Building Equity: New Mortgage Product to Support Homeowner Success and Investment into Homes

Starting Date: 2020-01-01

Family Housing Fund (FHFund) and our partners will expand access to capital for Black homeowners by developing and piloting a new mortgage product with a built-in savings escrow on the private market. Homeowners will be able to withdraw from this escrow to help make mortgage, utility, insurance, or property tax payments if needed, or to make repairs or improvements to their home. This mortgage product will create a new pool of resources to help homeowners weather financial emergencies or invest in home improvements.

With a mortgage product that ensures access to cash savings, homeowners will be well-equipped to invest in maintenance or improvements, ensuring that repair needs compounded with appraisal bias do not further devalue homes in Black communities. Importantly, homeowners will be well-equipped to preserve and grow the value of their homes, thereby creating future stability and greater wealth building opportunities for their families and communities.

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What is the geographic reach of your work to date?

Regional

Which metropolitan areas (if any) does your work focus on?

Twin Cities seven-county metro region (Minneapolis, Saint Paul, and surrounding suburban counties)

What is the core idea of your innovation? How does it increase the value of homes in Black communities?

Family Housing Fund (FHFund) and our partners will expand access to capital for Black homeowners by developing and piloting a new mortgage product with a built-in savings escrow on the private market. Homeowners will be able to withdraw from this escrow to help make mortgage, utility, insurance, or property tax payments if needed, or to make repairs or improvements to their home. This mortgage product will support homeowners to build liquidity to help weather financial emergencies or invest in home improvements. Many homes in Black communities in the Twin Cities require substantial investment due to their age and years of neglect by institutional investor owners. While these homes can provide an affordable entry point to homeownership for low-wealth individuals, homeowners often deplete their savings to purchase a home and have little access to capital for repairs or home improvements in the early years of ownership. National research indicates that appraisal bias also devalues these homes, further limiting access to capital for homeowners to make improvements. With a mortgage product that ensures access to cash savings, homeowners will be equipped to invest in maintenance or improvements, ensuring that repair needs compounded with appraisal bias do not further devalue homes in Black communities. Importantly, homeowners will have resources to preserve and grow the value of their homes, thereby creating future stability and greater wealth building opportunities for their families and communities.

Support from this Challenge will allow FHFund to kick-start the development of the mortgage product and pilot the product on the private market. In this grant period, we will work with private lenders, nonprofit community partners, and impacted households to co-design a mortgage product that meets the needs of Black communities and serves lenders’ interests.

As the mortgage product proves successful, we plan to embed it into the private lending industry to create structural change. FHFund will work with three private lenders to develop and pilot a mortgage product in the Twin Cities during this grant period. After piloting and refining the product, we expect that our lending partners will permanently embed it into their business practices, more private lenders will adopt the model, and widespread adoption will shift the mortgage lending industry.

How is your idea new or different from current approaches?

Our innovation builds on current approaches used in the nonprofit sector and adapts them for the private sector. For example, Twin Cities Habitat for Humanity requires homebuyers to purchase homes using a mortgage product with a built-in savings escrow to ensure that new homeowners have access to savings that can be used to make mortgage and utility payments when financial emergencies arise. The national nonprofit Prosperity Now has researched a similar mortgage escrow concept and its potential for ensuring success in homeownership. Building on the experience and research of these and other nonprofits, FHFund will utilize our unique position and skill for cross-sector collaboration to adapt this concept for the broader private market.

A JPMorgan Chase analysis of private bank data shows that access to cash savings significantly reduces the likelihood of mortgage defaults, and liquidity is more effective than home equity in ensuring homeowner success (JPMorgan Chase Institute 2019, https://bit.ly/3H0SVII). This evidence suggests that post-purchase savings behavior among borrowers is beneficial for private lenders, and they may have an incentive to support a borrower’s savings behavior. As such, we will work with private lenders to co-design, pilot, and embed a mortgage product with a built-in savings escrow. After data from the pilot period is available to support the hypothesis that this product reduces mortgage default, we expect that private lending partners will incorporate it into their business practices and more lenders will follow suit, creating systems change that expands access to capital more broadly across the market.

