Can no down payment mortgages close the homeownership gap?

One of the nation’s largest banks is seeking to help rectify decades of housing discrimination against communities of color.

Bank of America announced this week that it will be offering zero down payment mortgages for first-time homebuyers in historically Black and Hispanic neighborhoods in five U.S. cities. Borrowers would be able to qualify for these loans by showing on-time rent, utility, and other payments, and wouldn’t be on the hook for closing costs.

While many real estate experts lauded the bank’s Community Affordable Loan Solution program as a way to help more people of color become homeowners, the program is not without risks. If the economy and housing market slip into the downturn that many fear, home values could fall, leaving the recipients of these loans owing more than their homes are worth — which is what happened during the Great Recession.

“Homeownership strengthens our communities and can help individuals and families to build wealth over time,” AJ Barkley, head of neighborhood and community lending for Bank of America, said in a statement. “Our Community Affordable Loan Solution will help make the dream of sustained homeownership attainable for more Black and Hispanic families.”

After centuries of systemic racism in the U.S., the homeownership rates of people of color significantly lag white households. About threequarters of white households are homeowners, at about 74.6% in the second quarter of this year, according to the most recent U.S. Census Bureau

report. However, the homeownership rate is just 45.3% for Black households, 48.3% for Hispanic households, and 61.1% for Asian households.

The loan would cover the down payments and closing costs for approved first-time buyers in Black and Hispanic communities in Charlotte, NC; Dallas; Detroit; Los Angeles; and Miami. It may eventually be rolled out to other cities. In addition, borrowers would not be charged costly private mortgage insurance (PMI) which penalizes those who don’t put down at least 20%.

Instead of looking at traditional credit scores, loan officers for the program will evaluate applicants based on their histories of paying rent, utility and phone bills, and car loans. The bank claims that applicants’ eligibility will be based on their incomes and the location of the home they hope to purchase.

Applicants must go through a Bank of America-approved homebuyer certification course before applying to the program.

“The racial and ethnic homeownership gap is as wide today as it was when discrimination was first made illegal,” says Janneke Ratcliffe, vice president of the Housing Finance Policy Center at the Urban Institute. Loans like this will help “more people have access to homeownership. We should see it make a difference.”

That’s critical, as homeownership is the primary way that millions of Americans gain a toehold into the middle-class and build wealth that is passed down to future generations. Many minorities were denied this opportunity due to deed restrictions and redlining, which prohibited them from buying and receiving mortgages for homes in white communities, as well as steering and other governmentsanctioned, racist housing policies.

The bank is providing borrowers with grants between $10,000 and $15,000 so they have equity in their properties once they close, reported Bloomberg.

However, if the economy succumbs to a recession and the home values fall, homeowners who received one of these no-down-payment loans could suddenly find themselves underwater on their mortgages.

“If the program creates long-term, sustainable homeownership, then a temporary slump in home values should not be a major concern,” says Sarah Mancini, a staff attorney at the National Consumer Law Center.

She’s not worried about this leading to another catastrophe, like what happened during the Great Recession, as many of these homeowners will simply stay put.

“Historically values should rise over time,” Mancini says.

Ratcliffe says these loans have been done safely before and aren’t as risky as the subprime loans that went bust in the mid-2000s, triggering the foreclosure crisis. Today’s lenders verify borrowers’ incomes and debt levels carefully and most of the predatory loans that balloon over time have been banished from the market.

“You shouldn’t confuse this type of lending that is well vetted and includes housing counseling and alternative ways of establishing peoples’ credit worthiness and ability to repay with the risky loans and careless underwriting of the loans that led to the foreclosure crisis,” says Ratcliffe.

Shutterstock Bank of America announced this week that it will be offering zero down payment mortgages for first-time homebuyers in historically Black and Hispanic neighborhoods in five U.S. cities.