Bank of America Corp started a trial programme aimed at helping first-time homebuyers in black and Hispanic neighbourhoods by offering mortgages that don’t require down payments, closing costs or minimum credit scores, all considered longtime obstacles to narrowing the gap between white and minority ownership.
Customers using the programme will be evaluated for a home loan not by credit scores, but rather factors such as their history of making rent, utility, phone and auto-insurance payments on time, BofA said on Tuesday. The programme will be tried out in certain predominately black and Hispanic areas of Dallas, Detroit, Los Angeles, Miami and Charlotte, North Carolina. BofA wouldn’t disclose the planned size of the programme, which may be expanded later to other cities.
The Charlotte-based bank is going beyond credit scores so “people can use other mechanisms to define their creditworthiness, buy a home and build their wealth”, said AJ Barkley, head of neighbourhood and community lending at BofA.
While US home ownership saw its biggest annual increase ever during the pandemic, it remained lower than a decade earlier for African Americans, and black and Hispanic buyers were more likely to be rejected for mortgages than their white and Asian counterparts, according to the National Association of Realtors. Approval rates for homeowners looking to lower their payments have also varied by race, with BofA approving 66% of black refinancing applicants and 78% of white ones in 2020, according to data compiled by Bloomberg.
The US justice department has hammered lenders for practices that discriminate against minority borrowers, and, in the wake of George Floyd’s murder in 2020, banks and other corporations vowed to do more to fight racial inequities. BofA’s new offering is on top of a $15bn (R255bn) programme that offers down-payment and closing-cost assistance to lower-income consumers, and another programme that is hoping to provide $15bn more in mortgages to low- to moderate-income buyers through May 2027.
We will qualify applicants to confirm they have demonstrated an ability to repay. What we don’t want to do with this programme is place people in homes they cannot stay in.
— AJ Barkley, head of neighbourhood and community lending at BofA
While no-down-payment mortgages potentially make it easier for lower-income borrowers to buy homes, they’re not without risks. If the housing market were to slump, homeowners without a significant amount of equity may have little incentive to keep paying their mortgages, hurting their credit scores and sticking lenders with foreclosed homes. Under the BofA programme, the lender is giving homebuyers down-payment grants of $10,000 to $15,000 (R170,000 to R255,000) so they have immediate equity in their homes.
“Lower-down-payment loans perform worse, all things being equal — but all things are not equal,” said Laurie Goodman, an institute fellow at the non-profit Urban Institute, speaking generally about such programmes. “There is a way to offer these loans where it isn’t as risky, where other factors can more than compensate for a low down-payment,” and there is an argument, she added, for taking on “a slightly higher probability of default to give people the opportunity to build wealth”.
The BofA offering requires borrowers to have certification from the US department of housing and urban development and counselling to qualify, Barkley said. In the past, the bank has had to deal with soured loans inherited from Countrywide Financial Corp, which was accused of failing to properly verify and analyse borrowers’ employment, income, credit information, liabilities and other data.
“We will qualify applicants to confirm they have demonstrated an ability to repay,” she said. “What we don’t want to do with this programme is place people in homes they cannot stay in.”
Applicants don’t need to disclose their race, and US Census data will be used to determine that eligible neighbourhoods are predominately black or Hispanic, Barkley said. There is no minimum or maximum loan size under the new offering, which qualifies as a Federal Deposit Insurance Corp “special purpose credit programme”.
Separately, BofA announced a lending programme to help small businesses owned by minorities and women. Historically disadvantaged borrowers will be able to apply for down-payment grants of as much as $25,000 (R424,727) to help with commercial real estate purchases. Initially, the properties must be in opportunity zones in Atlanta, Chicago, Charlotte, Dallas or Los Angeles, though the programme is slated for expansion next year.
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