The American dream, redeemed: how to make homeownership a safe bet for minority borrowers.

• Author: Cramer, Reid
• Position: Column

Is the pursuit of the American Dream through homeownership just an elaborate bait and switch? It's understandable why many might now think so. The collapse of the housing bubble has particularly devastated minority families who, after generations of discrimination in housing and mortgage lending, at last got a home of their own, only to find that it destroyed what little wealth they had.

But this disaster didn't have to happen. With the right polities, homeownership could once again become a major avenue of broad upward mobility in American life, even for families with lower incomes. Proof of concept comes from an innovative community financial institution that has proven to be financially sustainable even as it has benefited lower-income home buyers throughout the collapsing real estate market of recent years.

In 1998, a credit union in Durham, North Carolina, started a project called the Community Advantage Program, or CAP, with money from the state government and a $50 million grant from the Ford Foundation. Its goal was to increase the flow of private capital to lower-income and minority borrowers. CAP purchased mortgage loans originated by banks that were seeking to satisfy the requirements of the Community Reinvestment Act, which mandates that banks make at least minimal loans (often to minorities) in their local communities. Eventually, CAP's portfolio grew to more than 46,ooo home-purchase mortgages made to lower-income households. Yet, despite what might be considered the risky profiles of its borrowers, CAP's portfolio has weathered the storm, far exceeding the performance of the rest of the housing market during the recession. While nationwide, x5 percent of prime adjustable-rate mortgages and 20 percent of subprime fixed-rate mortgages have serious delinquencies, the CAP rate is only 9 percent. And CAP homeowners have seen a median annualized return on their equity of 27 percent, leading to a median increase in equity of close to $18,000, meaning that they were better off than investors in the Dow Jones over a similar time period.

Two lessons derive from the CAP experience.

First, product matters. If you sell people exploding mortgages, guess what--they are likely to get hurt. But if you connect them, as CAP did, with an appropriate mortgage product in a fair and transparent manner, most will do just fine. For many families, that old-fashioned, self-amortizing, thirty-year, fixed-rate mortgage does the trick. And to make it...