We believe our innovation is unique because the savings escrow may also be used for home repairs, renovations, or other improvements such as energy-efficiency upgrades. Our goal is not only to support sustained homeownership, but also to create a new tool for investing in and growing the value of homes in Black communities.

FHFund is in a unique position to pilot this mortgage product as part of our broader body of work to help new Black, Indigenous, and People of Color homeowners build wealth. This body of work – the Building Equity in Small Multifamily Ownership initiative – has already attracted interest and secured support from private market lenders.

What are the primary circumstances that devalue homes in Black communities that you are addressing? What is the impact?

In the Twin Cities, much of the housing stock in Black communities suffers from years of disinvestment and neglect. With nearly 40% of homes built before 1970, the Twin Cities region generally has an aging housing stock in need of rehab and repairs. After the foreclosure crisis disproportionately caused Black homeowners to lose their homes, national investors bought many homes in Black communities and converted them to rentals. These investors proved to be less responsive to maintenance, renter, and community needs, and many investor-owned homes now need reinvestment due to quality and habitability concerns. The Near North neighborhood of Minneapolis – where the majority of residents are Black and 1-4 unit homes make up most of the housing stock – was hit especially hard by the foreclosure crisis and the transition to investor ownership.

Affordable homeownership options in majority-Black or BIPOC neighborhoods often come with significant repair needs. With home prices now rising at historic rates, Black households often need to fully deplete their savings in order to provide sufficient down payment to purchase a home. As a result, they are left with minimal savings and access to capital to invest in improvements or repairs. Black families in the Twin Cities are more likely to lack access to generational wealth, as they have long been locked out of homeownership and wealth building opportunities. Due to a history of segregation, racial covenants, and destruction of Black communities for highway construction, our region is home to the nation’s worst Black-white homeownership disparity; while 76% of white households own their homes, only 24% of Black households are homeowners. In Minneapolis, Black households make up 17% of households but own 5% of the housing wealth, while white households own 88% of housing wealth (Urban Institute 2021, https://urbn.is/3KBAj4l).

Without access to capital for repairs in the early years of ownership, households can struggle to make improvements or repairs to their homes. They may even fall behind on mortgage payments because they need to pay for repair needs instead. Ultimately, repair and rehab needs compound with bias in appraisal and other factors to devalue homes in Black communities. In Minneapolis, the average value of Black-owned homes is $70,000 lower than the city average (Urban Institute 2021).

What were your “aha” moments (the key insights) that led you to see how your innovation could work?

In late 2019, FHFund began developing a strategy to reduce racial disparities in wealth and homeownership by helping BIPOC families build wealth as owner-occupant landlords of 2-4 unit buildings. This strategy became the Building Equity in Small Multifamily Ownership initiative, and we have received two major grants to deploy lending capital as part of the initiative. As we developed the strategy, we began building new relationships and deepening our existing relationships with Black-led and community-based nonprofits. In conversations with these partners, we heard that current mortgage products were not meeting the needs of Black homebuyers and other people of color for several reasons, including underwriting requirements that do not represent the full story and qualifications of a mortgage applicant.

We also met with nonprofit and private market lenders to inform the Building Equity strategy. These lenders expressed caution about providing mortgages to low-wealth individuals, especially for 2-4 unit properties, out of concern that homeowners would not have the resources to weather rental vacancy periods, or make repairs and improvements to aging homes without missing mortgage payments. From these conversations, we learned that access to post-purchase support for rehab and repairs was critical not only for sustaining homeownership, but also for successfully securing mortgage financing in the first place. We understood that Black communities were seeking new mortgage options and that lenders were seeking assurances beyond traditional underwriting guidelines.

Another major “aha” moment came from JPMorgan Chase Institute research (cited above), which demonstrated that access to cash savings reduces the likelihood of defaulted payments. These findings suggest that private lenders have an incentive to support savings behavior among mortgage borrowers and may be willing partners in piloting a mortgage product with escrow. More private lenders across the industry will have an incentive to adopt our mortgage product once it is proven effective in preventing mortgage defaults.

