How wealth is extracted from lower income folks, other quirks of ‘new’ economy
By David Pendered
Renters take a double whammy — they don’t build home equity, and their on-time rent payments don’t get reported to help build their credit score.
The result often is higher interest rates paid to lenders for credit card debt, car loans and other sorts of debts than the rates paid by homeowners. In contrast, homeowners can borrow money at lower rates than renters because of higher credit scores associated with housing equity and credit history built with each on-time payment.
Non-white Hispanics comprise the group that gains the most from this aspect of the nation’s financial system. A Census report shows about 75 percent of non-white Hispanics own homes, compared to almost 50 percent for Hispanics and about 45 percent for Black alone homeowners.
This issue of homeowner equity and credit history is another aspect of structural racism brought to light in the Federal Reserve’s 10th and final event in its “Racism and the Economy” series. The next round of meetings, to begin in February 2022, is to exam policy proposals to promote financial equity the Fed can implement within its mandate to promote maximum employment.
Credit history and ratings are components of the financialization of society, which panelist Lisa Servon described in terms of extracting wealth from those of lower income. The use of credit scores as a ubiquitous measurement started only in the 1980s and has increased at a rapid pace, according to Servon, the Kevin and Erica Penn presidential professor, and department chair of City and Regional Planning, at the University of Pennsylvania.
Atlanta Fed President Raphael Bostic said at the Nov. 16 event the Fed has both the authority and influence to enhance equity within the nation’s financial system in order to help lower-income folks.
“I think there’s a lot of space in making being poor less expensive,” Bostic said.
California has started an effort to help renters establish credit history. Servon said the new law has “the potential to level the playing field between renters and owners.”
Starting on July 1, California required certain landlords to submit rental payments to a major credit bureau upon the renter’s request. The new law applies to landlords of multifamily structures that receive state or federal subsidies to provide affordable dwellings. The intent is to help renters establish a credit history that can lead to higher credit ratings, and lower costs to borrow money.
Abbey Wemimo, a co-founder of New York-based Esusu Financial Inc., highlighted the concept at the event. Wemimo’s policy proposal presents insights on how its version of a reporting program could help renters build their credit.
Home ownership isn’t a panacea for minorities, according to Lisa Rice, president and CEO of the National Fair Housing Alliance. They tend to pay higher interest rates for mortgages and higher fees for essential services including home insurance, she said.
“A research analysis led by Berkeley researchers shows African Americans and Latinos are paying $765 billion more than their commensurate level of risk when they do access mortgage credit,” Rice said, without elaborating.
The “Racism and the Economy” series has been underway for a year. Bostic was an early advocate of the program created soon after George Floyd’s murder by a police officer, in May 2020. The intent was to assess opportunities for the central bank to improve equity in the nation’s financial system.
Note to readers: All 12 banks of the Federal Reserve System hosted the “Racism and the Economy” series. Click here to read more about the look into structural racism in the nation’s economy.