Bank of America is offering zero down payment mortgages with no closing costs for first-time homebuyers in certain Black and Hispanic neighborhoods in a new program designed to chip away at inequality in the housing market.
The new loan, launched this week, requires no minimum credit score nor mortgage insurance, which lenders typically charge when borrowers put less than 20% down.
Instead of a traditional credit score, first-time homebuyers will be evaluated based on their history of making timely payments for rent, utilities, phone service and auto insurance.
Bank of America said the new mortgage, known as the Community Affordable Loan Solution, is available in certain census-designated markets including Black and Hispanic neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami.
The bank said borrowers do not need to be Black or Hispanic to qualify. Eligibility is based on borrower income and home location.
“Homeownership strengthens our communities and can help individuals and families to build wealth over time,” AJ Barkley, head of neighborhood and community lending for Bank of America, said in a statement. “Our Community Affordable Loan Solution will help make the dream of sustained homeownership attainable for more Black and Hispanic families.”
A Bank of America spokesperson told CNN the bank will consider how to expand the program to other cities after an initial assessment.
The move by one of the nation’s largest lenders comes at a time when skyrocketing home prices have threatened to deepen the alarming divide between White homeownership and that of minorities.
Black homeownership stood at just 43.4% at the end of 2020, according to the most recent statistics available from the National Association of Realtors. That is lower than the rate a decade earlier.
The Hispanic homeownership rate has climbed to a record high of 51.1%, according to the NAR. However, both rates are still well below the White homeownership rate of 72.1%.
The biggest obstacle to buying a home for low and moderate-income homebuyers is having enough cash for down payments and closing costs, according to Boston College Law School professor Patricia McCoy.
“This obstacle disproportionately adversely affects Black and Hispanic-American homebuyers,” McCoy, a former federal regulator, said in an email to CNN.
The racial divide is even more concerning given the fact that homeownership has long been a way to build wealth in America.
A year ago the Biden administration announced several recommendations to close the racial homeownership gap. Earlier this year, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, unveiled a sweeping plan to address discrimination in access to homeownership.
Among the recommendations were down payment assistance, lower mortgage insurance premiums and a credit reporting system that factors in rent payment history. It also suggested increasing the use of special purpose credit programs, which is what the Bank of America loan is.
These credit programs enable lenders to offer loans with favorable terms to borrowers who have suffered economic damages or who share common characteristics like low income, race or location. Though the Equal Credit Opportunity Act prohibits discrimination in lending based on race, sex, age or other traits, it does allow for these credit programs.
As part its program, Bank of America said it will make a down payment on behalf of borrowers. Those grants of $10,000 to $15,000, depending on the city, will immediately give borrowers equity in the home.
The Bank of America spokesperson said the mortgage will feature a “competitive” fixed rate.
The zero down payment mortgage could conjure up bad memories of the subprime mortgage crisis, which was driven in part by shoddy lending standards. Millions of families lost their homes due to foreclosure and lenders – including Bank of America and its Countrywide unit – lost billions of dollars.
McCoy, a former mortgage regulator at the Consumer Financial Protection Bureau, said the Bank of America zero-down payment feature comes with risk, especially because homebuyers will have little equity.
If home prices plunge, borrowers could end up “underwater” on their mortgage – where they owe more than the home is worth.
“The problem of underwater mortgages occurred in the wake of the 2008 financial crisis,” McCoy said, “and it spawned millions of foreclosures, with an especially devastating impact on Black and Hispanic-American homeowners.”
Bank of America stressed that before offering a loan, it will make sure the applicant has the “resources to sustain homeownership and has demonstrated a willingness and ability to repay.” The bank also said prospective buyers must complete a thorough homebuyers’ certification course to make sure they are ready to buy.
Joe Brusuelas, chief economist at RSM, told CNN the program is not big enough to “pose any systemic risk to the bank or the economy.”
Brusuelas added that he is encouraged by the fact that Bank of America will take into consideration alternative factors like timely rent payments and on-time utility bill payments when making mortgage decisions.
“While risk managers inside the bank will have their work cut out for them,” Brusuelas said, “this does appear to me to be the kind of financial innovation that does contain the possibility of narrowing economic inequality.”