Advocates point to the hundreds of dollars private mortgage insurance can add to monthly loan payments as an impediment to helping close the racial homeownership gap. iStock photo

A new analysis of Home Mortgage Disclosure Act data shows the low interest rates homebuyers enjoyed in 2020 and 2021 had an outsized impact on efforts to close the racial home ownership gap in Massachusetts. 

But it also has a leading housing advocacy group worried too many Black and Latino buyers are still buying homes with a more expensive type of mortgage, insured by the Federal Housing Administration, when less-costly options exist that could help them stretch their dollars further at a time when home prices are higher than they’ve ever been. 

The analysis, prepared by the Chicago-based Woodstock Institute for the Boston-based Partnership for Financial Equity, found that 4,920 Black households and 8,694 Latino households were able to buy homes in the state in 2021, setting new 30-year highs and breaking previous records, set in 2020.  

Many of 2021’s Black and Latino buyers were likely first-time buyers as well, with 3 in 4 Black Massachusetts homebuyers that year buying homes with down payments worth 10 percent or less of the property’s value. For Latino buyers, that figure was only slightly lower. 

“There’s a lot of good news in this report,” Tom Callahan, executive director of the Partnership for Financial Equity, said in an interview with Banker & Tradesman. 

Still, despite the records broke in 2021, the state of overall housing affordability and the extremely limited number of homes available for sale in Massachusetts put a damper on Black and Latino buyers’ ability to buy, he cautioned. Many of these buyers clustered in Gateway Cities, where homes are typically more affordable. 

Local Options Lack Expensive Fees 

FHA loans have generally been the industry-standard loan product offered to people buying their first home when they don’t have the ability to make a large down payment or when they have bad credit. 

With a FICO score requirement of 580 or above – 500 for buyers making a down payment of 10 percent or more – it’s helped many buyers who otherwise wouldn’t qualify for a conventional mortgage where credit score requirements can be much higher. 

“It’s easier to get an FHA mortgage because you don’t need a high down-payment, and if you’re credit-challenged – probably that’s the biggest reason people are going into FHA mortgages,” said Debbie Sousa, executive director of the Massachusetts Mortgage Bankers Association. “FHA is not a bad product.” 

But FHA loans still require the borrower to carry private mortgage insurance over the life of the loan for borrowers who make a down payment worth 5 percent or less than the price of the house – a bucket most first-time buyers fall into, especially if they aren’t coming into their home search process with a lot of financial resources.  

Although the Biden administration cut the premium nearly in half earlier this year, the payments intended to insure the government against borrowers defaulting on their loans would still add over $250 to a family’s monthly mortgage payment on the median-priced condominium in Greater Boston – $615,000 in May according to The Warren Group, publisher of Banker & Tradesman. With today’s high interest rates driving the monthly payment on a property like that far above $3,000, mortgage insurance payments can make the difference between being able to afford a home or not. 

That’s why housing advocates and many in the mortgage industry, including the Massachusetts Mortgage Bankers Association have urged more lenders to offer – and more buyers to ask for – similar low-down payment loans offered by MassHousing and the Massachusetts Housing Partnership (MHP), the state’s two quasi-public housing finance nonprofits.  

The former agency has created products with a somewhat higher minimum credit score requirement than FHA loans, but without costly mortgage insurance payments for buyers who meet income requirements. Instead, the mortgage insurance is paid by MassHousing itself. 

The latter’s ONE Mortgage program also doesn’t require homebuyers to pay for mortgage insurance but is only available through banks and credit unions. 

FHA Still the Default 

Some mortgage lenders’ treatment of FHA loans as the default option shows up in the data, Callahan said.  

According to the Partnership for Financial Equity’s report, Black and Latino homebuyers outside the city of Boston in 2021 were between three and five times as likely as white homebuyers to have an FHA mortgage, and 1.5 to two times as likely as low-to-moderate-income buyers of all races – a group generally the most likely to have lower credit scores. 

“Some of that is referral-based. [Buyers] walk through that door because their Realtor suggested they could get a mortgage from that company,” Callahan said. 

Mortgage companies are far and away the largest originators of FHA loans, the Partnership for Financial Equity report found. Some of that may have to do with mortgage companies’ dominance of the home lending space, the report said. In addition, only 45 percent of banks’ and credit unions’ loans made in Massachusetts’ Gateway Cities were made to borrowers with low down payments, compared with 66 percent of loans made by mortgage companies in those areas. 

But fewer than 3 percent of traditional purchase mortgages that banks originated statewide were FHA loans, compared with nearly 20 percent of loans originated by mortgage companies, the Partnership for Financial Equity’s report found. 

James Sanna

But, Callahan said, the data suggests many mortgage companies’ loan originators may not be offering MassHousing-backed loans to all buyers who qualify, while most banks and credit unions appeared to be making extensive use of these loan products and MHP’s ONE Mortgage. 

“If you look at those mortgage companies, they’re all big, national players and to the extent that they’re looking to do business in Oklahoma and Massachusetts, what works in both states is FHA,” he said. 

Sousa, the MMBA leader, said she doesn’t think it’s likely that ease of doing business is the main driver of the disparities, instead suggesting that buyers with lower credit scores were the main driver of FHA loans’ continuing popularity in Massachusetts, along with mortgage companies’ inability to offer MHP’s ONE Mortgage and independent mortgage brokers’ current ability to offer MassHousing loans. 

“We’re trying to do what we can, but we’ve got obstacles. The biggest obstacles – it doesn’t matter your race or ethnicity – the biggest challenges out there [to accessing home ownership] are coming up with a down payment and your FICO score,” she said. 

Ultimately, Sousa and Callahan both said, building more housing, and more affordable housing, will make the biggest dent in Black and Latino buyers’ and lower-income ability to afford homes.