourage banks to increase lending to these very borrowers and communities.” ” concluded.
Not all progressive groups oppose the proposed rules. Alexa Philo, a former Federal Reserve examiner who now works as a senior policy analyst at Americans for Financial Reform, said the proposal faces strong opposition from the industry because it could squeeze executive pay. He said that it is causing.
“If banks have to raise more equity capital, stock prices related to banker bonuses could decline,” he said in an email. “That’s why the banking lobbies are fighting with all their might the increased capital requirements. The rest, especially the alleged negative impact on economic growth, is mostly nonsense.”
Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, sounded incredulous at the push for industry lobbying as bank CEOs testified before the committee Wednesday. made a statement.
“In fact, Wall Street banks say the bank run will ‘hurt working families.’ Really?” he asked. “Is that what you’re claiming?”
But the backlash from such a wide range of outside groups has added to bipartisan concerns on Capitol Hill, with lawmakers speaking in two hearings last month about the Fed’s chief banking officer, Michael S.・Pressed Mr. Barr on this issue.
Barr, the proposal’s architect, suggested regulators may tweak the final version, which is expected to be released next year. “We place great importance on access to credit for low- and moderate-income borrowers,” he testified. “We have heard those concerns and will take them into account as we work to finalize the rule.”
As banks offer fewer mortgages, companies like Quicken Loans and Guaranteed Rates (“non-bank lenders” that are not subject to the same rigorous supervision as banks) are filling some of the gap. I entered the market for this purpose. In 2014, four of the top five mortgage lenders were banks. By 2022, only Wells Fargo will remain in the group, according to mortgage data analysis firm Recursion.
But housing finance experts say the new institutions are, at best, an imperfect alternative to banks.
“Borrowers in high-cost areas with limited cash available for a down payment may still find it difficult to secure credit from non-bank lenders,” said Michael Reher, an assistant professor at the University of California, San Diego. Ta. I studied the phenomenon. He also experienced it firsthand when he needed to finance 90% of his home purchase and could only get a mortgage from a local bank.
The reason for this, according to Reher, is that Banks have more room on their balance sheets to maintain mortgages with smaller down payments because their funding from deposits is generally stable. In contrast, emerging mortgage companies are not banks and do not hold deposits, so they make most of the loans they make to Fannie Mae and Freddie Mac, the large government-backed mortgage companies that provide liquidity. need to sell. housing market. Fannie and Freddie then limit the types of loans they purchase to reduce risk. to danger.
The proposed capital controls do not apply directly to non-bank financial institutions. Some housing finance experts say this unequal treatment could burden the neediest borrowers.According to a recent study, minority homebuyers tend to pay more in closing costs than others when purchasing a home, and those costs can amount to up to 1% of the loan. showed. And the fewer lenders available, Reher said, the more expensive these costs become due to reduced competition.
For Caldwell, all the additional expenses will weigh on the purchase of a home, which he already needs to pay for. So the Cincinnati resident increased her savings to $3,000 for a down payment, paid off her credit cards to improve her credit score, expanded her search, and adjusted her expectations.
Caldwell said she first told her real estate agent that she wanted to find a three-bedroom home and was willing to pay $1,500 a month for the mortgage. He countered that she had to find a way to pay the $1,800, but that amount has since increased.
Additionally, if she were to extend the lease on her two-bedroom apartment (where her 11-year-old son shares a bedroom with his 22-year-old brother), the rent would increase by $70 a month to nearly $1,400. .
“It’s really disheartening to hear that costs keep going up,” she says. “Where do they want people to live?”