Fight Looms over Down Payment Aid to Close Racial Wealth Gap

Democrats are pushing to spend billions of dollars to help first-time homebuyers afford down payments, setting up a clash with industry groups and GOP lawmakers, who are warning about racial targeting of the aid and risks to the housing market.

A $10 billion proposal by House Financial Services Chair Maxine Waters (D-Calif.) would give homebuyers up to $25,000 for a down payment. President Joe Biden’s top housing official, HUD Secretary Marcia Fudge, says such assistance is a priority for the administration.

Waters’ plan has triggered concern in the mortgage industry because it would require lenders to identify and direct aid to first-generation buyers — those whose parents don’t own homes — and “socially and economically disadvantaged” groups. The move is also stirring broader criticism about how much it would help buyers and whether it could even put them at risk.

Democrats are in a “rush to put families in homes they can’t afford,” said Sen. Pat Toomey of Pennsylvania, the top Republican on the banking and housing committee.

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“We are simply providing first-generation homebuyers, largely people of color, what white, first-time homebuyers have been receiving for years in the form of the ‘Daddy Down Payment’ loan — family assistance that is almost never repaid,” said David Dworkin, president and CEO of the National Housing Conference, an advocacy group.

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The plan with the most traction — the $10 billion proposal in a housing infrastructure bill by Waters — would give state housing finance agencies grants to award up to $20,000 in down payment assistance to first-generation homebuyers below a certain income threshold and up to $25,000 if the homebuyer is from a “socially and economically disadvantaged” group. Waters’ bill includes the provision alongside massive investments in public housing and the national Housing Trust Fund.

The California lawmaker has cast down payment assistance as a necessary corrective to the “grave injustices against people of color” produced by U.S. policies of the past.

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While the housing industry is broadly supportive of the plan — boosting homeownership is good for their bottom line — lobbyists are raising concerns about its implementation and the way a prospective homebuyer’s eligibility would be determined.

There’s no standard way to verify who counts as a first-generation homebuyer, for instance, because there’s no central database tracking that information.

The bill defines socially disadvantaged homebuyers, who would qualify for a larger credit, as individuals identifying as Black, Hispanic, Native American or Asian American, but “such presumption may be rebutted with credible evidence to the contrary,” according to a discussion draft of the legislation.

The eligibility requirements have made some mortgage lenders uneasy.

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Republicans are challenging racial targeting outright {snip}

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“This is exactly what [the Federal Housing Administration] was set up to do, to redline,” a Senate GOP aide said, referring to the ugly history of government policies discouraging mortgage lending in Black neighborhoods. “Now to engage in the same practice — to determine who is a certain race and see who should get what money — as a policy matter, that is just something we absolutely oppose.”

GOP lawmakers have also voiced alarm with easing down payment requirements, which serve as a way of ensuring that borrowers have “skin in the game” when they receive a loan. They’re beginning to warn that billions of dollars in down payment assistance would potentially put homebuyers at risk as well as taxpayers.

Toomey, who leads housing oversight for Senate Republicans, warned in a hearing last month that “relaxing underwriting requirements or expanding down payment assistance programs for low-income families, especially in an overheated housing market, is a recipe [for] disaster.”

Mortgages with higher loan-to-value ratios — meaning the borrower has put down less money up front — default at higher rates, according to the government’s own data.

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