FHFund and our partners secured a three-year capital grant from JPMorgan Chase to pilot the Building Equity strategy, including this mortgage escrow concept. Interest and support shown by JPMorgan Chase encourages us to believe that our innovation will gain traction in the private market.

How does your innovation create structural change? What will be different in 5-10 years if you are successful?

After proving that this mortgage product with escrow prevents mortgage defaults and improves homeowner success, more lenders will adopt the product and embed it into their businesses, making it available across the market and in more geographies. Widespread adoption of the product will create structural change in the private lending market, broadly increasing access to capital for homeowners. Additionally, through the process of co-developing the mortgage product across sectors, we will establish a model for collaboration between community partners and the private lending industry.

We envision that in five years, the majority of the top-ten private mortgage originators in the Twin Cities market will offer our mortgage product. Homeowners who choose to use the mortgage product with escrow will have sufficient savings that can be accessed to pay bills when financial emergencies arise or to make repairs, renovations, or improvements to their homes. Ensuring their homes are stable, safe, and healthy will reduce stress, anxiety, and other negative health outcomes associated with housing instability. Energy-efficiency improvements will lower households’ environmental footprints and reduce energy costs. Importantly, low-wealth individuals – and Black households in particular – will preserve and grow the value of their homes. Higher valued homes will offer homeowners greater wealth-building opportunities, and Black families will create generational wealth that supports the stability and success of their families well into the future. Paired with other supports created by the Building Equity initiative, our innovative mortgage product will help significantly reduce racial disparities in homeownership and wealth.

We believe that our innovation is one piece of the puzzle to fully value homes in Black communities and close racial wealth disparities. We understand that homes in Black communities are also undervalued due to bias in appraisal, disinvestment in communities, wealth extraction, and the legacies of redlining, segregation, and destruction of Black neighborhoods. FHFund is eager to learn about more ideas for addressing these systemic issues from other Challenge participants and more leaders in the field.

What is your innovation’s path to (i.e. strategy for) success? What momentum or impact have you achieved thus far?

We have built significant momentum for this market innovation. Our mortgage product concept is an outgrowth of our Building Equity initiative, which aims to help BIPOC homeowners build wealth as owner-occupant landlords of 2-4 unit buildings. This initiative received a multi-year capital grant from a national private lender in 2020 and a second large investment from a local foundation to expand its geographic scope in 2021. Several components of the initiative, including a down payment assistance loan program, and a zero-interest repair loan program, were launched in 2021 or will launch in the first half of 2022. A portion of funding from the capital grants is dedicated for risk mitigation to help pilot mortgage innovations, and these funds could be used to incentivize participation in the mortgage escrow concept. So far, the focus of the Building Equity initiative has been to support homebuyers in the 2-4 unit market, but we are exploring which elements of this initiative should be implemented in the single-family market as well. Our innovative mortgage product will be available to single-family homebuyers as well as buyers of 2-4 unit buildings.

Through the Building Equity initiative, we have begun developing relationships with private lenders, who informed our project and could become important partners in piloting our mortgage product. We have also built and deepened relationships with Black-led, community-based organizations who focus on meeting the specific needs of BIPOC homeowners and communities. These partners have helped us understand the needs of the Black communities that we aim to serve and are critical informants for our work. They will be crucial partners in the development of our proposed mortgage product with escrow.

This grant will allow FHFund to dedicate staff time and hire a consultant to lead the development of this mortgage product. During this grant period, we will identify and hire a consultant with expertise and relationships in the private lending industry who will help us engage and secure participation from private mortgage lenders. We will convene private lenders, Black-led community partners, and individuals with lived experience to work together to co-design the mortgage product. After designing and implementing the product, we will evaluate what works and make adjustments as needed in a collaborative, iterative process.

What will take your innovation to the next level?

To kick-start the development and launch of a new mortgage product with built-in escrow, capacity funds are needed to dedicate FHFund staff time and to hire a consultant to lead this work. While the Building Equity initiative has received two large capital grants, the vast majority of these funds are restricted for lending capital such as construction loans and down payment assistance. Funding for personnel to lead the work is currently limited. Support from this Challenge will allow FHFund to hire a consultant with the expertise and relationships necessary to work with private lenders.

