Low-Income Homeownership Examining the Unexamined Goal

by Retsinas, Nicolas P.; Belsky, Eric S.

• ISBN13: 9780815706137
• ISBN10: 0815706138
• Format: Paperback
• Copyright: 2002-08-13
• Publisher: Brookings Institution Press

Summary

This volume gathers the observations of housing experts on low-income homeownership and its effects on households and communities.

Table of Contents

Foreword	ix
Acknowledgments	xiii
Examining the Unexamined Goal	1	(14)
Nicolas P. Retsinas
Eric S. Belsky
Part 1. Homeownership in the 1990s
Anatomy of the Low-Income Homeownership Boom in the 1990s	15	(49)
Eric S. Belsky
Mark Duda
The Industrial Structure of Affordable Mortgage Lending	64	(47)
Frank E. Nothaft
Brian J. Surette
Part 2. Overcoming Borrowing Constraints
Introduction	105	(6)
Edward L. Golding
Eliminating Credit Barriers: How Far Can We Go?	111	(35)
Stuart S. Rosenthal
Prepurchase Homeownership Counseling: A Little Knowledge Is a Good Thing	146	(29)
Abdighani Hirad
Peter Zorn
Supply-Side Constraints on Low-Income Homeownership	175	(33)
Michael Collins
David Crowe
Michael Carliner
Part 3. Returns to Homeownership
Introduction	201	(7)
Frank DeGiovanni
Asset Appreciation, Timing of Purchases and Sales, and Returns to Low-Income Homeownership	208	(31)
Eric S. Belsky
Mark Duda
Home Price Appreciation in Low- and Moderate-Income Markets	239	(18)
Karl E. Case
Maryna Marynchenko
Policy Implications of Portfolio Choice in Underserved Mortgage Markets	257	(22)
William N. Goetzmann
Matthew Spiegel
Part 4. Low-Income Loan Performance
Introduction	275	(4)
George McCarthy
Prepayment Risk and Lower-Income Mortgage Borrowers	279	(43)
Wayne R. Archer
David C Ling
Gary A. McGill
Performance of Low-Income and Minority Mortgages	322	(26)
Robert Van Order
Peter Zorn
Performance of Community Reinvestment Loans: Implications for Secondary Market Purchases	348	(33)
Roberto G. Quercia
Michael A. Stegman
Walter R. Davis
Eric Stein
Part 5. Socioeconomic Impacts of Homeownership
Introduction	375	(6)
Steven Hornburg
Social Benefits and Costs of Homeownership	381	(26)
William M. Rohe
Shannon Van Zandt
George McCarthy
Housing and Wealth Accumulation: Intergenerational Impacts	407	(20)
Thomas P. Boehm
Alan M. Schlottmann
Impact of Homeownership on Child Outcomes	427	(20)
Donald R. Haurin
Toby L. Parcel
R. Jean Haurin
Building Homes, Reviving Neighborhoods: Spillovers from Subsidized Construction of Owner-Occupied Housing in New York City	447	(32)
Ingrid Gould Ellen
Michael H. Schill
Scott Susin
Amy Ellen Schwartz
Contributors	479	(2)
Index	481

Excerpts

Examining the Unexamined Goal

Anthropologists point out that the notion of ownership is a cultural construct. In some societies, land and buildings constitute community wealth; those societies would find the notion that an individual might "own" a house-and even the notion of "ownership" itself-bizarre.

This construct, though, is embedded in American culture; it is oft equated with the American Dream. From its agrarian roots in medieval England, the concept of landholding as a precondition of liberty has evolved into a yearning for ownership. We have the attendant rituals: the wedding checks amassed toward a down payment, the housewarming parties, the burn-the-mortgage celebrations, the "starter" home, the intense spending to give it bigger bathrooms, gourmet kitchens, more square footage. A few communitarian societies, focused on a utopian ideal, have existed, but in the history of American housing, those enclaves are footnotes. For the most part, Americans have wanted to own their patch of space-whether it is a one-acre lot in exurbia or a one-bedroom condo on a yuppified city block. And homeowning Americans have lavished attention (and money) on those spaces, considering them anchors-psychologically, physically, and economically.

Government has helped, using its bully pulpit to spur homeownership. In 1918 the Department of Labor launched the "Own Your Own Home" campaign. Herbert Hoover, as secretary of commerce, established "Better Homes of America," a program supported by Presidents Warren Harding and Calvin Coolidge.

The government also acted. Some actions were overt: the initial land grants gave people land for homesteading; the Veterans Administration subsidized mortgages for veterans (just as the GI bill subsidized their college educations); fair housing laws attacked race-based exclusionary practices; the 1977 Community Reinvestment Act required banks to look beyond their traditional borrowers, to inner-city residents.

