Building Assets, Building Credit: Creating Wealth in Low-Income Communities

Chapter 1. New Paths to Building Assets for the Poor

Most poor people have no problem filling in the spaces on their balance sheets for income, debts, and expenses, but come up short in the space for assets. Apart from seniors who bought homes when their incomes were higher, few among the poor have many assets. In fact, when last measured in 2001, the median net wealth of renters with incomes of $20,000 or less was a low $900. Indeed, assets for the poor among those who do not own homes seem an oxymoron. After all, low incomes coupled with high rents and other living expenses rule out savings. In some neighborhoods it is hard to find a bank branch, let alone one that offers accounts for those with minimal savings. Meanwhile , stocks and bonds are accessible to middle- to upper-income earners, as the other ephemera of wealth, like paintings and gold, are to high net worth households. The Path More Traveled Since poor people spend their money on daily living, how can they accumulate substantial wealth? In twenty-first century America, the answer is housing. People who buy homes are buying not just shelter, but also an asset, one in which they will build equity. Through the enforced savings of paying off a mortgage, homeownership can allow the poor to build assets even with little or no infla1 New Paths to Building Assets for the Poor eric s. belsky and nicolas p. retsinas 1 02 7409-5 ch01.qxd 7/7/2005 10:09 PM Page 1 tion in a home’s value. But housing usually appreciates over time, matching or beating inflation, especially if a property is held long enough. Housing has not always been seen as a vehicle for generating financial wealth. Throughout history people have prized and exchanged salt, diamonds, and even tulips, converting these items into mediums of exchange that could rise or fall in value. But houses were not bought and sold. Instead, they were inherited or eventually collapsed from neglect. Even today, in much of the world homeownership is considered socially desirable, but it is not a vehicle for wealth accumulation . For instance, poor people in Mexico own their homes, but since those homes have limited exchange value they are not assets that can be borrowed against or sold to build wealth. A home is most definitely an asset in the United States. Home equity ranks as Americans’ chief source of wealth, even among the majority of households who own stock. And as home values have risen, homeowners have drawn on the equity in their homes through refinances and home equity loans, cashing out $333 billion in this way from 2001 to 2003. Both tax-advantaged and secured by real estate, borrowing against home equity is typically much less costly than consumer credit. Owning a home, therefore, can be a path both to wealth accumulation and cheaper borrowing. Credit for All Just as certainly as housing is an asset in this country, it is only recently that lowincome households, especially those with a history of missed payments (or worse, default), have enjoyed widespread access to the mortgage credit needed to buy homes. Mortgages themselves are relatively new. Until the mid-nineteenth century, most home buyers paid the full cost through accumulated savings, leaving homeownership to the ranks of the wealthy or families who pooled years of savings . By the mid-twentieth century, banks opened homeownership to the middle class, launching the now classic 20 percent down, thirty-year fixed-rate mortgage. After World War II, this classic mortgage propelled thousands of families to the suburbs where they purchased capes and split-levels. Yet many lowincome families (as well as a lot of middle-income families) could not afford this classic mortgage. Either the down payment or monthly payment was too high. Just as crucial, many would-be borrowers found that their race, ethnicity, or religion restricted their choices. Lenders said no to borrowers, even solvent ones, if their skin color was wrong. Real estate agents respected “gentlemen’s agreements ” that restricted some neighborhoods to Christian Caucasians. With red pens, bankers drew exclusionary lines around neighborhoods, barring African American buyers. Even the Federal Housing Administration spawned restrictive covenants and redlining. This barrier to homeownership stymied the creation of 2 new paths to building assets for the poor 02 7409-5 ch01.qxd 7/7/2005 10:09 PM Page 2 wealth. Minorities and others could not buy homes and so...