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February 06, 2013 11:33 AM Another Try At Expanding Homeownership

By Ed Kilgore

After the great U.S. housing bubble burst, there was a sense, particularly among conservatives, that a foolish liberal experiment in expanding homeownership to people without the income or credit or “personal responsibility” to own homes had failed once and for all. Henceforth, it was often said, we’d get back to the good old days of fixed-rate mortgages, large down-payment requirements, and tough credit requirements. Those people would be back in rental housing where they belonged.

But while the housing bubble did rightly convince some people that homeownership wasn’t all it was cracked up to be, the central function of residential real estate as the American middle class’s primary method of wealth accumulation means that giving up on broad-based homeownership may be equivalent to giving up on upward mobility. And as the New America Foundation’s Reid Cramer explains in the January/February issue of the Washington Monthly, there are models for expanding low-income and minority homeownership that have worked, even during the Great Recession:

In 1998, a credit union in Durham, North Carolina, started a project called the Community Advantage Program, or CAP, with money from the state government and a $50 million grant from the Ford Foundation. Its goal was to increase the flow of private capital to lower-income and minority borrowers. CAP purchased mortgage loans originated by banks that were seeking to satisfy the requirements of the Community Reinvestment Act, which mandates that banks make at least minimal loans (often to minorities) in their local communities. Eventually, CAP’s portfolio grew to more than 46,000 home-purchase mortgages made to lower-income households. Yet, despite what might be considered the risky profiles of its borrowers, CAP’s portfolio has weathered the storm, far exceeding the performance of the rest of the housing market during the recession. While nationwide, 15 percent of prime adjustable-rate mortgages and 20 percent of subprime fixed-rate mortgages have serious delinquencies, the CAP rate is only 9 percent. And CAP homeowners have seen a median annualized return on their equity of 27 percent, leading to a median increase in equity of close to $18,000, meaning that they were better off than investors in the Dow Jones over a similar time period.

The problem with the very different and notoriously disastrous Fannie Mae/Freddie Mac
model for expanding homeownership, argues Cramer, was their congressional mandate to make profits, which put these institutions into competition with predatory lenders using predatory methods.

The key lesson learned is that it’s a bad idea to put federal housing subsidies in the hands of profit-seeking institutions. Instead, to ensure that responsible buyers can access private capital, government will have to embrace an expanded direct role in providing insurance on mortgages and setting standards on future loans. We can do this through a recapitalized Federal Housing Administration or a new set of public entities that take the place of Fannie and Freddie. Promoting homeownership among those of modest means is an appropriate goal of government, but it is time to be up-front and direct about how we pursue that obligation.

In other words, we should stop blaming the victims here, take a fresh look at successful means for expanding homeownership, and stop believing Mr. Potter was right.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • c u n d gulag on February 06, 2013 11:45 AM:

    Some people were meant to own homes.
    Some people want to own homes.

    I was born to rent.

    I am useless around the house, except for things like cooking, cleaning, vacuuming, washing dishes, and mowing the lawn.

    I am NOT handy - I can barely screw-in a lightbulb, let alone handle a plumbing problem.
    And as for electricity - I have a healthy respect for it, and, outside of turning on light switches, and changing bulbs, I stay away from it, lest I electrocute myself.

    My late father was handy.
    But he passed away last year, and now I'm left to try to stem the tide of time in a 50 year-old house, with the skills a handy 6 year-old would probably exceed. Especially now that I'm physically handicapped, to add to the burden of not being at all handy.

    But, my mom doesn't really want to sell, so, here we sit, paying taxes we can't afford, hoping that nothing goes seriously wrong - or, that my handy brother-in-law won't be too busy to come and help fix.

    Home ownership is not for everyone.
    Maybe, if I started when I was younger - but, I think not.

  • Sgt. Gym Bunny on February 06, 2013 12:03 PM:

    The problem with the very different and notoriously disastrous Fannie Mae/Freddie Mac model for expanding homeownership, argues Cramer, was their congressional mandate to make profits, which put these institutions into competition with predatory lenders using predatory methods.

    Exactly! It's not that those people were inherently unqualified for home ownership. If there was a lesson learned from the housing debacle it was that the government shouldn't underwrite (or turn a blind eye to) widespread predatory lending practices...

  • Robb on February 06, 2013 12:22 PM:

    While I disapprove of the "blame the victims" philosophy of the Right, I really think the government should not provide any incentives to home ownership.
    Home ownership and renting already have trade-offs and home ownership is not always the best choice.

    Ending homelessness is a more worthy goal and that involves making renting easier as well as ownership.

  • Ron Byers on February 06, 2013 12:36 PM:

    I think we need to be about wealth creation in this country. Traditionally homeownership has been the bedrock of wealth creation. There is no reason it can't continue to be.

    What happened in the bubble that lead up to the great recession was mortgage lending was divorced from mortgage management and risk. That is lenders immediately sold mortgages to uninformed investors encouraging lenders to engage in shoddy lending practices. An entire subprime industry developed around the shoddy practices. If a lender stands to lose if the mortgagee fails, the lender will make sure to minimize risks. Make sure lenders have some skin in the game and the entire process will improve the next time around.

  • mmm on February 06, 2013 1:31 PM:

    @Robb... you're absolutely right about home ownership and renting trade offs, but I see no reason why government can't be a partner with lending institutions to help people achieve what might be best for them. As a retiree, I sold my home and relocated, but found that renting was not the best option financially. It's too easy for regular lending institutions to be "selective" as to who they lend to, so thank goodness we have a choice. If you research the number of types of government mortgages (FHA, VA, farms, etc.) that help to drive the housing industry, you realize the importance of its contribution.