Is Homeownership a Fleeting American Dream?

People of color are also disproportionately impacted by an overly restrictive housing market; between 2007 and 2012, loans to African Americans and Latinos have fallen by 73 percent and 66 percent respectively.

Jim Carr is a Senior Fellow with the Center for American Progress and Distinguished Scholar with The Opportunity Agenda. He is also a former executive with Fannie Mae and the National Community Reinvestment Coalition, and Assistant Director for Tax Policy and Federal Credit with the U.S. Senate Budget Committee.
National Journal
James H. Carr
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James H. Carr
Feb. 19, 2014, 11:55 p.m.

Re­cent es­tim­ates by the Mort­gage Bankers As­so­ci­ation that home-loan ori­gin­a­tions are pro­jec­ted to fall by more than 30 per­cent this year is only the most re­cent data show­ing that the U.S. mort­gage mar­ket con­tin­ues to struggle. In spite of im­prov­ing home prices, in­creas­ing new-hous­ing con­struc­tion, and im­press­ive earn­ings by ma­jor hous­ing fin­ance firms, ac­cess to mort­gage cred­it con­tin­ues to be out of reach for po­ten­tially mil­lions of cred­it­worthy bor­row­ers.

Po­ten­tial first-time homeown­ers have been par­tic­u­larly squeezed out of the hous­ing mar­ket by a com­bin­a­tion of overly re­strict­ive cred­it stand­ards and a dis­pro­por­tion­ate share of in­vestors pur­chas­ing formerly own­er-oc­cu­pied hous­ing.

Typ­ic­al down pay­ments for loans backed by Fan­nie Mae and Fred­die Mac, for ex­ample, are close to 20 per­cent. And an astound­ing 42 per­cent of home sales in Novem­ber of last year were for cash — typ­ic­ally to in­vestors. (In 2012, the me­di­an U.S. ex­ist­ing-home sale cost was $176,900, equat­ing to a 20-per­cent down pay­ment of $35,380, ac­cord­ing to the Na­tion­al As­so­ci­ation of Home Build­ers; the me­di­an U.S. house­hold in­come, between 2008 and 2012, is $53,046, the Census Bur­eau re­ports.)

With hous­ing-re­lated activ­it­ies ac­count­ing for between 17 to 18 per­cent of the U.S eco­nomy, un­ne­ces­sar­ily lock­ing fam­il­ies out of homeown­er­ship un­der­mines the U.S. eco­nomy and con­trib­utes to the con­tinu­ing weak labor mar­ket. And be­cause the fam­ily home is the most im­port­ant as­set of the typ­ic­al Amer­ic­an fam­ily, un­ne­ces­sary bar­ri­ers to homeown­er­ship also lim­its the abil­ity of house­holds to build wealth.

Ac­cord­ing to a re­cent Urb­an In­sti­tute re­port, young adults ages 29-37 have 21 per­cent less wealth than did their par­ents at their age. An in­ab­il­ity to buy a home at the same rate their par­ents did at their age is a key reas­on for this dis­par­ity.

People of col­or are also dis­pro­por­tion­ately im­pacted by the overly re­strict­ive hous­ing mar­ket; between 2007 and 2012, loans to Afric­an-Amer­ic­ans and Lati­nos have fallen by 73 per­cent and 66 per­cent re­spect­ively.

Un­for­tu­nately, rather than im­prov­ing ac­cess to mort­gage cred­it, many poli­cy­makers are head­ing in the op­pos­ite dir­ec­tion — to­ward mak­ing cred­it less, rather than more, avail­able.

The Pro­tect­ing Amer­ic­an Tax­pay­ers and Homeown­ers, or Path, Act — in­tro­duced last year by House Fin­an­cial Ser­vices Com­mit­tee Chair­man Jeb Hensarling, R-Texas — would all but elim­in­ate the fed­er­al hous­ing fin­ance in­fra­struc­ture that for 70 years has en­abled mil­lions of Amer­ic­ans to ac­cess sus­tain­able and af­ford­able homeown­er­ship.

That pro­posed law de­vi­ates so far from our cur­rent hous­ing fin­ance sys­tem that Moody’s Ana­lyt­ics es­tim­ates that Path, if en­acted, would res­ult in the elim­in­a­tion of the 30-year fixed-rate mort­gage for most house­holds and in­crease mort­gage in­terest rates by nearly a full per­cent­age point. And ob­tain­ing a down pay­ment of less than 20 per­cent would also be rare. Yet des­pite the ex­treme nature of the bill, it has already passed the House Fin­an­cial Ser­vices Com­mit­tee, and ele­ments of it could be­come law.

An­oth­er re­cently in­tro­duced bill is the Hous­ing Fin­ance Re­form and Tax­pay­er Pro­tec­tion Act of 2013, in­tro­duced by Sens. Bob Cork­er, R-Tenn., and Mark Warner, D-Va. That bill main­tains a strong fed­er­al role in the hous­ing fin­ance sys­tem while ad­dress­ing many of the cur­rent sys­tem’s ma­jor weak­nesses, but fails to re­quire the new sys­tem to provide broad ac­cess to safe and af­ford­able mort­gage cred­it for all com­munit­ies.

Since the hous­ing mar­ket’s im­plo­sion, many poli­cy­makers have avoided as­sert­ively ad­voc­at­ing for ac­cess to af­ford­able home loans due to wide­spread mis­un­der­stand­ing by the pub­lic about the causes of the hous­ing fore­clos­ure crisis. To many, “af­ford­able lend­ing” has be­come syn­onym­ous with “reck­less and ir­re­spons­ible” un­der­writ­ing.

