The new loans, which launched this week, don’t require a minimum credit score or mortgage insurance, and lenders typically charge if the borrower puts in a down payment of less than 20%.
Instead of a traditional credit score, first-time homebuyers are evaluated based on their history of timely paying rent, utilities, phone service, and car insurance.
According to Bank of America, the new mortgages, known as Community Affordable Loan Solutions, will be available in certain census-designated markets, including the Black and Hispanic neighborhoods of Charlotte, Dallas, Detroit, Los Angeles and Miami. Available.
The bank said borrowers don’t have to be black or Hispanic to qualify. Eligibility is based on the borrower’s income and home location.
“Homeownership strengthens our communities and helps individuals and families build wealth over the long term,” said AJ Barclay, head of neighborhood and community lending at Bank of America. Our community affordable loan solutions will help more Black and Hispanic families realize their dreams of sustainable home ownership.”
A Bank of America spokeswoman told CNN that the bank will look at ways to expand the program to other cities after an initial evaluation.
The move by one of the largest US lenders comes at a time when soaring home prices threaten to deepen an alarming divide between white homeowners and minority owners.
According to the latest statistics available from the National Association of Realtors, black homeownership was just 43.4% at the end of 2020. That’s lower than the rate ten years ago.
According to the NAR, Hispanic home ownership has hit a record high of 51.1%. but, Both rates are still well below the white homeownership rate of 72.1%.
According to Boston College Law School professor Patricia McCoy, the biggest obstacle for low- and middle-income homebuyers is having enough cash for a down payment and closing costs.
“This disorder is disproportionately affecting black and Hispanic American homebuyers,” former federal regulator McCoy said in an email to CNN.
Racial disparities are even more concerning given the fact that homeownership has long been a way to build wealth in America.
Some of the recommendations include down payment assistance, mortgage insurance premium reductions, and a credit reporting system that considers rent payment history. He also suggested increasing access to the Special Purpose Credit Program, which is a Bank of America loan.
These credit programs allow lenders to offer loans on favorable terms to financially impaired borrowers and borrowers who share common characteristics such as low income, race, and location. The Equal Credit Opportunity Act prohibits discrimination in lending based on race, sex, age or other characteristics, but these credit programs allow.
As part of the program, Bank of America said it would pay down payments on behalf of borrowers. A grant of $10,000 to $15,000, depending on the city, gives the borrower an immediate stake in the house.
A Bank of America spokeswoman said the mortgages feature “competitive” fixed interest rates.
Home loan with zero down payment It brings back bad memories of the subprime mortgage crisis, caused in part by poor lending standards. Millions of families lost their homes to foreclosures, and lenders, including Bank of America and its Countrywide division, lost billions of dollars.
McCoy, a former mortgage regulator with the Consumer Financial Protection Agency, said Bank of America’s zero down payment feature comes with risks, especially because homebuyers have few assets.
If house prices plummet, borrowers could find themselves in a mortgage “drunk”.
“In the wake of the 2008 financial crisis, the underwater mortgage problem and millions of foreclosures have had a particularly devastating effect on black and Hispanic American homeowners,” McCoy said. ”, he said.
Bank of America emphasized making sure applicants “have the resources to maintain their home ownership and demonstrate their willingness and ability to repay” before offering loans. The bank also said prospective buyers must complete a thorough homebuyer certification course to ensure they are ready to buy.
RSM chief economist Joe Bruce Elas told CNN that the program would not be big enough to “create systemic risk to banks and the economy.”
Brusuelas added that he is encouraged by the fact that Bank of America will consider alternative factors such as timely rent payments and on-time utility payments when making mortgage decisions. .
“Risk managers within banks will cut their jobs, but this appears to me to be a form of financial innovation that has the potential to reduce economic inequality,” Brusuelas said. Told.