Homeownership

An Innovative Approach to Affordable Housing is Gaining Momentum

David Newville — Thu, 15 Jan 2009 21:38:00 -0500

Early this week my New America colleague, Rourke O'Brien and I wrote an op-ed in the Washington Post on the benefits of shared equity homeownership. Shared equity is a unique approach to homeownership that helps bridge the large gap between renting and traditional homeownership for low- and moderate income families in high-cost housing areas.

The way it usually works is a local government or nonprofit provides funding to an eligible family to purchase a home. In exchange for the funding the public entity receives a portion of any price appreciation in the home when the family sells it. The public entity then uses its share of the price appreciation to help the next eligible family purchase a home.In the op-ed, we specifically look at a new shared-equity homeownership project right here in the District. City First Enterprises, a nonprofit affiliate of City First Bank of D.C., is planning to create 1,000 new units of affordable housing using the shared equity model. This would be one of the largest shared equity projects in the country.

At the same time there is also a proposal that will be going before the Obama Administration and Congress soon that would create a national shared equity homeownership demonstration project. The project is being led by NCB Capital Impact and would test the viability of shared equity with 5,000 households in 8 to 10 housing markets around the country. It would cost $125 million and specifically focus on the feasibility of taking this model to scale.

The demonstration also has the potential to help with efforts to remedy the current foreclosure crisis. Some homeowners facing foreclosure could be given the option to convert their traditional mortgages into shared equity ones. Homes that have already been foreclosed on could be resold more easily using shared equity, helping to stabilize neighborhoods. Not to mention the fact that the construction activity and jobs created as a result of the demonstration would add to the impact of any larger government stimulus investments and projects.

Overall, shared equity is a promising, timely and cost-effective method for helping low- and moderate income families share in the important benefits of both homeownership and asset building. The demonstration project is a prudent next step which should be approved by Congress and the Obama Administration.

Asset Building Event: Responsible Homeownership (Featuring FDIC Chairman Sheila Bair)

Mark Huelsman — Mon, 15 Dec 2008 16:29:00 -0500

As 2008 draws to a close, over 2 million families have already lost their homes or are facing foreclosure. Many homeowners in need of relief are wondering if help will be on the way anytime soon.

"We are doing everything we can to be responsible," said Aoah Middleton, who started missing mortgage payments when her five-year-old daughter was diagnosed with cancer in 2006, to the New York Times. "Banks are getting helped. Rich people are getting helped. Why isn't there anyone to help me?"

As policymakers struggle for solutions to revive the economy, FDIC Chairman Sheila Bair has stood out in the search for creative policy decisions to keep people in their homes. She's been called "the consistent voice of reason" by CNN, adding that she has "loudly and courageously... thrust the corrosive issue of foreclosure to center stage."

Join us this Wednesday, December 17^th, for what promises to be a stimulating discussion with Chairman Bair. The event will also feature groundbreaking research from the Center for Community Capital at The University of North Carolina that provides a roadmap for making responsible homeownership work, especially among lower-income families.

Discussants will include Eric Stein (President, Center for Community Self-Help), Mark Willis (Visiting Scholar, Ford Foundation), Reid Cramer (Research Director, Asset Building Program), and Ellen Seidman (Director of Financial Services Policy, Asset Building Program).

After the Storm: The Future of Low-Income Homeownership in America

David Newville — Thu, 20 Nov 2008 21:45:00 -0500

During a week where the FDIC, the White House, Congress and the Treasury Department are embroiled in a battle over how to best address the millions of Americans who are the brink of losing their homes to foreclosure, it may seem odd to discuss new strategies for helping more low-income families become homeowners. There is no disputing the fact that the foreclosure crisis and the larger global economic crisis it helped spawn, are the immediate issues at hand. However, once the dust has settled it will be necessary for government officials, advocates, and politicians to come together and have an honest discussion about the future of homeownership policies for low- and moderate-income Americans.

If you are still operating under the false assumption that the Community Reinvestment Act or low-income "predatory borrowers" are to blame for the economic crisis please read this excellent blog post by my New America colleague Ellen Seidman or even better, this recent statement by Comptroller of the Currency John Dugan.

Despite the crisis, homeownership remains one of the best ways for American families to build wealth and assets. According to NCB Capital Impact, nonelderly homeowner have an average net worth of $57,000 while nonelderly renters have an average net worth of less than $5,000. Home equity is the single largest source of wealth for most Americans and accounts for the vast majority of this difference. However, as the recent crisis has shown us, homeownership is not without its risks and for low-income families these risks are even greater.

So what can policymakers do to address this dilemma? Is there a way that low-income families can enjoy the asset building and many other benefits of homeownership without being exposed to an excessive amount of risk? The good news is that there is a solution to this problem and it is called shared equity homeownership.