Other actions indirectly bolstered housing, a side effect of programs initiated to spur economic recovery. For instance, the pre-New Deal Federal Home Loan Banks, the New Deal Federal Housing Administration, and its companion, the first National Mortgage Association, aimed to restore liquidity to a Depression-era banking system in collapse. These agencies bolstered the shaky underpinnings of banks, thereby guarding against insolvency but also bolstering their ability to make mortgage loans. Similarly, in 1918 the first income tax allowed a deduction for all loan interest, not just mortgage interest. Tax architects did not foresee its impact on housing. (But in 1986 when Congress expressly retained that deduction while dropping most other deductions, Congress recognized this deduction as a homeownership incentive.)

Today politicians stand firmly behind homeownership, cheering at every incremental boost in the number of homeowning households (now up to a record high 68 percent of households in 2001). Fannie Mae and Freddie Mac, the two secondary mortgage market behemoths that bought or securitized nearly three-fifths of prime conventional conforming mortgages written last year, have a special status as "government-sponsored enterprises" because they undergird the current flux of first-time home buyers. Every state but Arizona has a Housing Finance Agency, authorized to issue bonds using a federal tax exemption to subsidize mortgages for low- and moderate-income first-time buyers. Local communities use their federal block grant moneys to spur homeownership among inner-city residents.

Today supplying credit to home buyers and owners is an enormous industry, with debt outstanding on single-family properties alone at over $5 trillion in 2001, a level that exceeds either corporate or federal government debt. The mortgage finance system has become highly specialized and regulated. Though banks and thrifts still hold some loans they originate in their portfolios, they are more apt to sell their loans into the secondary market and retain only the servicing rights and take origination fees. Increasingly, they lend through mortgage company affiliates that, together with independent mortgage companies, originate the lion's share of mortgages. Banks and thrifts are under regulatory pressure to lend to low-income borrowers and areas (in the form of the Community Reinvestment Act), and Fannie Mae and Freddie Mac are as well (in the form of goals established annually for them by the Department of Housing and Urban Development).

Homeownership, in short, is valued and promoted by government: it is considered good for the buyers, good for their communities, and good for the country. It is not far behind motherhood and apple pie as an American symbol. At least in the abstract, nobody questions this American icon.

It is time, however, for some iconoclastic scrutiny-time to examine the unexamined goal. With the industry geared up to lend to low-income borrowers in ways the nation has never seen before, the government egging them on, and cultural norms drawing renters into the market, the time is ripe to pause and take stock of what we know and do not know about low-income homeownership. Rhetoric aside, is homeownership truly good for low-income buyers, their communities, and the country? Even if homeownership was a worthy goal two generations ago, have times changed to devalue the notion that individuals should own their homes?

Supported by the Ford Foundation, Freddie Mac, and the Research Institute for Housing America, Harvard's Joint Center for Housing Studies organized the symposium "Low-Income Homeownership as an Asset-Building Strategy." The symposium asked researchers to play the role of iconoclasts, statistically probing the impact of housing on these buyers and their communities. Their findings, published herein, deserve attention. On the one hand, the authors offer reassurance to policymakers: homeownership as a national goal does merit government support. For individuals struggling to save for a down payment, it is worth the effort; for the country struggling to bolster homeownership, it is a worthwhile goal. On the other hand, America at the dawn of this century is a markedly different place from the America of 1960: the "typical" home buyers of today bear only a passing resemblance to their earlier counterparts. The benefits, the constraints, the pitfalls-all have changed within the past few decades. To sustain the current high level of homeownership, and to increase that rate, policymakers will need to reexamine their strategies.

The Home Buyers of Today

The most startling fact about homeownership today lies in the title of the symposium: "Low-Income Homeownership." A generation ago, there were not enough low-income home buyers to warrant a study. Consider the typical buyer of the 1920s. Banks required a 50 percent down payment and offered a loan of three to five years. Wealthy people owned their own homes; they could bypass banks. But the nonwealthy homeowners tended to be frugal older couples with moderate-but-not-modest incomes who had saved throughout their working lives. Households with low incomes could rarely save enough for a 50 percent down payment.

The New Deal's banking subsidies lowered banks' risk, letting them lend to more borrowers, for longer periods, with lower down payments. By the 1950s the typical borrower put 20 percent down and got a fixed-rate mortgage for twenty years. That buyer had a moderate income. Still, a 20 percent down payment shut most low-income households out of the market, even in neighborhoods of modest homes. (Race and foreign accents closed the door still tighter.)

Today a buyer can put as little as nothing down, get a variable-rate mortgage, and amortize a loan for as long as thirty years. The secondary mortgage market, buttressed by statistical techniques that assign a "credit score" that correlates well with loan repayment behavior, has let lenders (which now include mortgage companies as well as traditional banks) reach out to people whom the lenders of the 1960s would have shunned. Low-income households are no longer shut out; now families with incomes of $30,000 or less can buy a house. From 1993 to 2000 the number of home-purchase loans to low-income families surged by 79 percent. Mortgage lenders recognize low-income borrowers as a profitable market. Evidence presented in the following chapters shows that, properly insured against losses, low-income loans can be every bit as profitable to lenders as others, especially now that technology has cut mortgage origination costs.