After all, three of­ten re­cited reas­ons for the hous­ing mar­ket’s woes are:

  1. The fed­er­al gov­ern­ment ex­pan­ded ac­cess to homeown­er­ship to house­holds that were not pre­pared to ac­cept that re­spons­ib­il­ity.
  2. The Com­munity Re­in­vest­ment Act, or CRA, forced banks to make un­sound and risky loans.
  3. Fan­nie Mae and Fred­die Mac un­der­took too much risky lend­ing, doom­ing bor­row­ers and the broad­er mar­ket.

Yet, both facts and com­mon sense dis­miss all three of these ex­plan­a­tions. The loans that were at the epi­cen­ter of the fore­clos­ure crisis were high-cost subprime loans of which only 9 per­cent in the dec­ade lead­ing up to the crisis went to first-time home­buy­ers.

The ar­gu­ment that CRA was re­spons­ible is equally without mer­it; the Fed­er­al Re­serve Board con­cluded that only 6 per­cent of high-cost (a proxy for subprime) loans were covered un­der CRA.

As for Fan­nie Mae and Fred­die Mac, for most of the hous­ing bubble, they only guar­an­teed the safest of loans, which is why their mar­ket share cratered as Wall Street swelled on subprime mort­gage products. When the two hous­ing gi­ants re­versed course in 2006 and began buy­ing and se­cur­it­iz­ing un­sus­tain­able exot­ic loans (an in­ar­gu­ably bad idea), the found­a­tion for the fore­close crisis was already firmly in place.

What really happened is that in the dec­ade lead­ing up to the fore­clos­ure crisis was that the hous­ing mar­ket had be­come sat­ur­ated with reck­less and un­sus­tain­able loans that were very prof­it­able for fin­an­cial firms yet highly risky for con­sumers.

A ma­jor share of subprime loans were ac­tu­ally de­signed to fail — that is, they were de­signed to trig­ger an un­af­ford­able in­crease in the loan’s in­terest rate, typ­ic­ally two or three years after the loan’s ori­gin­a­tion.

That pro­cess was in­ten­ded to force bor­row­ers back to their lenders to re­fin­ance their mort­gages back down to an af­ford­able pay­ment and, in the pro­cess, pay an­oth­er round of un­jus­ti­fied high ori­gin­a­tion fees. In short, subprime loans were not about homeown­er­ship but rather about fin­an­cial ex­ploit­a­tion.

Private in­vestors had an in­sa­ti­able ap­pet­ite for these sorts of loans, and the risk they posed were spread across the fin­an­cial sys­tem.

The pub­lic’s con­fu­sion on this is­sue is, however, not hap­pen­stance. Sub­stan­tial money has been poured in­to the de­vel­op­ment of policy pa­pers, me­dia out­reach, and con­fer­ence present­a­tions that mis­rep­res­ent the facts of the causes of the crisis.

Mis­in­form­a­tion helps to de­flect at­ten­tion away from the need for strong fed­er­al reg­u­la­tion of the fin­an­cial mar­kets that was ab­sent dur­ing the bal­loon­ing of the hous­ing mar­ket. In fact, pla­cing the blame for the hous­ing mar­ket’s woes on failed fed­er­al at­tempts to pro­mote homeown­er­ship sets the table for even less ad­equate reg­u­lat­ory over­sight.

Fed­er­al sup­port for well-doc­u­mented and un­der­writ­ten, low-down-pay­ment, 30-year fixed-rate mort­gages to first-time bor­row­ers was not the cause of the hous­ing crisis and, as a res­ult, re­strict­ing ac­cess to af­ford­able home loans to cred­it­worthy fam­il­ies is not an ap­pro­pri­ate re­sponse.

As Con­gress con­tin­ues to con­sider hous­ing-fin­ance re­form le­gis­la­tion, it must en­sure the fu­ture sys­tem serves all low- and mod­er­ate-in­come bor­row­ers as well as com­munit­ies of col­or and cred­it­worthy bor­row­ers with safe, af­ford­able mort­gage cred­it.

In ad­di­tion to le­gis­lat­ive ac­tion, Pres­id­ent Obama’s re­cent ap­point­ment of former Rep. Mel Watt to head the Fed­er­al Hous­ing Fin­ance Agency open ad­di­tion­al doors to im­port­ant re­form of the hous­ing fin­ance sys­tem. As the reg­u­lat­or of hous­ing fin­ance gi­ants Fan­nie Mae and Fred­die Mac, FHFA has im­mense power to in­flu­ence the hous­ing mar­ket. There are nu­mer­ous steps Mr. Watt could take to pro­mote a ro­bust hous­ing re­cov­ery and make cred­it more widely avail­able for cred­it­worthy bor­row­ers.

The worst of the risky and ir­re­spons­ible lend­ing that let to our hous­ing col­lapse have been purged through the mort­gage re­forms en­acted in 2010 through the Dodd—Frank Wall Street Re­form and Con­sumer Pro­tec­tion Act. But the task of cre­at­ing a mort­gage mar­ket that works for Amer­ica’s fam­il­ies is far from com­plete.

Now is the time for the FHFA, Con­gress, and the White House to act af­firm­at­ively to re­in­state homeown­er­ship as a crit­ic­al pil­lar of the Amer­ic­an Dream.

Jim Carr is a seni­or fel­low with the Cen­ter for Amer­ic­an Pro­gress, spe­cial­iz­ing in hous­ing, and dis­tin­guished fel­low with The Op­por­tun­ity Agenda.

The Next Amer­ica wel­comes op-ed pieces that ex­plore the polit­ic­al, eco­nom­ic and so­cial im­pacts of the pro­found ra­cial and cul­tur­al changes fa­cing our na­tion. Email us. Please fol­low us on Twit­ter and Face­book.

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