Participation from private market lenders is critical to successfully create systemic change. As previously stated, JPMorgan Chase research provides evidence suggesting that private lenders have a vested interest in supporting savings behavior among mortgage borrowers. With an expert consultant, we will craft a compelling business case for working with us to design and pilot this mortgage innovation. We have three specific Twin Cities lenders in mind to serve as our first potential partners for this innovation.

So far, we have met multiple times with these three private market lenders to discuss this concept. Overall, there is interest and agreement that this type of innovation is needed. Further engagement is needed to activate private market champions who actively push this work forward. Cultivating these champions would be a first task for the consultant hired during this grant period.

Participation from our Black-led community partners is also critical for the success of our innovation. These partners are already working closely with us in several aspects of the Building Equity initiative. With this grant, we will compensate these community partners for the time they spend helping to co-design the mortgage product and advising the project.

Finally, more data and evidence demonstrating the impact of post-purchase savings would improve the likelihood of private market adoption of our mortgage concept. As part of the Building Equity initiative, FHFund is piloting a three-year, post-purchase matched savings program for new homeowners. We plan to use early learnings from this pilot to help build the case for incorporating savings behavior into mortgage products. This program will also inform the development of our mortgage product.

How will you involve others to move your initiative forward?

As stated above, we plan to work with a consultant and at least three private lending partners to co-design and pilot this mortgage product in order to prove its success and benefits on the private market. Using early evidence demonstrating the impact of liquid savings on mortgage performance, we will make a strong business case for private market participation in our pilot. Additionally, restricted funds from our Building Equity budget may be used to help mitigate any perceived risk and secure participation. Ultimately, private market adoption of this mortgage product is necessary to embed our innovation into the mortgage lending system and create structural change. In the long term, participation from more private lenders will be needed to scale our work and truly shift the market. As we pilot the mortgage product and prove that the savings escrow successfully reduces likelihood of defaulted payments, we will share our results and learnings broadly with more lenders and with the broader public.

We will also work with Black-led community organizations to co-design the mortgage product and advise the project, as stated previously. We already have strong relationships with these organizations, some of which are nonprofit lenders, developers, and housing providers who are piloting similar mortgage innovations in the nonprofit space. We share the same goals to support Black families in building wealth through homeownership. We will also learn from the experiences of nonprofit organizations that have already implemented a similar mortgage escrow concept, such as Twin Cities Habitat for Humanity. We have already met with these partners to learn about their experiences and rally support for this work.

In everything we do, FHFund works in a collaborative and iterative process with many partners and stakeholders. As a housing intermediary working across private, public, and nonprofit sectors, FHFund is uniquely positioned to bring different partners to the table and find solutions that work for everyone. We bridge a variety of perspectives to catalyze bold action and systemic change. As we develop and pilot the mortgage product in this grant period, we may seek advice, feedback, or partnerships with additional organizations.

What is the current composition of your team (types of roles, qualifications, full-time vs. part-time, board members, etc.). How do you plan to evolve the team’s composition as the innovation grows?

The FHFund team includes seven full-time staff positions, four of which are dedicated to spending significant time on elements of the Building Equity strategy. Two of these staff members are highly experienced in designing and implementing cross-sector initiatives, balancing different perspectives to find solutions to entrenched problems and create a housing system that works for everyone. With a background as a realtor and broker, a third staff member brings a private market perspective to the work. This staff member was recently hired to help lead FHFund’s growing body of work to expand access to wealth building opportunities, including this mortgage concept and the Building Equity initiative. Finally, FHFund is in the process of hiring a new program director (the fourth staff position involved in this work), who will contribute to and oversee this project. Additionally, a variety of perspectives from public, private, and nonprofit sectors are represented on FHFund’s board of directors, which includes leaders from the Minneapolis and Saint Paul City Councils, the Minneapolis Regional Chamber of Commerce, and community-based organizations.