Growing recognition of the capacity to lend profitably to borrowers and in areas once thought too risky has spawned a surging industry of "subprime" lenders. Pushing the envelope even further, these lenders have been marketing mortgages to borrowers with shaky credit histories, borrowers even aggressive "prime" mortgage lenders still turn away. But that too is changing, and conventional mainstream lenders are experimenting with products that grade into the subprime market.

Minorities also are no longer shut out. From 1994 to 2000 loans to black home buyers soared 89 percent, loans to Hispanic buyers rose by 138 percent, but loans to whites grew by only 25 percent. Admittedly, a racial and ethnic gap persists: holding income constant, a higher proportion of whites own homes than do blacks and Hispanics. But most studies attempting to control for both income and wealth differences find that most of the disparities are caused by these differences, which emanate not from housing markets but from education and labor markets. And, as census data demonstrate, the buyer of today may well be a Latin American, Caribbean, or Asian immigrant or a person of color native to the United States.

As for the "traditional" Beaver Cleaver family-owner of the 1960s (two parents with a stay-at-home mother watching over a few children), it no longer predominates. Homeownership rates are up sharply among single-parent families, with female-headed households nearing the 50 percent mark for homeownership in 2001. The homeownership rates of people living alone have also surged: from 50 percent in 1994 to 54 percent in 2001. And among married couples youth is no impediment to homeownership, as 62 percent of those under age 35 now own their home, up from 56 percent in 1994. Whatever the mixture of people that can constitute a "household," chances are high and growing that they will own a home.

Their homes, though, may not be the "traditional" ones: high-rise condos, suburban capes and ranches, or to-be-gentrified townhouses. For many low-income households, an "affordable" house is a "manufactured" one. In the South, 40 percent of low-income buyers bought manufactured housing in the 1990s, often on the periphery of the urban core on tracts of leased land (in the noneuphemistic vernacular, in trailer parks).

Overcoming Borrowing Constraints

Today's good news is that low-income borrowers' access to credit has improved dramatically. A decade ago, lenders did not offer loan terms and underwriting standards that would help low-income borrowers overcome their income and wealth constraints. Mortgages with low down payments were scarce, and few lenders were willing to let borrowers-many already spending well over half their incomes on rent for years on end-qualify for a loan whose payments with taxes and insurance amounted to more than 28 percent of their income. The government through the Federal Housing Administration (FHA) was willing to let them devote more of their income to these payments but did not stretch in the ways lenders now will under some circumstances. As for low-income borrowers with less-than-stellar credit histories, banks rarely let them even get past the front desk. A strike on their credit history or problems documenting a credit history disqualified them.

Today neither low income nor flawed credit is as insurmountable a barrier to homeownership. One in six borrowers puts down 5 percent or less, and if their credit history is solid and their down payment large enough, lenders are prepared to let them qualify for loans with housing payments closer to 40 percent of monthly income. Increasingly, borrowers with minor to serious past credit problems can qualify for a loan if they are willing to pay higher than a "prime" mortgage interest rate to cover the added risk they pose for lenders. As Stuart Rosenthal points out, credit constraints may delay homeownership for some households and overall may depress ownership rates by 4 percent, but progress in better understanding the risks posed by such borrowers may reduce their depressive effect on homeownership.

Low-income borrowers, though, do face two hurdles. First, the low-income borrower must keep up payments. Each borrower is only a crisis-a pink slip, an illness, a broken car-away from delinquency or default on a loan that will impair his or her credit history and add to the mortgage borrowing costs. After low-income borrowers purchase a home, because they are a population that historically has been at greater risk of job loss, they are more likely to face difficulties staving off default. (Low-income borrowers rarely have wealthy families who can tide them over in a crisis.) Not surprisingly, home buyers with low incomes and poor credit histories fall behind on their payments more often than higher-income borrowers with unblemished credit histories.

As Abdighani Hirad and Peter Zorn point out, though, credit counseling helps. By now credit counseling is standard for many low-income borrowers: a lender gives them a home-study kit, hooks them up to telephone instructions, enrolls them in a class, or gives them one-on-one counseling. Hirad and Zorn, reviewing 40,000 mortgages, conclude that borrowers who receive classroom instruction are 23 percent less likely to be delinquent after fifty days than their noncounseled counterparts. Individual counseling works even better: a remarkable 41 percent were less likely to be delinquent. (Neither telephone counseling nor home study reduced the risk of delinquency.) As awareness of the value of credit counseling spreads, some borrowers who failed to make payments in the past may seem like better risks in the future if they are counseled.

Michael Collins, David Crowe, and Michael Carliner point out that a second hurdle for the low-income borrower is finding an inexpensive house. A family that can borrow enough for a $70,000 home needs to be able to find that $70,000 starter. Some regions of the country-indeed, some neighborhoods-have a surfeit of low-priced homes (though the bargain fixer-uppers may require thousands of dollars of cash, not just sweat equity). In other regions, few houses sell for less than $70,000, a circumstance that explains the popularity of manufactured houses on leased land, which can sell for as little as $25,000.

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Excerpted from Low-Income Homeownership Copyright © 2001 by Brookings Institution Press
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.