Homeownership under siege: Who will have access to mortgages in the future?
By Martin Eakes,
Think about the most prosperous and stable families you know. They might not be rich, but they’ve been lucky enough to keep their jobs. They are healthy and have health insurance. They live in a safe neighborhood. They have access to high quality schools, they can prepare their children for college, and they are actively involved in the community.
If you’re thinking of families with these characteristics, then chances are high that they are also homeowners.
Homeownership isn’t just about having a roof over your head. For many Americans, owning a home is key to moving from a paycheck-to-paycheck existence to building wealth that can be invested in the future. Especially for low-and-middle income families, homeownership makes a significant difference. Among families earning between $20,000 and $50,000, those who are homeowners have 19 times the wealth of those who rent their home.
More than 30 years ago, my wife, Bonnie, and I realized that lenders were ignoring lower-income families and people of color regardless of the ability to repay loans. We started the Center for Community Self-Help with the belief that, given a chance, families of color, rural residents, and female-headed households with low-to-moderate incomes could become successful homeowners and entrepreneurs.
Through Self-Help’s lending experience we learned that families will work very hard to pay their mortgages and stay in their homes. Self-Help loans are carefully underwritten, 30-year, fixed rate mortgages, often with low down payments. For many of our borrowers, preparing to buy isn’t easy but we work closely with them and verify their ability to repay. For the first eleven years of our business we had virtually no losses, and until the recent recession, Self-Help loan losses were low by any industry standard.
In the 1990s, we expanded Self-Help’s lending by participating in the mortgage “secondary market.” We purchased community reinvestment loans from larger, traditional mortgage lenders to encourage them to expand lending in underserved markets. Then we packaged these loans to and sold them to Fannie Mae, one of the major government-sponsored enterprises (GSEs) that buys mortgages, thus generating funds to make more home loans in the future.
Through these loan purchases and sales, we have helped make more loans accessible to low-to moderate income families. To date, Self-Help’s secondary market program has financed over $4.5 billion in affordable home loans and helped more than 50,000 families.
Unfortunately, many of the wealth-building gains made in recent years have been wiped out by the epidemic of predatory mortgage lending that started in the late 1990s. In 2002, we formed the Center for Responsible Lending which has been a leading voice in fighting predatory lending and calling for fair, sustainable and accessible home loans. The Dodd-Frank financial reforms passed last summer finally addressed the worst of mortgage lending abuses that had been ravaging communities all over the nation for years, especially communities of color—but not before hard-won gains in wealth had been wiped out. This is a tragedy, and we shouldn’t make it worse by putting financial stability further out of reach for families who have already borne the brunt of the foreclosure crisis.
Threats to the Future of Homeownership
Today there are two major threats to the future of homeownership for lower-income families and people of color. One is the move to eliminate the key role played by the GSEs, Fannie Mae and Freddie Mac.
Since the end of the Great Depression, the GSEs have increased the availability of mortgage capital so that owning a home could become accessible for low-to-moderate income American families. By purchasing loans from banks, the GSEs provide funding so the banks can make more loans at reasonable rates. The GSEs have assisted millions of American families gain a foothold in the American middle class and remain there securely. The benefits extend to the next generation, as increased homeownership made possible by the secondary mortgage means that more families create wealth they can pass on to future generations.
As we all know, the GSEs experienced huge losses during the mortgage crisis, and in 2008 they were put under the government’s control. During the subprime boom, the GSEs made some bad decisions that led to their takeover, particularly by following Wall Street’s lead in making no-documentation “Alt-A” loans, which had extraordinary losses, to boost market share and their stock prices. In spite of this, affordable housing loans have been unfairly blamed for the housing crisis when Wall Street was the main driver in encouraging toxic loans and creating investments for subprime mortgages.
The future of the GSEs remains uncertain, but two points are clear: (1) Regardless of how the secondary mortgage market operates in the future, the national goal must be to equalize homeownership rates between whites and people of color to the greatest extent possible, and (2) that mission cannot remain solely in private hands. History tells us that the private sector, left to its own devices, avoids investment in underserved markets. We need a source of funding for mortgages that will overcome a long history of neglect and discrimination and that is driven by our national economic interest.
Mandated Down Payment Requirements – Detrimental and Unnecessary
The other potential threat to fair and accessible mortgages is a move to raise down payment requirements. Federal banking regulators have issued a proposal that would require down payments as high as 20% for “qualified residential mortgages” which define loans that don’t require risk retention by issuers of private mortgage securities. These loans are likely to become the overall industry standard, and they will have an enormous influence on who can qualify for a loan and at what price.
The mortgage market of the future can drive economic growth without shutting out responsible home buyers. Creating artificial barriers to low down payment loans would be a major setback for recovery in the housing market, and it would be devastating to communities that have been underserved by conventional mortgage lenders for decades—widening the wealth disparities that already exist between whites and communities of color.
Many families have steady incomes and decent credit ratings, but very little in savings. These are the families who stand to benefit the most from ownership, but mandating large down payments will pose unreasonable obstacles. The chart below shows how many years it would take for a middle-income African-American and Latino family to save for a 10% down payment plus 5% in closing costs.
As shown, for a typical U.S. household, it would take nearly 10 years to save enough for a 10% down payment and 5% closing costs, even if they saved for nothing other than an average moderately priced house of $172,900. For a middle-income Latino family, it would take 12 years. And for a middle-income African-American family, it would take about 15 years—and, again, this is without saving for education or any other purpose.
According to Harvard’s Joint Center for Housing among renters, only the wealthiest 25% of white families nationwide have more than $5,000 in cash savings. For renters of color, only the wealthiest 25% have more than $2,000. These households include many families who are employed and have good credit records.
Regulators seem to be operating under the assumption that low down payments caused the housing meltdown, but that’s simply not true. Bad underwriting and toxic loan products, not low down payments, caused the housing crisis. Fortunately, the Dodd-Frank bill addressed the significant lending abuses that led to the meltdown. Low down payment loans were successful before the subprime boom, and they can be successful again.
In these very tough economic times, the issue of wealth building is urgent. While we need key reforms in the secondary mortgage market, we have to be careful not to make an overzealous correction that causes more harm than good. It’s true that not every renter should become a homeowner right now. But if we allow public policies that lock out qualified families from ownership, the costs of those missed opportunities for stronger communities, growing businesses, and a more equitable society will extend to us all.
Martin Eakes is the CEO of Self-Help, Inc. and the Center for Responsible Lending based in Durham, NC.
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SIDEBAR (optional) Families can succeed with low down payment loans. Even in the wake of the housing crisis, homeownership has been the single best tool for building wealth. In 2009, the UNC Center for Community Capital analyzed outcomes on 46,500 mortgages originated in Self-Help’s secondary marketing program. Families with an average annual income of $30,792 were able to net $21,000 in home equity even during the recent housing crisis, and after making a down payment of only $2,000. The average annual equity increase for these borrowers was 27%, and 54% of these owners reported that they had acquired savings in addition to their home equity.
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