Closing Costs

Much of intergenerational wealth comes from the ownership of property. It’s a problem. Between deliberate schemes to keep certain people out of neighborhoods, like redlining, and the inability to earn and save sufficient wealth to buy property, a significant cohort has been squeezed out of the market. Needless to say, minorities have not been welcomed with open arms over the years, and so have not been able to accumulate the intergenerational wealth that allows a family to build security and become vested in their community.

But it’s not as if this hasn’t been recognized before, and well-intended programs haven’t been tried to correct this problem by making home-ownership more readily available to black buyers.

Richard Nixon gave voice to a shift in government policy in 1968 when he declared that “people who own their own homes don’t burn their neighborhoods.” The Housing and Urban Development Act of 1968 created policies that let low-income black renters, long excluded from conventional mortgages and other standard ways of financing homes, become homeowners.

At the core of the law were three components: A down payment cost only $200; a buyer’s mortgage was linked to her income, not her house’s value; and the interest rate on the loan, subsidized by the federal government, was capped at 1 percent.

That Nixon’s reasoning was a bit self-serving is beside the point. It was a sweet deal. Essentially, for the cost of a rental, you could buy a home. You could relish the joys of ownership and the benefits of appreciation. No longer would blacks be frozen out of the housing market, perhaps the greatest driver of wealth outside of malicious algorithms ever created. So how did this work out?

It was a boon — at least for banks and the real estate industry.

And for all the related industries as well, like home improvement, but that’s the nature of commerce and doesn’t mean it couldn’t also serve its intended beneficiaries.

Speculators bought decrepit or even condemned houses on the cheap and then quickly flipped them. F.H.A. appraisers, often part-time real estate agents, would sometimes pocket bribes to inflate the value of the house.

Meanwhile, bankers signed off on bloated appraisals because Washington absorbed the risk. These bankers made money on both the fees to make the loan and the closing costs to sell the house, so they cared only about issuing a huge number of mortgages, which they’d package and resell. It didn’t matter to them whether a house went into foreclosure.

To no one’s shock, unscrupulous people quickly figured out ways to capitalize on a government program, to use it, scam it, and turn it to their own advantage. Why people who believe that government offers the fix to social problems fail to consider that this invariably happens because government is incapable of crafting regulations that either foreclose abuse or aren’t so onerous as to make the programs untenable is a mystery.

But these scoundrels couldn’t get away with it without one more thing: clueless buyers.

One of the Americans who saw their hopes of owning a home shattered was Janice Johnson, a black single mother on welfare and living about as far from the lily-white suburbs as a person could get. She and her 8-year-old son had lived in a decaying apartment, in a building that had recently been condemned by city officials, in a working-class black neighborhood in Northeast Philadelphia.

Needing a new place to live, Johnson was pointed toward HUD. Is a single mother on welfare in the best position to buy a house? It’s not that single mothers shouldn’t own houses, although being on welfare suggests that perhaps she would have done better to first have a job, which implicates some unknowns, such as education, child care and, dare I say it, the bourgeois value of a stable family unit to support her?

Ms. Johnson bought her first home in September 1970. But days after she moved in, the sewer line broke, spewing wastewater all over the basement floor. The electricity was sporadic and haphazard. There were holes in the foundation. The windows were nailed shut and inoperable. The floorboards in her dining room were so rotten, she feared her table would fall through the floor.

This is offered as a description of how the unscrupulous banking and real estate industries took advantage of Johnson. Did she not see the house before buying it? Granted, it may not be possible to inspect sewer lines, and sewer lines sometimes break regardless of best efforts to have a home inspector detail the potential problems, but didn’t she see the holes in the foundation, the rotten floorboards in the dining room? Did she look at the windows?

The time to figure out whether a house is too decrepit to purchase a home is before one buys, not after one moves in.

The argument is that Johnson was an easy mark for the scammers, unaware of what to look for and so a patsy for a program that enabled a person with little skin in the game to buy when they lacked the knowledge to assess its value.

She called the real estate agent who sold her the house to complain. He sent workmen out a couple of times, and they even patched the failing plaster in her dining room; but soon after, the agent reminded her that the problems in her house were “homeowner’s business.”

The real estate agent wasn’t wrong, even if the agent was as venal as suggested. Despite the good intentions of the plan, it was doomed to fail, and it failed spectacularly, at least for those it was intended to help.

Real estate brokers and mortgage bankers valued black women like Janice Johnson precisely because they were poor, desperate and likely to fall behind on their payments. The HUD-F.H.A. guarantee to pay lenders in full for the mortgage of any home in foreclosure transformed risk from a reason for exclusion into an incentive for inclusion. Banks could profit from being repaid for inflated mortgages, and profit again when the foreclosed property was resold to another poor family that qualified for a government-guaranteed mortgage.

Missing, here, is any recognition that Johnson had any involvement in her own decisions. It’s the government and its malevolent industries taking advantage of poor black people who were targeted because of racism. But nobody forced them to buy a decrepit house, and if they weren’t capable of figuring out that holes in the foundation present a problem, or that water heaters break and need to be replaced, then no program can save them.

It’s hard to uproot these predatory practices because race has been so important to the real estate industry’s bottom line. At the very least, Washington must renew its commitment to aggressively enforce its own civil rights laws and ruthlessly punish offenders.

Or Washington can give potential home buyers a quick course on what to look for in a house before buying, on what the real costs of home ownership are, and why the accumulation of intergenerational wealth takes some effort and thought.

6 thoughts on “Closing Costs

  1. Dan

    Missing from most of the “push for homeownership” literature is the recognition that there are benefits to renting, too. Among them, that defects in the property are the landlord’s responsibility–though that leads to the question of recourse against the landlord. Another is that, regardless of what happens to the market, you can’t be upside down in a rental. Maybe it’s OK if not everyone (of whatever race) owns their own home.

    Reply
  2. Elpey P.

    This editorial sounds like a much more conservative-friendly argument about government policies than they realize. Those wacky liberals and their unintended consequences. It would be entertaining to repackage it with slightly different conclusions, post it on National Review, and read the hot takes on it.

    Intergenerational wealth is to white people what cars are to Manhattanites.

    Reply
  3. B. McLeod

    Looks like Ms. Johnson understood purchasing a house about as well as Dr. Taylor understands the federal civil rights laws. To her credit, Ms. Johnson didn’t try to write an article about real estate transactions.

    Reply

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