We Have Tools to Revive Homeownership — It's Time to Use Them
Bank of America will launch a 3% down payment home loan in partnership with Freddie Mac, but will not retain any risk if the loans default. Thats because B of A will immediately will sell the loans and servicing rights to Self-Help Federal Credit Union, a Durham, N.C., community development lender.
Housing policy focused on government guarantees and the 30-year mortgage hasn't done much to help low- and middle-income homeowners build wealth.
Presumptive Democratic nominee Hillary Clinton appears likely to embrace a recent plan to merge Fannie Mae and Freddie Mac into a single government corporation if she wins the White House.
Homeownership in America today is at a crossroads. The percentage of homeowners has dropped to 63.5%, down from a peak of 69.1% just before the housing crisis. We know how to safely reverse that trend. Now is the time to act. To improve minority homeownership rates, and in the process bolster the overall homeownership rate, the mortgage industry should begin by taking a careful look at the criteria used to enable homeownership, known in the industry as the three Cs: credit, collateral and capacity.
The forecasts of a declining homeownership rate are based on static assumptions about public policy and the effectiveness and growth of private sector and nonprofit programs that would encourage homeownership.
By some estimates, the homeownership rate will decline even more sharply in the decade ahead as millennials choose to rent, instead of own, their homes. They ignore the fact that, while most research shows that millennials are not buying homes now, 80% of millennials overall say that owning a home is an important part of the American dream. Additionally, 87% of African-Americans and 84% of Hispanics agree.
For the most part, forecasts of a further decline in homeownership assume that, because homeownership rates for minority groups have trailed that of whites, and because minorities are the fastest-growing segment of the overall population, the homeownership rate has to decline.
The past does not have to be prologue — and more emphatically, there's no need for past trends to carry forward into the future. Because minority homeownership rates have historically been lower than those of whites doesn't mean that they have to continue along the same path.
Prior to the housing crisis of 2008, the homeownership rate for minorities was on the rise. Although early criticism of the crash was leveled at loose credit standards, more exhaustive and less myopic research has shown that rational credit standards that enabled previously underserved populations to obtain homeownership were not the main culprit.
Post-crisis credit standards have tightened considerably and housing counselors in the NeighborWorks network report that borrowers who they think should be getting approved for mortgages are not. These housing counselors know their markets, and are not in the business of pushing consumers into homeownership before they are ready. In fact, research from the Urban Institute for NeighborWorks America shows that homeowners who work with housing counselors are one-third less likely to default on their mortgages.
If we want the homeownership rate to increase, then credit requirements — especially around qualifying credit scores for the best mortgage rate available — have to make sense. Today they don't.
As for collateral, generally speaking, the more equity in a home the less likely a homeowner is to default. However, this leads to lenders and investors in mortgages to look less favorably on low-down-payment mortgages, the type of mortgage often used by minorities who generally have less wealth to draw on for a down payment.
Homebuyers who have low down payments are not bad risks, especially when armed with the knowledge that homebuyer education and counseling provides. The mortgage lending community has to do better at reaching borrowers with less wealth, who are also often minorities, about low-down-payment products.
Moreover, the nonprofit community has to do more to inform consumers about down-payment assistance programs. Household surveys done by NeighborWorks have consistently shown that two-thirds of consumers are unsure of or not aware of down-payment programs in their communities. That has to change if the homeownership rate is to reverse its downward path.
Finally, capacity. Capacity is the ability or income to meet the mortgage obligation as well as other expenses without undergoing undue financial stress. NeighborWorks is not in favor of stated income mortgages. We don't want borrowers to take on more debt than they can manage. We want lenders to verify income. However, we also want lenders to not use cookie-cutter measures to qualify a borrower. As said before, minorities generally have less wealth, and sometimes that means that they also have lower incomes. That does not mean that their income isn't enough to manage a mortgage, if properly evaluated and counseled.
One role of a housing counselor is to tell a consumer the truth about their finances — income, expenses, savings goals, etc. Basically, a budget. When housing counselors work with lenders the entire financial picture of the borrower is considered, rather than only a single ratio. As a result, more homeownership options will be available to everyone, including minorities, who otherwise would not have been able to secure a mortgage.
A few lending products introduced this year are moving in the right direction, offering alternative ways of looking at income, particularly of every adult living in the home, including those not on the mortgage. These products have gotten off to a slow start. They have to accelerate to be effective.
Marietta Rodriguez is the vice president of homeownership programs and lending at NeighborWorks America, a congressionally chartered nonpartisan nonprofit headquartered in Washington.