Marsheila Caldwell wants to celebrate her upcoming 50th birthday by buying a home in a neighborhood safe enough for her 11-year-old son to play outside.

The Cincinnati social worker is gearing up to restart a search she had abandoned out of frustration three times in recent years because she couldn’t find an affordable house that met her needs. But she also knows the market has only gotten more difficult, with home prices hitting record levels and interest rates hovering at two-decade highs.

“I’m just praying that somewhere I can find what I’m looking for,” Caldwell said.

Finding a home she can afford could get harder if regulators get their way. An unusual alliance of big banks and some housing affordability advocates are arguing that a proposal meant to boost the financial stability of banks would make mortgages more expensive for cash-poor home buyers – disproportionately people of color.

The proposed rule change would force banks to hold on to more capital for residential mortgages with smaller down payments. The logic is that such loans are riskier, so banks should keep more in reserve against defaults.

The practical effect: To afford that bigger cushion, banks will demand higher mortgage rates for borrowers who can afford only a small down payment.

Despite narrowing during the pandemic – helped by low interest rates and government stimulus programs – the racial homeownership gap has been widening more recently and now stands at 29 percentage points, its widest in a decade, according to the National Association of Realtors.

“This is an all-hands-on-deck moment,” said Odette Williamson, a senior attorney with the National Consumer Law Center.

And working-class minorities hoping to buy their first home – a critical tool for building wealth that many have been systematically denied – have been facing new obstacles in recent years.

Borrowing costs for mortgages have more than doubled over the last two years as the Federal Reserve has battled inflation by hiking interest rates, which hit a 22-year high earlier this year. That has compelled current homeowners to hold off from selling and instead stay put until rates cool – choking off supply and locking in prices that rocketed during a pandemic-fueled buying spree.

OUT OF REACH

Higher financing costs already have put homeownership out of reach for most of these borrowers who qualified just two years ago: Before the Fed started raising interest rates, 3.4 million Black Americans were deemed “mortgage ready” based on their credit history and income, according to research by Freddie Mac. Thanks to the higher cost of financing, that number stands at less than 1 million now, the National Fair Housing Alliance found in a follow-up analysis based on traditional underwriting standards.

Meanwhile, Black home loan applicants in the 50 largest U.S. metropolitan markets are 1.6 times more likely to be denied than the overall population, a recent study by LendingTree found.

“That just shows you what happens with this wealth divide,” National Fair Housing Alliance CEO Lisa Rice said. “When you don’t have family members that you can lean on because they weren’t able to build wealth to help with a down payment, these higher interest rates have a devastating impact.”

These concerns prompted regulators and industry executives a few years ago to make home-buying easier for underserved borrowers. After George Floyd’s murder ignited nationwide protests in the summer of 2020, corporations across the economy committed to projects aimed at battling systemic racism. Mortgage lenders pledged to work with financial regulators to provide credit to more minority borrowers.

Yet only a handful of companies followed through. While several mortgage lenders have launched pilot programs over the past year that collectively pledge to initiate tens of thousands of home loans, those efforts will barely make a dent in the racial homeownership gap at their current scale: Closing it would require 4.5 million more Black Americans buying homes, according to the Urban Institute.

More broadly, big financial institutions have retreated from lending to economically disadvantaged mortgage borrowers. Three of the largest banks for mortgage lending – Bank of America, JPMorgan, and Wells Fargo – cut the share of home loans they issued to lower-income borrowers by more than half in the six years following the 2008 financial crisis, a 2017 Federal Reserve study found.

The new rules put forth by banking regulators could drive banks to accelerate that trend, critics say. The proposal, unveiled in July by the Federal Reserve and two other agencies, would not only harmonize U.S. regulations with international rules on capital requirements but also would go beyond foreign standards regarding extra capital for larger banks. Advocates of the change say it’s an attempt to ensure the banking system remains sound in the event of another crisis like the one that shook the industry this spring.

ODD BEDFELLOWS

The banking industry has launched an unusually aggressive lobbying blitz against the proposal with help from some unlikely allies: Traditionally progressive groups focused on promoting homeownership are also rallying against it.

