In this Op-Ed piece appearing in the American Banker, Tobias Peter, Research Fellow and Director of Research at AEI Housiing Center, points out that Federal loan policies that promote risky lending can set up minority households for failure.

How federal housing policies hurt borrowers of color

The COVID-19 pandemic has revealed a distressing fact in the housing world: Federal home loan policies that promote risky lending in the name of providing “responsible, affordable mortgage credit access” for minority households are setting up minority households for an increased risk of failure.

 

Wild home price cycles and risky lending discriminate against unwitting borrowers of color that get their timing of the purchase wrong. Stable home price cycles and safe lending on the other hand allow borrowers to build lasting wealth.

 

To achieve this, we need more supply. Places such as Minneapolis or Portland have already eased burdensome local zoning codes, which will ultimately enable new home construction. Another place, Palisades Park, NJ, a suburb of New York City, which did away with its restrictions long ago, was able to add 24 percent to its housing stock between 2000 and 2013. While this process will take time, the AEI Housing Center estimates that gradually replacing a small portion of one unit homes with two to four unit ones has the potential of adding about eight million homes over the next two decades — or about 6 percent to the current stock.

 

In the meantime federal policies should limit risky lending practices, especially during a boom, instead of encouraging them. Unfortunately, this message has not reached everyone. The Consumer Financial Protection Bureau’s new QM (qualified mortgage) proposed rule would enable borrowers to get even riskier loans, thereby setting up people of color once again for failure.