In an effort to address the stubbornly persistent racial wealth gap, one of the nation’s largest banks has launched a mortgage program aimed at first-time homebuyers in Black and Latino neighborhoods. The program’s loose qualifying standards remove some of the major barriers to homeownership — but they also could create a risk of default for borrowers with little safety net.

New no-down payment mortgage

Bank of America’s new Community Affordable Loan Solution requires no down payment requirement, no closing costs, no minimum credit score and no mortgage insurance. The program for now is limited to first-time buyers in African-American or Black and Hispanic-Latino neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami. A key distinction: In addition to the first-time buyer requirement, the bank will determine eligibility for the program by the borrower’s location and income, not race.

An official from a prominent organization of Black real estate brokers lauded the bank’s initiative.

“It’s going to take more than one institution to make a dent, but any positive step toward addressing what has been an ongoing issue is a step in the right direction,” says Danny Felton, a real estate broker in Miami and second vice president of the National Association of Real Estate Brokers.

In one generous feature of Bank of America’s program, borrowers aren’t subject to mortgage insurance premiums. Most low-down payment conventional loans, as well as the 3.5 percent-down FHA loan, carry mortgage insurance. Felton describes that conundrum as “the poor pay more.”

An unequal housing economy

Bank of America’s program aims to address an ongoing challenge for the U.S. housing market: Black and Hispanic Americans’ struggle to attain homeownership. While nearly three-quarters of White Americans owned their homes as of the second quarter of 2022, less than half of Black and Hispanic Americans were homeowners, according to the U.S. Census Bureau.

There are many reasons for the racial homeownership gap, including lower incomes and less household wealth among Black and Hispanic Americans, along with the real estate industry’s history of discriminatory lending practices. Mortgage lenders long ago abandoned such overtly biased practices as redlining, but the economic wounds have been slow to heal. A growing body of research suggests that homes owned by African Americans today are undervalued by appraisers, and in one recent survey, close to half of Black and Hispanic homebuyers reported missing out on homes in certain neighborhoods due to discrimination.

Borrower beware

Bank of America’s program is attractive for the borrowers who qualify. However, it also comes with something of a red flag: Compared to borrowers who clear stringent qualifying hurdles, borrowers who buy a home with no down payment, no closing costs and no minimum credit score face a much higher risk of default. To soften that risk, the bank is requiring borrowers in the program to complete a homebuyer certification course.

Even so, these new owners will buy at what might be the top of the housing market, and with no equity to cushion them against a decline in prices.