FHFund has developed and deepened relationships with Black leaders of community-based partner organizations through several program areas. In the Building Equity initiative, we work closely with three Black-led organizations in the Twin Cities with expertise in banking, financial coaching, community engagement, and housing development. We discussed and garnered support for our mortgage escrow concept with these partners as part of the development and implementation of the Building Equity initiative. We recently discussed plans for this mortgage product with one of these partners, a CDFI who is also piloting innovations to mortgage underwriting and lending. This partner is eager to provide a mortgage product with escrow themselves and could be a first pilot lender of this innovation, establishing a proof-of-concept that inspires lenders on the private market.

The consultant we hire for the project during this grant period will have expertise and key relationships in the in private lending industry to leverage for this project, as well as a strong commitment to advancing racial equity. When FHFund hires consultants and contractors, we prioritize choosing firms led by BIPOC individuals and women.

How does your team reflect communities directly impacted by the topic you are addressing? Why are you, your team, or organization dedicated to the issue?

FHFund’s mission is to help the affordable housing network adapt to the needs of families in complex and constantly changing conditions. We work towards building a housing system that works for everyone in our region – a housing system that is fair and predictable, produces a breadth of real housing choices, addresses the entrenched impacts of systemic racism, and offers solutions at a scale that meets the regional demand for affordable housing. One of our core goals is to ensure that families have equitable access to opportunities to build wealth and live in healthy, affordable homes. The devaluation of homes in Black communities in the Twin Cities prevents many Black homeowners from building generational wealth, leads to further disinvestment, and stifles community and economic growth. Additionally, neglected maintenance needs or quality concerns in the region’s housing stock can become serious habitability issues that threaten the housing stability and health of families, with a disparate impact on BIPOC households. Nationally, 5.8% of Black homeowners report living in inadequate housing conditions, compared to 3.1% of white homeowners (Urban Institute 2020, https://urbn.is/3IwtEGT).

FHFund is dedicated to addressing the devaluation and quality concerns of homes in Black communities as we work towards building an equitable housing system that works for everyone. Housing is the foundation for success stories; when families can build generational wealth through their home, they have greater housing stability over time and more opportunities to invest in their education, careers, or businesses. Because FHFund is an intermediary with its eye on the entire housing system, in all of our work we focus on developing and implementing strategies that have the potential for creating systemic and structural change.

As a white-led organization, we know that it will take humility and persistence within our organization as we deepen our commitment to racial equity and build the relationships necessary to do this work with intention and authenticity. We are committed to deepening and expanding our relationships with BIPOC-led partners and communities, and we are committed to compensating Black-led organizations and people with lived experience who share their valuable time, experience, and knowledge with us.

Is there anything else you think we should know about your innovation?

We will determine the features and logistics of the mortgage product as we convene lenders and community partners to co-design the project. Currently, we anticipate the product will build recurring escrow payments into monthly mortgage payments and will offer a lower interest rate that ensures affordability for the homeowner. Because the escrow reduces risk for the lender, the product would be less expensive for the lender to operate, justifying the lower interest rate. These are our early ideas; rather than prescribing the exact structure of the product, we are kick-starting a collaborative planning process to design and implement the product.

We believe this is a unique moment in time for creating systemic change that advances racial equity in the Twin Cities region. The police murder of George Floyd in Minneapolis and the uprising that followed sparked intense public will for new approaches and created a generational opportunity for structural reform in our region. Organizations across the housing system, including many private sector entities, voiced renewed or revamped commitments to racial equity work. With this new public will and resolve, we have a historic opportunity to engage new partners, implement innovations, and transform our system. It is a moment for real change that is long past due.

The attached file provides an overview of the broader Building Equity strategy referenced in this application. Our mortgage product concept is an outgrowth of this established initiative, and other elements of the strategy will complement the product to ensure homeowner success. While the Building Equity initiative focuses on supporting ownership of 2-4 unit buildings, the mortgage product we propose will be available to single-family homeowners as well as small multifamily homeowners.

The second attached file is a PDF version of the JPMorgan Chase Institute research referenced in the previous questions. The findings of this report suggest that private mortgage lenders have an incentive to support post-purchase savings among homeowners. These findings encourage us to seek partnerships with private market lenders and lead us to believe our mortgage product concept will gain traction in the private market. This report is also available here: https://bit.ly/3vR4Who

The third attachment is FHFund’s 2021 strategic plan.