The headline and an excerpt: 

Elizabeth Warren’s New Housing Proposal Is Actually a Brilliant Plan to Close the Racial Wealth Gap by Mehrsa Baradaran and Darrick Hamilton/Slate October 26, 2018 

“Last month, Sen. Elizabeth Warren released a $450 billion housing plan called the American Housing and Economic Mobility Act. … The bill is the first since the Fair Housing Act with the explicit intent of redressing the iterative effects of our nation’s sordid history of housing discrimination.”

According to Baradaran and Hamilton, past housing discrimination has led to present-day disparities in education, income and wealth, because it allowed white families to use their home equity to:

“…secure small-business loans, send their children to college, or help their children put together home down payments—an iterative wealth building that was passed on to the next generation. In contrast, black families were left exposed to predatory private finance.” 

The basic idea is that home owners are able to leverage their home equity to move up the economic ladder. Thus, the rationale for the Act is to right historical wrongs through a massive home ownership program to promote economic mobility within previously discriminated communities; hence the name, “American Housing and Economic Mobility Act”. Sounds good but would it work?

In the first post of this series, I looked at the federal government’s previous efforts to do basically the same thing, such as through down payment assistance, subsidies, vouchers to buy homes, forgivable loans, and deferred-payment mortgages. The Department of Housing and Urban Development (HUD) issued a review and critique of these programs in 2006 and concluded the home ownership programs were mostly a failure because many of the families helped had no business owning homes in the first place, due to their precarious financial situation. They might have been able to buy a home with government help, but a good number weren’t able to sustain home ownership after an initial period of mortgage assistance. And so, despite billions spent on these programs over the past 50 years, the black-white disparity in home ownership is actually greater today than in 1900. See Part I of this series for more details.

The rest of these posts will address the specific case made by Baradaran and Hamilton: that initial disparities in home equity have led to multigenerational disparities in business ownership, education, and home ownership. First, the role of home equity in financing small businesses. First, a few factoids about small business in America:

Only half survive their fifth year of business.

About a third survive their tenth year of business.

Close to a third of small businesses use no financing in a given year.

Small business owners are twice as likely to finance their capital needs with current earnings and credit cards than with bank loans in a given year.

Most bank loans to small businesses are not home equity loans, because, to quote: “You have to have a spotless personal and business credit record to qualify”.

Home equity loans are more likely to be used once a business is established and has a steady, reliable revenue stream. Given the uncertain prospects of any young business, it would be crazy (and difficult) to get a home equity loan just to keep things going. If the business fails, you might also lose your home - and chances are within ten years the business will fail. No reasonable entrepreneur would take that risk.

In other words, a business owner has to be successful already in order to take advantage of a home equity loan. Successful business owners will have access to other ways of financing their ongoing needs. That they choose to take out a home equity loan instead simply means they are sufficiently confident of the continued success of their business to risk losing their home for a quick, low-interest loan.

Bottom line: home equity loans are a footnote in the story of American business financing.

Next: How prevalent is the use of parent home equity loans to pay for their children's college education?

Followed by: The contribution of predatory finance to racial inequities in home ownership.

Reference:

2017 Year-End Economic Report /National Small Business Association