Historically, homeownership was the vehicle by which millions of Americans built equity and wealth while contributing to the growth and development of strong, stable communities. Regrettably, over the last 20-some years housing has become less of a wealth builder and more of a consumer ATM.
This fundamental shift in consumer behavior contributed to the severity of the financial crisis we have just weathered. Countering it should be part of the strategy for rebuilding the home sales market and restoring access to mortgage credit for responsible borrowers.
And there is no question such a strategy is needed. While there are many signs that our battered economy is slowly recovering, the nation’s home purchase market still lags behind. Though home sales have picked up, they still account for only 30% of mortgage originations, with refinancings taking the lion’s share, according to Mortgage Bankers Association data. Historically, purchases made up more than half of the market.
Millions of potential and deserving homeowners continue to be shut out of the market. The crisis devastated neighborhoods, jeopardized local governments’ ability to pay for needed public services and threatened community businesses and overall economic health.
The route that brought us to this state is well documented. The lending community, encouraged by federal policy, abandoned conventional underwriting principles by deciding they could accept ever-increasing risks as long as they priced for it. Borrowers and lenders embraced an environment of expanding credit options with lower standards.
What needs to be done to reestablish a low-foreclosure mortgage market that provides appropriate and responsible access to individuals and families?
Homeownership is not an unreasonable or unattainable goal for hard working Americans. We propose a simple and focused program that would provide a responsible way for first-time homebuyers to enter the market.
The Home Ready Buyers program would target those who were most challenged under the old system: first-time homebuyers; those who want to purchase homes but have impaired credit; and those who need time to save for a 3% down payment.
State housing finance agencies would set up the Home Ready Buyers programs. A modest fee on all purchase mortgages would provide the funding for the programs’ activities, which would include credit counseling.
Importantly, the programs would incorporate a disclosure requirement highlighting the financial benefits of shorter-term mortgages, such as establishing equity more quickly and reducing interest costs. While qualifying for a 20-year mortgage might mean the borrower purchases a less expensive home, it would support a better economic outcome for the borrower and an attractive credit risk for the lender or investor.
In addition to the disclosure, the credit counselor would be required to develop a budget with the borrower that demonstrates their capacity to manage a 20-year amortizing mortgage. Regulators would acknowledge that even with a down payment as small as 3%, Home Ready Mortgages meet the definition of a Qualified Residential Mortgage under the Dodd-Frank Act if the term does not exceed 20 years. (This would give lenders an incentive to write the loans, since they could be sold or securitized without the 5% risk retention requirement for non-QRM loans.)
The process would start with borrowers – who are committed to saving and credit improvement – working with state housing agencies to enter into an agreement with a lender and mortgage insurer that would last up to 36 months and require:
- Establishing a minimum down payment goal of 3% plus appropriate closing costs;
- Entering into a credit improvement plan to increase the borrowers’ credit score to at least 680;
- Participating in a credit/financial counseling program to gain greater understanding of borrowing, saving and budgeting; and
- Participating in a home maintenance and repair class.
Lenders would provide access to low-cost checking and savings accounts and, upon a borrower’s successful participation in the program, agree to offer a mortgage and a mortgage insurer would agree to provide insurance.
Preparing first-time homebuyers with the tools to succeed as homeowners requires an investment. But, as the recent economic downturn has too clearly shown, that cost pales when compared to the tremendous social costs associated with putting people into homes they cannot afford with payments they cannot sustain.
Our economy cannot wait for 7 to 10 years on the hope that underwater borrowers will rehabilitate themselves. For a housing market recovery to be self-sustained, there must be a supply of capable, creditworthy borrowers. The Home Ready Buyers program can establish an infrastructure so borrowers and lenders can be responsible and succeed.
Mark Goldhaber runs Goldhaber Policy Services. He worked in the Department of Housing and Urban Development during the Reagan administration and later at Freddie Mac and GE Mortgage Insurance, the precursor of Genworth Mortgage Insurance. James Bennison was most recently the head of capital markets and policy development for Genworth's U.S. mortgage insurance business and has over 20 years’ experience in capital markets and structured finance, including at ING and SunTrust.