In Pursuit of a Responsible Homeownership Policy

Despite current economic woes, families continue to aspire to own their own homes. For many, homeownership represents a path to stability, community, and long-term wealth building. But achieving these social and economic goals requires a new policy regime and regulatory framework that mitigates the inherent risks of the process. If done right -- by matching buyers with appropriate mortgage products in a transparent and fair manner -- we can make homeownership work for a broad range of American families, even those with low incomes and few resources.

While the burst of the housing bubble recedes into the past, its echo continues to reverberate throughout the economy and in communities across the land. The U.S. housing market remains a mess. Home values have steeply fallen from their 2006 peaks, loan defaults have reached historic levels, and the implosion of the housing finance system may take years to rectify. The latest figures from the Mortgage Bankers Association report over 8 percent of all mortgages were at least one month late during the first quarter of 2009, which is the highest figure since tracking began almost 40 years ago. Additionally, almost 4 percent of mortgages were in foreclosure. Taken together, 12 percent of all Americans with a mortgage are in trouble and prospects look dim for improvement in the housing market until well into 2010.

The picture actually looks worse in certain markets and states. Standard & Poor’s Case-Shiller Home Price Index, a widely watched measure of 20 metropolitan areas, fell a record 19 percent over the last year. In Las Vegas, the drop was almost 33 percent. Woe to the family looking to move from Nevada, Arizona, California, or Florida for a job opportunity elsewhere.

Of course, these families and others have a right to expect their policymakers to help chart a way out of this muddle. Looking back in hindsight, it seems that too many irresponsible actors were allowed to operate without supervision. The challenge now is to craft a more responsible housing policy. This should necessarily include support for both rental housing and homeownership as well as transforming our housing finance system so it once again is known less for its profitability and more for its delivery of safe, sound, and appropriate mortgage products.

In the near term, policymakers will be expected to assist distressed homeowners and prevent mass displacements. The Obama administration’s anti-foreclosure plan debuted in February to generally positive reviews but it has been slow to take hold. What they dubbed the “Making Home Affordable” program strives to enable homeowners whose home values have declined to take advantage of falling interest rates and refinance their mortgages at better terms. And perhaps more significantly, it encourages mortgage servicers to modify existing loans by lowering monthly payments or writing down the principal. Advocates have argued that additional sticks are required to ensure that mortgage principals are lowered when appropriate. And they seem to have a point, as servicers appear to prefer modifying loan terms even when this isn’t enough to avoid foreclosure. Months after the initial rollout, there remains concern that the plan can reach enough homeowners to make a difference and do so before their household finances completely erode. The administration’s plan is likely to need additional revisions but they had the right instincts which was to put real money on the table, $75 billion, to make sure the servicers don’t stay on the sidelines.

Of course, the policy is still reliant on the performance of the broader economy. If massive job losses persist, people will not be able to stay current on their payments, even after their loans have been refinanced or modified. This means that stabilizing housing markets will depend on the quality and character of the economic recovery. But soon enough, policymakers will have to decide what a sustainable and responsible housing policy looks like for the future.

As they set out on this task, it would be wise for them to acknowledge the underlying cause of the housing crisis: a finance system that allowed for the inflation of a now-burst housing bubble. The previous demise of the stock market bubble redirected capital back into global markets via our housing stock and a seemingly insatiable appetite for mortgage-backed securities. Eventually these securities were sliced, diced, and sold in such a manner that it became difficult to assess their underlying value and risk.

The rise in homeownership rates, which topped out at a record 69 percent in 2004, was aided by a policy push — begun under President Clinton and continued by President Bush — to get more lower-income families into the market as homeowners. But we should not blame these new buyers for the upward pressure on home prices. Pervasive cheap credit and the advent of risk-based pricing (otherwise known as subprime lending) expanded the market and allowed more people to get into good homes through good loans. Unfortunately, a rise in predatory practices was also used to get good people into bad loans that they could not afford over the long term. Many well-intentioned advocates overlooked the dangers and risks posed by homeownership for certain families or the growing prevalence of predatory lending. A number of groups were paying attention, such as the Center for Responsible Lending, which has been dedicated to protecting homeowners from abusive financial practices. They were on the case, but the concerns they expressed to policymakers went mostly unheeded.

Instead, the watchdogs were told that lenders were already overregulated. In a February 2009 op-ed in The Wall Street Journal, former Texas Republican Senator Phil Gramm sought to blame the Community Reinvestment Act (CRA) for causing the housing crisis, since he claimed it forced banks to loan to risky borrowers. This is a weak claim lacking empirical evidence. CRA, which has been on the books for over 30 years, was never an excuse to make loans that would not perform. There were many ways to get an “outstanding” rating for the banks that were being assessed under CRA, and they could do so through safe, sound, and fair lending. These arguments ignore the reality that many loans were made by unregulated firms in the alternative banking sector not covered by CRA. The political attacks by Graham and others on the right have become a distraction from the real work of figuring out how to fix our housing markets.

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