The Financial Services Forum, representing eight of the biggest U.S. banks, said it is spending a seven-figure sum on television advertising blasting the proposal as an added fee on Americans already burdened by inflation. Another group, called Center Forward, is airing ads with a similar message on national broadcasts, including during NFL games. And big bank CEOs raised the issue in testimony before the Senate Banking Committee on Wednesday.

Meanwhile, the NAACP, the National Urban League, and the Urban Institute have lodged their critiques. An Urban Institute study of the proposal’s impact on lower-income minorities concluded it is “particularly perverse in the face of efforts by the bank regulators and other government agencies to encourage banks to increase their lending to precisely these borrowers and communities.”

Not all progressive groups oppose the proposed rule. Alexa Philo, a former Federal Reserve Bank examiner who now works as a senior policy analyst at Americans for Financial Reform, said the proposal has sparked heated opposition from the industry because it could dent executives’ pay.

“When banks have to raise more equity capital, it can depress the share prices that are linked to banker bonuses,” she said in an email. “That’s why the bank lobby fights greater capital requirements with everything it has. The rest, particularly about alleged harms to economic growth, is largely nonsense.”

Sen. Sherrod Brown, D-Ohio, who chairs the Senate Banking Committee, struck an incredulous tone over the industry’s lobbying push as the bank CEOs testified before the panel Wednesday.

“Wall Street banks are actually saying that cracking down on them will, quote, ‘hurt working families.’ Really?” he asked. “You’re going to claim that?”

But pushback from such a broad range of outside groups has helped spur bipartisan concern on Capitol Hill, where lawmakers pressed Michael S. Barr, the Fed’s chief banking cop, on the matter in a pair of hearings last month.

Barr, the architect of the proposal, signaled that regulators could tweak the final version, expected to roll out next year. “We do care very much about access to credit for low- and moderate-income borrowers,” he testified. “We hear those concerns, and we will very much take those into account as we work to finalize the rule.”

THE NEW PLAYERS

As banks have offered fewer home loans, companies such as Quicken Loans and Guaranteed Rate – “non-bank lenders” that are not subject to the same strict oversight facing banks – have stepped in to fill some of the gaps. In 2014, four of the top five mortgage lenders were banks; in 2022, only Wells Fargo remained in the group, according to the mortgage data analysis firm Recursion.

But this new crop of lenders is at best an imperfect substitute for banks, housing finance experts say.

“A borrower in a high-cost area with limited cash for a down payment would probably still find it difficult to secure credit from a non-bank lender,” said Michael Reher, an assistant professor at the University of California at San Diego who has studied the phenomenon. He also experienced it firsthand when he needed to finance 90% of his home purchase and could land a mortgage only from a local bank.

The reason, Reher said, is that banks have greater leeway to keep mortgages with smaller down payments on their balance sheets since they have a generally stable cushion of funding from their deposits. By contrast, the newer mortgage companies aren’t banks and don’t have deposits, so they need to sell off a greater portion of the loans they make to Fannie Mae and Freddie Mac, the government-backed mortgage giants that help pump liquidity into the housing market. In turn, Fannie and Freddie limit the sorts of loans they will buy to reduce their risk exposure.

The proposed capital rule would not apply directly to non-bank lenders. That disparate treatment could end up costing the neediest borrowers, some housing finance experts say. Minority home buyers tend to pay more than others in closing costs when buying a home, an expense that can cost up to 1 percent of their loan, recent research has shown. And the fewer lenders available, the more expensive these costs will be on account of the diminished competition, Reher said.

For Caldwell, every additional expense weighs against buying a house, a move she already needs to stretch to afford. So the Cincinnati resident has padded her savings for a down payment to $3,000, paid off credit cards to improve her credit score, expanded her search area – and adjusted her expectations.

Caldwell said she originally told her Realtor she wanted to find a three-bedroom house and could spend $1,500 a month on a mortgage. He countered she had to find a way to pay $1,800, and that number has since climbed.

Then again, if she extends the lease on her two-bedroom apartment – where her 11-year-old son is sharing a bedroom with his 22-year-old brother – her rent will increase by $70 a month, to nearly $1,400.

“To hear costs just keep going up is really disheartening,” she said. “Where do they want people to live?”

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