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Federal Efforts To Help Homeowners May Be Strangling Them

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By Robert Couch

Oddly enough, recent government efforts to cut struggling homeowners some slack may in fact be hurting many more than it is helping.  Specifically, it is negatively impacting those who don’t yet own a home – those first-time homebuyers who would like to attain the American Dream – that of homeownership.

The U.S. has had nearly a century’s worth of national policies designed to encourage homeownership – going back to Herbert Hoover.  Yet, a recent string of reports has presented some troubling news about the future of homeownership and asset building, given the trends over the past several years. Taking a comprehensive look at the housing finance landscape leads one to the conclusion that many of the policies we are pursuing as a nation are having the unintended consequence of reducing the ranks of homeowners in the United States.

After the bubble of 2007, some might think homeownership isn’t as worthy a goal as it used to be.  Marketing pitches involving this subject might seem very yesteryear, harkening back to an America that no longer exists: a happy nuclear family sitting on the front steps of a modest and neatly kept home with a yard and a dog — in short, model and content citizens. While our demographics as a nation may have changed, one thing has not: various studies have shown that homeownership comes with a multitude of benefits — homeowners have better health and increased educational attainment, and homeownership has been shown to correlate with more taxes paid, a higher voting rate, and increased family net worth.  Homeownership was the original “asset building” idea, and because of the real and perceived benefits of owning the place where your family lives, there has been a steady progression of governmental efforts to make this status achievable.  But maybe not so much any more.

According to the Harvard Joint Center for Housing Studies, there has been a continuing,  and precipitous decline in the nation’s homeownership rates. More troubling is that the trend is most pronounced within those demographic groups with the most ground to make up: African-Americans, Hispanics, young people, and first-time home buyers.  The Center attributes much of the cause of the decline to increasingly stringent lending standards on the part of mortgage lenders nationwide.

A second body of data from both Freddie Mac and Fannie Mae – the first released by the GSEs at this level of detail on large pools of mortgages originated in 1999 through 2012 – found that there is a strong correlation between loan characteristics, such as credit scores, the appraised value of the collateral, and the track record of the borrower in paying the loan. The data also reveals that the correlation between marginal credit and/or excessive leverage at origination and eventual loan defaults grows stronger as property values decline in an economic downturn.

It’s also worth looking at the track record of the $25 billion fund created as a result of the settlement of the case brought against five of the largest mortgage loan servicers, as reported by the Monitor of that fund.  The servicers were compliant overall with a major restructuring of mortgage loan servicing systems throughout the country; they also gave out payments of tens of billions of dollars to hundreds of thousands of borrowers who may -- or may not -- have suffered injury as a result of servicing practices.  While the Monitor’s reports immediately drew mixed reactions, there is near universal agreement on one point: the cost of administering a mortgage loan that has gone into default will increase dramatically in the years ahead. As a result, there are increasing incentives embedded in the servicing rules to make only loans that have the highest probability of performing throughout their lives - that is the best of the best – and forego those that have the slightest risk of default.

When all of these reports are viewed together, a troubling picture emerges. The various reactions to the mortgage crisis of 2006-09 have caused lenders to become very conservative in approving home loans. For the foreseeable future, it will be increasingly difficult for borrowers with less-than-stellar credit or little cash for a down payment to qualify for a mortgage.  In raw numbers, this means that over 60% of Americans and a much higher percentage of newlyweds do not qualify for mortgages today based solely on average credit scores and required down payments.

The implication of all of this is far reaching. African-Americans, Hispanics, young people and low-to-moderate income families tend to have lower credit scores and less cash to inject into a home purchase. Accordingly, the new and stricter lending paradigm will be felt more by the borrower groups that historically have tended to have lower homeownership rates, thus widening a gap that has existed for years. Stated in other terms, well-meaning promise keepers who are fully prepared to fulfill their mortgage obligations are paying the price for policies designed to ease the burden on those who have failed to comply with the terms of their home loans.  In fact, they are paying for it twice…they can’t get loans and they have already had to pay to bail out their neighbors.

Couch, counsel at Bradley Arant Boult Cummings LLP, is a member of the Bipartisan Policy Center’s Housing Commission and served as President of Ginnie Mae in the George W. Bush administration.