What is shared equity homeownership you ask? It is a type of homeownership where low-income families share both the risks and rewards of homeownership with a third party that represents the interests of the community, usually a local government entity or nonprofit organization (The types of shared equity homeownership discussed here should not be confused with any of the private sector versions with similar names such as shared equity financing and mortgages, which many times can be quite bad for low-income families). There are several different types of shared equity homeownership, but they all involve a public or nonprofit third party providing some type of subsidy (i.e. land through a community land trust or money to lower the purchase price) to the homeowner in order to make the purchase more affordable and less risky.

In exchange for this subsidy, when they sell the home the homeowner agrees to recoup less home equity than they would in the traditional housing market (assuming that home values have risen). The rest of the home equity is used by the third party to provide the same shared equity homeownership opportunity to the next low-income family. It is this mechanism that allows programs like these to be financially self-sustaining under most circumstances in a rising real estate market. They do not continually require additional taxpayer money, but can still provide homeownership opportunities to more low-income families.

Under the scenario where home values actually decrease between the time of purchase and sale (sound familiar), homeowners are also protected because the third party will either absorb the losses at no cost to the homeowner or at the very least the homeowners losses will be smaller than they would be in the traditional housing market.

In order for shared equity homeownership to reach its full potential many details have to be appropriately addressed (i.e. the exact size of the subsidy). Furthermore, different models work better in different real estate markets. The best model for New York City is not necessarily the best for Albuquerque. However, we already know that shared equity homeownership can work. It has helped thousands of low-income families to become homeowners in a safe and responsible manner in places like Vermont, Minnesota and San Francisco.

When the financial crisis eventually reaches its resolution (hopefully sooner than later) policymakers will need to take several steps to make homeownership both safer and more accessible to low-income families. Shared equity homeownership should be one of them and the conversation should begin sooner rather than later.

How to Ruin a Good Announcement

Ellen Seidman — Wed, 12 Nov 2008 16:51:00 -0500

The announcement yesterday of new procedures for streamlined modifications of primarily prime mortgage loans in trouble was a perfect example of a good (albeit overdue) program being drowned by a really inept rollout.

Briefly, Fannie Mae, Freddie Mac, their conservator the Federal Housing Finance Agency, the Hope Now Alliance and a group of large banks announced standard procedures to do quick modifications-involving primarily an appraisal and verification of income-of seriously delinquent loans in either Fannie or Freddie MBS, or in the portfolios of either the GSEs or the banks. There are clear limits on what is involved. The big one is these are largely prime loans, and loans for which the servicer has relatively undivided loyalties. They are not the privately-securitized sub-prime and Alt-A loans that have caused the bulk of the problem to date, especially in lower income communities. That's a big limitation, but the fact is that the prime foreclosure rate is increasing steadily. And as of June 2008, there were about 373,000 Fannie and Freddie owned or guaranteed loans (many of them prime) that were seriously delinquent, and the number was climbing fast. That's Fannie and Freddie alone, not counting loans held in bank portfolios.

A second limit is that the borrower must be 90 days delinquent for the procedure to come into play, thus not helping borrowers who know they're about to get into trouble and want to proactively solve their problem before their credit is shot. Finally, the program doesn't really deal with the situation in which there are second and further junior liens on the property. A 38% housing-debt-to-income ratio may work if that loan is the only housing debt; it will strain any budget where there are additional liens.

The rollout was marred (that's being kind) by the Treasury trying to sell this for far more than it is, intimating that it is a substitute for aggressive action on a broader range of loans, including sub-prime and Alt-A loans and loans not yet seriously delinquent, such as the guarantee program that FDIC Chairman Sheila Bair has been pressing the Treasury to implement. The fact that the Chairman Bair wasn't around for the announcement and the Treasury spokesmen literally ran out of the briefing room to avoid answering questions didn't exactly help the picture.

Nevertheless, there is substantial value in what was announced. First, it may well break a log-jam with respect to Fannie Mae MBS in particular. Lenders have been complaining for some time that Fannie has been reluctant to participate in modifications in any meaningful way. Second, the program applies to all loans in Fannie or Freddie MBS, no matter who owns the MBS. This is a critically important point that the announcement essentially buried. Third, any deferred principal will not earn any interest. While the borrower will still ultimately be on the hook for it, the lender will lose all benefit of that part of the loan being outstanding. In some ways, this isn't really very different than the Hope for Homeowners combination of a big guarantee fee and a requirement that any equity gain be shared between homeowner and the party funding the loan (in that case in effect the government). Finally, if both the GSEs and the banks keep and make public careful records of what happens with these loans, and the program is successful (with limited re-defaults), those who want to apply similar broad standards to securitized loans will have a good case that doing so is in the investors' interest as well as the borrowers' and the country's.

