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Bank of America has a new zero down payment, zero closing cost mortgage for first-time homebuyers aimed at broadening access to homeownership in Black and Latino communities.
It is making its Community Affordable Loan Solution available in designated markets that include predominantly Black or Latino neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami.
As a Special Purpose Credit Program, the Community Affordable Loan Solution doesn’t have a minimum credit score or require private mortgage insurance, an additional cost borrowers typically encounter when putting down less than 20 percent.
AJ Barkley
“Homeownership strengthens our communities and can help individuals and families to build wealth over time,” said AJ Barkley, Bank of America’s head of neighborhood and community lending, in a statement. “Our Community Affordable Loan Solution will help make the dream of sustained homeownership attainable for more Black and Hispanic families, and it is part of our broader commitment to the communities that we serve.”
The new program, announced this week, is the latest component of Bank of America’s $15 billion Community Homeownership Commitment, which has set a goal of helping 60,000 individuals and families purchase homes by 2025.
Bank of America said it’s already helped facilitate 36,000 home purchases by providing more than $350 million in down payment and closing cost grants that don’t have to be repaid and made $9.5 billion in low down payment loans.
Homeownership rate by race, 2010 to 2020
Source: “A Snapshot of Race and Home Buying in America,” National Association of Realtors
At 43.4 percent, the homeownership rate among Black Americans in 2020 lagged the 72.1 percent rate for white Americans by nearly 30 percentage points, according to the most recent research by the National Association of Realtors. The 51.1 percent homeownership rate for Hispanic Americans also trailed whites by more than 20 percentage points.
Black homeownership rate by state, 2020
Source: “A Snapshot of Race and Home Buying in America,” National Association of Realtors
The homeownership rate for Black Americans varies dramatically from state to state, with only 9 percent of Black residents of North Dakota owning their homes in 2020, compared to 56 percent in Mississippi, according to NAR.
Bank of America’s Community Affordable Loan Solution can help more people of color become homeowners because it directly addresses two issues that can often be obstacles, said Jun Zhu, a visiting assistant professor of finance at Indiana University-Bloomington and a non-resident fellow of housing finance policy at the Urban Institute.
“Compared to white households, people of color sometimes do not have sufficient liquidity to compete for a home,” Zhu told CBS News. “And the other thing is that usually minority households have lower income than white households and they have fewer savings. So if you have a program with no down payment [and] no closing costs, it can help minority families to fill the gap between available savings and the upfront cash needed for a down payment and closing costs on the home.”
No minimum credit score
Zhu also likes that Bank of America’s Community Affordable Loan Solution has no minimum credit score requirement. Instead, it uses credit guidelines based on factors such as timely payment of rent, utility bills, phone and auto insurance.
Rental payment history is “highly likely to be predictive of mortgage loan performance,” according to a 2018 analysis by Zhu and fellow Urban Institute researcher Laurie Goodman, funded by the National Fair Housing Alliance.
Mortgage giants Fannie Mae and Freddie Mac have taken note of such research, and are now able to factor in a borrower’s rent payment history into their automated underwriting systems, giving lenders more leeway to do business with borrowers with no or limited credit history.
But loans with no down payment reminded CBS News‘ Tanya Rivero of the last housing bubble and crash.
“I do want to ask you about the zero down payment mortgage piece of this because you can’t help but get flashbacks to the 2008 housing crisis,” Rivero asked Zhu. “And so what are the risks that come with offering some of these types of loans?”
Zhu acknowledged that loans with higher loan-to-value (LTV) ratios tend to be at a higher risk of default, but LTV is not the only risk factor.
“I think in my mind, if … we can monitor the risk, I think the [Bank of America] program can make a step forward in opening the credit box, especially for the minorities.”
Bank of America executives are acutely aware of the risky lending practices of the last housing bubble, having purchased a poster child for those practices — Countrywide Financial — for $4.1 billion in 2008 in the hopes of becoming the nation’s largest mortgage lender. Bank of America ended up paying tens of billions more to private investors, regulators and consumers to settle disputes over Countrywide’s lending practices during the subprime mortgage crisis.
Bank of America’s shrinking mortgage portfolio
Source: Bank of America investor presentation
In reporting second-quarter results in July, Bank of America executives highlighted the bank’s smaller — and more conservative — home loan portfolio compared to a decade ago. At $228 billion as of June 30, Bank of America’s residential mortgage portfolio is 11 percent smaller than it was at the end of 2009. During that period, Bank of America also cut its home equity portfolio by 82 percent to $27 billion.
Brian Moynihan
“You can see how much the loan book has changed under more than a decade of responsible growth,” said Bank of America Chair and CEO Brian Moynihan on a call with investment analysts. “Note that the consumer portfolio is even more collateralized with a greater mix of mortgage and less [credit] card. In addition, much less second mortgage, and obviously, second mortgages [are] underwritten clearly differently than they were in the mid-2000 to 2010 decade. And all consumer portfolios have much higher FICOs”
Bank of America first mortgage originations by channel
Source: Bank of America regulatory filings
During the second quarter, Bank of America originated $14.47 billion in mortgages, down 29 percent from a year ago, with borrower FICO scores averaging a solid 771 and a conservative average loan-to-value ratio of 70 percent.
Bank of America’s more conservative approach reflects that it no longer seeks to be the nation’s biggest mortgage lender. Rival Wells Fargo managed to generate a total of $34.1 billion in second-quarter mortgage production, even as originations tumbled 36 percent from a year ago.
With Wells Fargo reportedly eying a “major retreat” from mortgage, Rocket Mortgage’s $34.54 billion in second-quarter originations suggest it’s well on the way toward achieving its goal of surpassing Wells Fargo as the nation’s largest retail provider of purchase mortgages.
Notably, most of Bank of America’s 2022 mortgage originations have come through its Global Wealth and Investment Management business, from clients who presumably have more assets than borrowers who apply for home loans through the consumer banking channel.
Which is not to say Bank of America has put the 2007-09 mortgage meltdown and recession completely behind it.
The $525 million in second quarter net charge-offs Bank of America recognized in its consumer division, was up by $185 million from the first quarter and included $85 million for “non-core mortgage sales.”
Alastair Borthwick
During the second quarter, Bank of America sold “an old portfolio of residential mortgages that we put in ‘all other’ [category] some years ago” totaling $3.3 billion, CFO Alastair Borthwick revealed on the second-quarter earnings call.
“We did have a loss, so you see that loss running through. But just so you’re aware, it was largely offset by a gain somewhere else,” Borthwick said. “So I wouldn’t think about it as much of an economic loss, but it did temporarily inflate the charge-offs, which is why we called it out.”
And this week Ambac Financial Group, which claims it lost hundreds of millions of dollars on mortgage-backed securities backed by loans originated by Countrywide, announced that it had won a decision that will allow lawsuits it filed against Countrywide and Bank of America as long ago as 2010 to proceed to trial.
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