A 4-part dissection of how more than 50 years after redlining was outlawed, America’s communities continue the practice in clever and blatant ways
The PMI Scam
Even if a would-be homebuyer is lucky enough to overcome the various obstacles to homeownership this blog series has focused on, there could still be issues that arise from the mortgage process itself. Whether a buyer is getting a conventional loan, an FHA loan, or even a VA loan for a home, all loan types require the buyer to get some sort of mortgage insurance if you are unable to put down 20% of the purchase price. The theory being that if you cannot come up with 20% down, you are likely a higher credit risk than those who have enough money on hand for the “standard” 20%. But any buyer who takes out a mortgage loan for more than 80% of the home’s value (which means you haven’t put down 20%) is required by law to get mortgage insurance—and almost always it is PMI.
PMI (short for Private Mortgage Insurance) is an industry that has been around for a little over 60 years. Prior to that, mortgage insurance was specifically provided by the government. Despite the fact that there are various loans that make it possible for people to buy homes by putting down as little as 3% of the purchase price (such as an FHA loan), PMI is yet another “shadow redlining” technique that is both perfectly legal and that also disproportionally affects poor and minority Americans.
The idea behind mortgage insurance is that it is insuring against any potential risk to the loan itself, such as loss of the buyer’s income, where the buyer is unable to make payments on the home and defaults. In this scenario, what would likely happen is that the home would eventually be foreclosed upon, and if the value of the home had dropped or the resulting foreclosure sale did not cover the amount of the mortgage principal owed, then the mortgage insurance will pay out the difference. This is how it is supposed to work.
Unfortunately, this not what actually happens. Yes, the mortgage insurer will pay the buyer’s remaining balance, but then they come after the buyer for that amount after the fact, even though the buyer had been paying them to insure against just such a scenario. And this is perfectly legal. It is also basically a sanctioned form of theft because the buyer has paid potentially tens of thousands of dollars for what, in essence, is not a service. When you have to pay an insurance company for coverage and then also pay them back for any money they pay out, you have essentially paid for nothing.
Keep in mind that mortgage insurance is not to be confused with home insurance, which covers the structure of the physical home and the land on which it sits. It is an additional cost incurred on top of your property tax, home insurance, mortgage payments and interest, and escrow. But, unlike regular types of insurance, where the company might have to pay out on a car wreck or a home fire but you still maintain a policy with them, the mortgage insurance policy effectively ends when the home is foreclosed upon and sold, and at the time of payout to the bank that held your mortgage, they will turn around and attempt to recoup their “lost” money despite your having paid them to insure you against the possibility of defaulting on the loan for whatever reason.
PMI is calculated—like all insurance—using an algorithm of risk a person poses, and also factors in the value of the home, credit score, and so on. For me, on a $35,000 home loan where I put down 3%, I paid nearly $100 extra a month—almost 25% of my monthly payment. Luckily, I never defaulted on my loan, and after I had paid off the initial 20% of the home’s value, I was able to remove the PMI and save all that money. But, I had, over the first several years of my loan, thrown thousands of dollars away for a service I didn’t want and never needed.
If you do end up getting PMI attached to your mortgage because you are unable to put down 20% of the home’s value when you buy the home, there are a couple things you should know. First, PMI is no longer necessary once you have paid down the principal of the loan enough that you have covered 20% of the purchase price. But, it is essential to track your loan’s progress because PMI is not automatically removed when you have reached 20% of the purchase price. You must contact the lender and have them cancel it, or you will be charged for PMI over the entire life of the loan and potentially spend tens of thousands of unnecessary dollars. Diligence is key here, so track the progress of your principal and contact the bank immediately when you cross the 20% threshold.
Luckily, there are actually ways around this PMI requirement, and potential homebuyers interested in not purchasing PMI would do well to visit this posting at WealthTender to see some very clever and perfectly legal workarounds to avoid throwing money at the PMI scam. It takes a little extra work when shopping for home loans, but it is well worth the effort.
Zoning Laws: The New Redline
There is one additional form of “shadow redlining” that has recently come to the forefront of the battle for housing equality, and that is zoning laws. While zoning laws are as complex and varied as the communities across America that employ them, one particular type of zoning law is largely agreed to be a new form of redlining that has flown under the radar because of the many other types of “shadow redlining” outlined in this series and the many other types that haven’t been featured in this blog. This type of “shadow redlining” zoning law is known as “exclusionary zoning,” which, much like redlining itself, created laws about how land could be used in a community. For example, some communities forbid apartment buildings or certain types of businesses to be allowed to even exist.
The most problematic and commonplace of these exclusionary zoning laws is the “single-family” law, which expressly outlaws multi-unit homes, from duplexes all the way up to sprawling apartment complexes. On its face, it seems reasonable that a community would not want to have massive structures or problematic businesses sullying the value and reputation of their community. This is the ever-popular NIMBY (Not In My Backyard) way of justifying these types of exclusions. But the reality is that our country has been facing an affordable housing shortage for decades, and multi-unit housing is how affordable housing is most logically, quickly, and cheaply built.
So common and historically problematic are “single-family” zoning laws, that the Biden Administration, as part of its America Rescue Plan passed in March 2021, singled out this practice and offered grants and tax credits to cities that change their exclusionary zoning laws.
Fair housing advocates were impressed by the gesture from the White House, but were not 100% convinced that the initiative would actually have a meaningful and lasting impact. The fear is that many of these racist exclusionary zoning laws are not only too entrenched in their communities, but that Americans from both sides of the political spectrum tend to adopt the NIMBY attitude. Even people who identify as progressive who want to address historical wrongdoing in our country are for the idea of more affordable housing, as long as it’s somewhere else. Also, fair housing advocates worry that this is a step in the right direction, but doesn’t go nearly far enough in addressing the many historically racist, purposeful, and still lingering practices of boxing poor and minority Americans out of homeownership and its many benefits.
Even so, the latest battle being waged in the never-ending fight for fair and equitable housing for all is now zoning laws. Cities and towns across the country are attempting a variety of ways to address our nation’s long history of exclusionary and racist housing practices. But these battles are only just beginning and are facing pushback from taxpayers in both red and blue states and cities.
The battle has been long, and continues to be fought to this day, but we must not lose sight of the ways—both large and small, purposeful and accidental—that poor and minority Americans are still being denied access to homeownership. Regardless of the outlawing of the federally sanctioned practice of redlining over fifty years ago, what is both disheartening and obvious to fair housing advocates is that there are countless forms of “shadow redlining” that persist to this day, and it they all need to be addressed. Luckily, it appears that the Biden Administration is truly aware of many of these forms of systemic and racist practices that have affected communities of color for generations. Hopefully the various laws and initiatives that have been outlined in this blog series are only the beginning of America’s need to honestly reckon with our historically racist housing past, so that we can move toward a truly more equitable future for all.
In the meantime, our initiative here at AHP 75 was expressly designed to address many of the root causes that are keeping America’s poor and minority communities from joining the ranks of their White counterparts as majority homeowners. We are proud to be on the frontlines of this never-ending fight, and we will continue to battle alongside our fellow fair housing advocates to reach 75% homeownership for all Americans, regardless of race or income.
Are you ready to make your move into the world of homeownership? Visit AHP75.com to learn about our homebuyer programs designed specifically to help low-income and minority Americans join the ranks of homeowners and get onto the path of financial stability and wealth generation.
Aaron Morales is the Social Justice Writer for AHP 75, based out of Chicago, IL.
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