Center Research Shows How to Ensure Vibrant, Sustainable Affordable Homeownership Long-term
It's a new year in housing finance. As the Federal Housing Finance Agency sets off under Mel Watt's leadership and the FHA begins a financial rebound, three new papers co-authored by researchers at the UNC Center for Community Capital draw on 15 years of research to remind us why affordable homeownership matters to families, communities and the economy.
The papers will soon appear in a volume edited by the Harvard Joint Center for Housing Studies, "Homeownership Built to Last."
Much is at stake as the agencies weigh issues of risk vs. access in the wake of the foreclosure crisis and Great Recession. These three papers show how research can inform the way forward and offer keys to ensuring vibrant, sustainable affordable homeownership long-term.
Why Serve Low-income and Minority Borrowers
Americans have long viewed homeownership as a sound financial investment and pathway to economic security. Research also has demonstrated a range of social benefits, including psychological health, physical health, parenting and children's academic achievement and behavior, social and political participation, and neighborhood/social capital.
Center Research Director Mark Lindblad and colleague William M. Rohe, Cary C. Boshamer Distinguished Professor of City and Regional Planning at the University of North Carolina at Chapel Hill, offer insights into how Americans' views of homeownership benefits have changed in the aftermath of the foreclosure crisis in "Reexamining the Social Benefits of Homeownership after the Housing Crisis."
Recent research indicates that attitudes toward homeownership as a financial investment have improved steadily since the height of the housing crisis, they say.
"Even after the dramatic loss of equity and the high foreclosure rates, the early evidence suggests that people seem to believe that, over the long run, owning is still preferable to renting, at least when it comes to the financial benefits of homeownership," say Lindblad and Rohe. "The long-term cultural preference for owning seems to have weathered the recent housing crisis."
How Underserved Markets Can be Served Responsibly
In "Access and Sustainability for First Time Homebuyers: The Evolving Role of State Housing Finance Agencies," director Roberto G. Quercia and co-author Stephanie Moulton of The Ohio State University examine a successful channel for financing affordable homeownership.
State Housing Finance Agencies (HFAs) entered the homeownership policy scene in the early 1970s and provided affordably priced mortgages to low-and-moderate-income and first-time homebuyers through the sale of tax-exempt mortgage revenue bonds.
State HFAs have issued nearly $260 billion in mortgage revenue bonds, funding mortgages for more than 2.9 million households since their creation while remaining financially viable. Survey data presented by the researchers shows that mortgage revenue bond program borrowers are relatively lower income (about half earn under 80 percent of area median income) and more likely to be minority borrowers (20-25 percent) and female heads of household (28-35 percent). As of mid-2012, the performance of these loans was substantially stronger than for FHA and subprime loans and on a par with all loans, despite the low down payments and incomes of the borrowers.
Given their expertise and record, HFAs have the potential to become key lenders for low-income, minority and other underserved borrowers, the authors say.
While uniquely positioned to forge the way forward for financing first-time and low-wealth borrowers, these important agencies face new challenges presented by market changes."Thus, new product development must be combined with emphasis on creative strategies to mitigate risk, including education, counseling and preventative servicing," the authors conclude.
What We Should Expect of Our Lending Institutions
In a third paper, Center Executive Director Janneke Ratcliffe and co-author Adam J. Levitin, law professor at Georgetown University Law Center, take on a fundamental question at the core of the housing finance system: Whether private lending institutions have obligations to reach out to traditionally underserved communities and borrowers and, if so, with what and how.
In "Rethinking Duties to Serve in Housing Finance," they contend that the future of the housing market requires it.
"Duties to serve" (DTS) regulations grew out of the need to correct discriminatory practices that led to gaps in lending and denial rates between white or higher-income borrowers and minority or low-to-moderate-income borrowers. During the mid-2000s, lending disparities shifted to credit terms, with minority and lower-income borrowers more likely to receive loans with disadvantageous terms.
Post-Great Recession, these borrowers again face a tight credit market that disproportionately locks them out. At the same time, massive demographic shifts mean that future housing demand lies increasingly in the hands of the very borrowers traditionally excluded from the market.
"Persistent lending disparities that prevent these potential homebuyers from obtaining mortgages could have broad and far-reaching effects by depressing the real estate economy and curbing household wealth formation," Ratcliffe and Levin say.
The paper reviews DTS systems covering depositories, Fannie and Freddie, and the Federal Home Loan Banks and examines the accumulated evidence about their impact. It finds that the provisions changed lenders' approach to serving low-to-moderate-income and minority borrowers without compromising safety and soundness. However, the authors conclude, "while there is strong empirical evidence that credit flows to these segments have improved, they have not been substantial enough to address the market failures that DTS seek to correct."
The paper offers a set of recommendations for a more effective approach for the modern mortgage marketplace, including alignment across various primary market entities, alignment between the primary and secondary markets, and improved metrics, tools, incentives and enforcement.
Effectively resolving the tensions between safety and soundness on one hand and access to credit on the other offers a strong rationale for mechanisms that explicitly motivate lenders to serve all qualified potential homebuyers, they conclude.
UNC Center for Community Capital researchers originally presented these papers at Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families, a symposium hosted in April 2013 by Harvard Business School's Joint Center for Housing Research with funding from the Ford Foundation, Bank of America and NeighborWorks America.