On a related note, all the programs so far have carefully concentrated on owner-occupied primary residences. What that is understandable as a moral matter, especially in the face of substantial evidence of investor fraud in the single family market, it ignores two critical facts. First, each additional foreclosure, no matter who the owner, furthers the downward spiral of house prices, affecting everyone nearby. This is especially a problem in communities where there are a large number of foreclosures. Second, where the investor has rented the property out (common, of course, for 2-4 unit homes), a foreclosure puts the tenants on the street, even if they have been faithfully paying their rent. To some extent this is a matter of changing local laws and lender practices, but if we thought somewhat more broadly about the role played by good owners of small-scale rental housing, which is usually unsubsidized and affordable, we might be able to avoid the trauma in the first place.

*Update*: On Thursday, November 13, as FHFA James Lockhart discussed these and other topics relating to the conservatorship. He was joined by Barry Zigas of the Consumer Federation of America and Gregory Baer of Bank of America. Listen to or view the event.

The Mainstream Comes On Board--CRA Didn't Cause the Current Mess

Ellen Seidman — Wed, 15 Oct 2008 16:44:00 -0400

Those who, like me, believe that CRA not only did not cause the current mess but has been a positive force, are gratified that the mainstream press has finally started to pick up the theme. For example, this morning the New York Times ran an editorial pointing up both the fallacies of the anti-CRA argument and the good CRA has done. And last week Forbes carried a piece by Luis Ubinas, the new President of the Ford Foundation, pointing out that the crisis was caused by risky mortgages (by risky, non-CRA-regulated lenders), not risky borrowers, and in particular not poor borrowers.

Perhaps even more important for countering the effects of the "blame CRA" campaign in middle America, the McClatchy papers have distributed a news item blasting the myth, noting, "What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans. These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans."

Ubinas' piece builds on an extremely timely and compelling study by the Center for Community Capital at the University of North Carolina. The study is also referenced in the Times editorial. Using matched samples of sub-prime borrowers who got well-underwritten, conventional, fixed-rate loans from banks and credit unions and those who got adjustable rate loans with prepayment penalties from brokers, the study found that the borrowers with good loans had significantly lower default rates than those with the bad loans. And nothing else accounted for the difference. As the study states: "all other characteristics being equal, borrowers are three to five times more likely to default if they obtained their mortgages through brokers. When the feature broker-origination channel is combined with the adjustable rate and/or prepayment penalty, the default risk is even higher."

So, enough already. Let's put the blame where it's due: on bad products sold by people with no interest in repayment to investors who didn't understand what they were buying in an unregulated market run amok. Good products sold by lenders with an interest in success to borrowers who understood what they were getting did much, much better.

Getting Homownership--And Its Alternatives--Right

Ellen Seidman — Wed, 25 Jun 2008 16:09:00 -0400

In Monday's New York Times, Paul Krugman raises the question whether the United States has gone overboard in promoting home ownership. Krugman points out not only that the bursting of the subprime bubble has also burst the homeownership bubble, but also that homeownership brings risks of excessive leverage (if prices go down some, an equity stake can be totally lost); "stickiness" (making it hard to move when jobs dry up); and the high expense of commuting (when families chase low house prices well beyond where the jobs are).

Krugman got much right, but before we throw homeownership overboard, it's worth pausing a minute to consider both the benefits of homeownership done right and what we need to do to make rental housing a reasonable alternative, both as shelter and as a way to build assets.

When done well-a home that is affordable, financed with a fixed-rate mortgage with taxes and insurance escrowed, and a homeowner who understands the responsibilities of homeownership-homeownership means having a place of one's own for the long term, in which to bring up family without the risk of eviction because the rent suddenly goes up. It's the opportunity to build up equity through the forced savings of a fixed-rate amortizing mortgage and through positive financial leverage. And it means the psychological satisfaction of owning a substantial asset, often for the first time in many generations. Hundreds of non-profit organizations and community development financial institutions across the country have helped hundreds of thousands of Americans do homeownership right, and from all reports, those homeowners are making it through this crisis OK.

So the first point is that we need to do a much better job of doing homeownership right, for many more people. And the ongoing energy challenge means that we need to add energy efficiency, both of the building and of its location, to what we mean by affordable.

But homeownership isn't necessarily the best option for every family at every point in their lives, even when some home, somewhere, would appear to be affordable. For some families, the additional debt burden-frequently on top of heavy student loans-is unsustainable. For those whose job prospects are unstable or likely to require frequent moves, renting enables greater flexibility. For others, the maintenance responsibilities of homeownership may be more than they want or can handle. And finally, especially with high gas prices and energy prices that are likely to stay that way, renting may simply be a better financial deal; rental housing may be closer to jobs or public transit, and heating and air conditioning a unit in a multi-family building is almost always less expensive than sustaining a stand-alone single-family house.

But our previous policy of responding to almost all housing needs by assuming they will be met by ownership cannot simply be abandoned. Instead, we need to accompany our effort to do homeownership right with:

Quality, affordable, well-located rental housing, which will require a reinvigorated federal housing policy, supported with sufficient funding;
High quality, well-structured financial systems and products that will help people save and grow their assets without the leverage of homeownership; and
Respect for the choices people make, and in particular, valuing the role of all of us-renters and owners alike-in the civic life of our communities.