Bipartisan Group Proposes Formula for Sustainable Homeownership

Bipartisan Group Proposes Formula for Sustainable Homeownership

02/25/2013 BY: ESTHER CHO

Although some argue the push for homeownership was the root cause leading to the housing downturn, a report from the Bipartisan Policy Center’s (BPC) Housing Commission argued it was actually a wide range of factors that converged to create the crisis and offered its own formula for encouraging “sustainable” homeownership for those with modest incomes.

After the collapse of the housing market and the hundreds of thousands of foreclosures that came with it, many questioned “the elevated status of homeownership,” the commission explained in a report titled Housing America’s Future: New Directions for National Policy.

But, according to the report, policies encouraging homeownership weren’t the main problem, though “overly exuberant home buying provided an important stimulant.”

A few of the real culprits named in the report included factors such as the relaxation of underwriting standards, emergence of abusive and predatory mortgage products, and activities of unqualified borrowers who submitted false or inadequate credit information.

While the Consumer Financial Protection Bureau (CFPB) has offered up new rules to prevent risky lending practices, the commission believes “the pendulum has swung too far from the excesses of the pre-bust era” and stated “today’s credit box is tighter and more restrictive than underwriting practice and experience justify.”

With past mistakes in mind, the commission argued sustainable homeownership should be encouraged among lower-income borrowers and can be achieved through broad availability of prime, fixed-rate mortgage financing and adjustable-rate mortgages with clear terms and limits on adjustments and maximum payments. The commission also recommended counseling for those who may need it.

To make its point, the report cited a study from the North Carolina’s Center for Community Capital that assessed 46,000 low-income homeowners who received traditional 30-year fixed-rate mortgages between 1999 and 2009 through a program. The study found 95 percent of those homeowners were continuing to make mortgage payments at the end of the decade, even surviving the housing crisis. The default rate among the loans was also less than one-quarter the default rate of subprime loans that the borrowers might have otherwise received, but the default rate was still higher compared to prime loans not part of the program.

The households in the study had a median income of $30,000 and oftentimes put down less than 5 percent on their home purchase. Overall, the researchers in the study found low-income households with mortgages that were properly serviced and without risky features can perform “quite” well.

The commission also advised requiring housing counseling for certain situations.

“Housing counseling can and should play an important role as a credit enhancer, mitigating the risk of lending to borrowers on the margins of creditworthiness,” the report stated.

Providing an example of the impact of counseling, the report noted a study from the Federal Home Loan Banks on foreclosure rates within FHLBanks’ homeownership programs that required counseling. The program was for lower-income and first-time homebuyers. Between 2003 and 2008, 1,177 out of 70,163, buyers in the program were in foreclosure, which translates to only 1.7 percent.

“Clearly, as indicated by the numbers, homeownership counseling works,” the report concluded.

Lastly, the commission also acknowledged the importance of “a strong, vibrant system of housing finance that can ensure a steady flow of mortgage funds to prospective homeowners and those seeking to refinance.”

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